What’What is a reduction of share capital and how to proceed ?
A company has the possibility to increase or reduce its share capital depending on the situation. These operations can be carried out to meet the needs of the company or the partners. That said, the reduction of capital is generally carried out in case of financial difficulties.
It must therefore be approached taking into account the impact of the procedure on the image and professional relations of the company.
The reduction of the share capital: what does it consist of? ?
The reduction of the share capital is often considered to regularize the financial situation of a company. By definition, it consists in reducing the amount of the company’s capital. This operation becomes necessary in particular when the total equity is less than half the value of the share capital.
In this case, the capital must be reduced to rebalance the company’s capital level.
In order to adjust its share capital, the company must follow certain legal procedures at the level of the partners and the administration. The administrative steps can nevertheless be entrusted to a third party specialized in the field. It is enough to see the website of the provider in legal formalities to know the offers proposed and the services included.
On the other hand, the internal part is relatively simple.
The manager must first of all convene an extraordinary general meeting to decide and record the reduction of the share capital. This decision can only be made in the presence of all stakeholders. The participants can then support or contest the project. This initiative is usually motivated by:
- Financial losses creating an imbalance between the share capital and the shareholders’ equity;
- A too weak activity compared to the social capital;
- A voluntary exit of one of the associates ;
- A strategic reduction in the value of the shares..
Apart from the partners, the creditors can oppose the reduction of capital, if the reasons are not financial.
How to properly reduce the share capital ?
The reduction of the share capital is a simple but delicate operation. Beyond image issues, it requires a fairly large amount of money to be effective in case of financial difficulties. The idea is effectively to free up cash in order to purge losses.
However, the approach is only feasible if the company has substantial means.
On the other hand, it is advisable to respect the minimum legal threshold for SAs (joint stock companies) and SCA (limited partnership with shares). This type of structure must have a social capital higher than 37 000 euros, in the absence of offer of securities to the public. In any case, a company has the choice between three solutions to reduce its share capital. It can, among other things :
- Decrease the value of the securities (shares or stocks);
- Reducing the number of shares ;
- Buy back and then cancel shares (in case of a reduction not motivated by losses).
During a company takeover, it is also possible to reduce and then increase the share capital. This process makes it possible, in a first step, to make up for losses and to clean up the equity capital. Then, the company will bring in new partners in order to relaunch its activity. This technique is commonly called “the accordion trick”.
What are the steps to do so ?
An extraordinary general meeting is necessary for decide to reduce the share capital of a company. However, it is important to consult the articles of association beforehand to find out the terms and conditions foreseen for such a decision. Once the operation has been completed, the minutes must be filed with the clerk of the court or the CFE within 30 days.
Other formalities may vary depending on the legal form, structure and reason for the operation. In general, the manager must ask the auditor to draw up a report indicating the causes of the capital reduction. It is further assumed :
- Update the company’s articles of association by changing the amount and distribution of the share capital;
- Publish a notice of decrease of the share capital in the JAL (newspaper of legal announcements) by specifying the old and the new value of the share capital;
- Drafting a request to modify the capital to be deposited at the clerk’s office of the commercial court or at the business formality center.
The modification will be confirmed by the reception of a K-bis extract including the the amount of the new share capital. Most often, this letter is received a few days after the filing of the file. However, the delay of reception depends on the interlocutor and the domiciliation of the company.