Case C-41/15, Dowling – the illegal takeover of a bank and the Irish bailout [judgment 2016, ECLI:EU:C:2016:836]

In 2011, the Irish State took over the “Irish Life” bank to reduce the risk of contagion in Ireland’s financial sector. At first blush, the State’s decision seems to contravene the EU’s Second Company Law Directive and the ECJ’s Greek banks case law. But can the Irish bank’s expropriated shareholders still invoke the safeguards in the Directive when the State’s act of buying the bank was a part of the State fulfilling its legal obligations under the TFEU, and the terms of the Irish bailout?

Background
At its peak, the size of the financial sector in Ireland was five times that of the Irish economy.

From 2008, banks in Ireland began facing financial difficulties of such magnitude that they were helped by both the Irish State, and the EU.

By November 2010, this help was threatening the very financial stability of the State itself. As a result, Ireland entered a ‘Programme of Support’ (the bailout) to enable the State to secure sustainable funding.

The bailout caused Ireland to enter a series of legal agreements with the EU Commission, the European Central Bank and the International Monetary Fund.

One feature of the bailout was that viable Irish banks should be recapitalised by 31 July 2011. To that end, a review of the Irish banks took place and one of the banks, “Irish Life”, was directed by Ireland’s Central Bank to increase its capitalisation to €4 billion. The problem was that in all probability Irish Life could not have raised this money from either new private investors or the bank’s existing shareholders. Consequently, the bank should have failed. Shareholders would have lost their money.

However, the likely consequences of the bank’s collapse for the Irish State were far greater. Broken legal agreements could have meant Ireland needing to pay out €26 billion (for guarantees already issued), and incur fines and other penalties. There was also a likelihood that the failure of the bank would trigger ‘contagion’ in Ireland’s financial sector and affect the financial stability not only of the Irish State but also that of other Member States.

Therefore, the Irish State took steps to recapitalise the bank. Initially, the Minister for Finance caused a proposal to be put to shareholders at an Extraordinary General Meeting of Irish Life and Permanent Group Holdings (ILPGH). He proposed facilitating the recapitalisation of Irish Life to the tune of €4 billion, by means of, inter alia, a capital injection by the Minister of €2.7 billion.

Unfortunately for the Minister, his proposal was rejected by shareholders. They preferred recapitalisation being achieved by other means.

Undeterred, the Minister applied to the Irish courts for a court order, that application being based on Ireland’s 2010 Credit Institutions (Stabilisation) Act. Judge O’Malley Iseult of the High Court neatly summarised the scope of the Order in these terms:

The Minister would acquire 99.2% of the company. This was done by compelling the bank to issue a very large number of new shares to him, at a share price dictated by him (being just under 6.5 cents per share), in return for the sum of €2.7 billion. For this purpose control of the company was taken from its organs and shareholders; the Memorandum and Articles of Association were altered; the decisions taken at the EGM were nullified and the company was delisted from the London and Irish Stock Exchanges. Further, various relevant legal rules, whether deriving from statute, common law, equity, codes of practice or contract were in effect disapplied insofar as the company was concerned.

The shareholders disagreed with the court order and sought to have it set aside. In essence, the shareholders, including one Mr Dowling, took the view that the sum of €4 billion euro was ‘far in excess’ of what was needed, with the result that the Minister had in effect mounted an illegal takeover of the bank and had expropriated the shareholders in the process.

Couched in more legal terms, the shareholders submitted that the Minister’s actions and decisions were based on an error of EU law.

The main focus of their challenge centred on key planks of the EU’s Second Company Law Directive 77/91/EEC. In that context, the shareholders claimed that the Minister had increased the company’s capital without the approval of the shareholders in general meeting, contrary to Article 25. Furthermore, he had allotted new shares without offering them on a pre-emptive basis to the existing shareholders, contrary to Article 29. And he had also lowered the nominal value of the company’s shares without the consent of the shareholders in general meeting and, to that end, had altered the company’s memorandum and articles of association, similarly without consent – each act thereby contravening Article 8 of the Directive.

Their submissions were fortified by a raft of ‘Greek’ case law, which had been handed down from the ECJ in the course of interpreting that Directive.

Thus, in the context of Articles 25 and 29 of the Directive, the ECJ in Case C-381/89 Sindesmos Melon ECLI:EU:C:1992:142 had allowed individuals to invoke the directive against public authorities in the national courts. The court had then interpreted the Directive to stop any national laws which allowed for an increase of capital to be decided upon by administrative measure, without any resolution being passed by a general meeting of shareholders. The ECJ also went on to rule against national provisions which enabled a decision to be taken, by administrative measure, that new shares were to be allotted without being offered on a pre-emptive basis to the shareholders in proportion to the capital represented by their shares.

The shareholders relied on a second Greek case, Case C-19/90 Karella and Karellas ECLI:EU:C:1991:229. At issue was the formation of public limited liability companies and the maintenance and alteration of their capital. The ECJ held that any increase in capital must be decided upon in a general meeting. The court interpreted Articles 25 and 41(1) of the Directive as stopping national rules which sought to allow an administrative action to increase the company capital.

They also placed reliance on a third Greek case, Case C-441/93, Pafitis ECLI:EU:C:1996:92, in which the ECJ had held that national rules providing for an increase by an administrative measure of the capital of a bank in financial difficulty, were impermissible.

And for good measure, the shareholders also relied on Case C-338/06 Commission v Spain. In that case, the ECJ had found that Spain had contravened Article 29 of the directive by granting a pre-emption right in respect of shares in the event of a capital increase by consideration in cash, not only to shareholders but also to holders of bonds convertible into shares. The ECJ had also objected to the fact that Spanish legislation was silent on allowing the shareholders’ meeting to decide to withdraw pre-emption rights in respect of bonds convertible into shares. That silence meant that statute did not expressly provide for the possibility of such withdrawal, and so the statute was not likely to create a situation which was sufficiently precise, clear and transparent for individuals to know the full extent of their rights and to rely on them before the national courts.

Besides claiming that the Minister had acted contrary to the EU’s Second Company Law Directive, Mr Dowling and the other shareholders also submitted that the the Minister had acted contrary to Directive 2001/34/EC. The Minister had breached the rules relating to the continuing listing of the company on official stock exchanges. He had overridden explicit decisions of the general meeting, altering the memorandum and articles of association and issuing new shares to the Minister. And he had breached the scheme of arrangement sanctioned by the Irish High Court in January 2010.

Moreover, the shareholders believed that the Minister had acted contrary to the Financial Instruments Directive (“MiFID” – Directive 2004/39/EC) insofar as it derogated from transparent and non-discriminatory rules based on objective criteria (the Listing Rules of the Irish Stock Exchange and the UK Listing Authority, requiring shareholder approval before “related parties” can enter into certain transactions).

And they also thought that the Minister had acted contrary to the EU’s Takeover Directive 2004/25/EC, and contrary to the TFEU provisions in relation to the free movement of capital because they considered the Minister’s actions were a disincentive to invest in shares.

The shareholders also asserted that the Minister had acted contrary to Directive 2001/24 on the reorganisation and winding up of credit institutions because notification of the order had not been published in the EU’s Official Journal.

And more generally, the shareholders believed that the Minister had acted in a way that was incompatible with the EU Charter of Fundamental Rights, particularly Article 17 which enshrines the right to property.

By way of response, the Irish State denied the claims made by the shareholders. As a minor point, the State submitted that the Greek cases were distinguishable as a matter of law and would be decided differently in light of the EU’s winding up legislation which came later.

However, the main point of the Irish State was that the Second Company Law Directive could not be used to invalidate a Minister’s order when that order was obtained in the course of the Minister fulfilling his obligations under EU law. Those obligations not only arose in the context of Articles 119 and 126 (and Title VII generally) of the TFEU, but also under the terms of the Irish bailout and various specific Implementing Decisions.

That is to say, Article 119(3) TFEU requires Member States to comply with the following guiding principles: “Stable prices, sound public finances and monetary conditions and a sustainable balance of payments”. Article 120 provides that: “Member States shall conduct their economic policies with a view to contributing to the achievement of the objectives of the Union….”. And Article 126 stipulates that: “Member States shall avoid excessive government deficits.” In light of this Treaty framework, and the likely consequences of banks not being recapitalised, the State was legally obliged to take the steps it did.

The Irish State also felt fortified in its belief as to the legality of the Minister’s actions by the principle established in the CJEU’s judgment in Case C-370/12, Pringle ECLI:EU:C:2012:756. For whereas the Pringle case concerned the compatibility of the European Stability Mechanism with the TFEU, the CJEU had explained that support could be provided to a Member State, even outside the provisions of the Treaty, provided that it was done in a way that complied with EU law. And to comply with EU law, support needed to be both conditional (so that states conducted sound budgetary policy), and fully consistent with the measures of economic policy coordination provided for in the Treaty. That was the case here.

Judge O’Malley Iseult observed that there was support in the legal literature cited by the parties both for the view that the ECJ’s Greek cases prohibit a breach of the Second Company Law Directive, and for the view that the cases would be decided differently in the light of the later legal framework and current circumstances. The judge also noted that Ireland’s 2010 Credit Institutions (Stabilisation) Act did permit the action that was taken by the Minister, and that as a matter of law the High Court in Ireland could only set aside or vary the order if the Minister’s belief as to the necessity of his action, was unreasonable or vitiated by legal error.

The judge decided to make a reference to the CJEU and ask two questions.