During its business activities, a company may encounter a situation in which its administrative body deems it appropriate to reduce its share capital. The decision on the reduction of share capital rests with the shareholders meeting, who vote at the invitation of the administrative body, with the law providing for two cases of share capital reduction in LLCs, namely:
- Voluntary reduction of share capital;
- Reduction of share capital due to losses.
The reduction of share capital is a particularly complex operation carefully regulated by the legislator given the functional importance of a company’s share capital.
Voluntary Reduction of Share Capital
Article 2482 cc regulates several cases of voluntary reduction of capital, namely by:
- Reimbursement to shareholders of paid-up shares or
- Release from the obligation of payments still due.
This modification of the share capital, occurs through the repayment of part of the capital to the shareholders and, as a result, involves a decrease in the company’s assets as well as in the share capital.
Previously, there was the possibility of reducing the share capital in case of exuberance of the value of the share capital in relation to the achievement of the corporate purpose. Currently, however, Art. 2445 of the Civil Code opens up the narrow confines of the law, referring more generically to the decision of shareholders to reduce capital.
Voluntary reduction can take place:
- Through the release of shareholders from the obligation to make payments still due;
- Via repayment of capital to shareholders, resulting in a reduction in the par value of issued shares;
- As a result of the allocation of assets to shareholders, in proportion to their participation in the capital;
- By the establishment of an available reserve in an amount equal to the approved reduction.
Mandatory Reduction of Share Capital
During the course of a company’s economic activity, the value of shareholders’ equity may fall below the value of the share capital, resulting in a loss of capital.
In such cases, the administrative and supervisory body should promptly prepare a report on the company’s equity situation so as to immediately inform the shareholders of the situation.
It should be noted that loss does not always result in an immediate obligation for the company to reduce its share capital. However, profits subsequently earned may not be distributed until the losses are written off (Article 2433, paragraph 3).
On the other hand, in the event that such losses amount to more than one-third of the initial value, the company will be obliged to reduce the share capital (Art. 2446) and a meeting must be convened without delay in order to decide on the appropriate measures to be taken. The legislator, however, does not list what these “appropriate measures” are, but it can be well assumed that they are either further capital payments or a resolution to reduce the share capital. Obviously, timeliness is crucial in order to avoid serious prejudice to claims, as well as penal consequences.
Reducing a company’s capital can be an unavoidable event in the life of a company as a result of losses as well as a considered choice at certain times in the market. Moreover, given its protective function vis-à-vis the company’s creditors, the procedure provided for by the legislature is particularly elaborate. For this reason, it is always advisable to seek the advice of experts in the field in order to be able to implement such capital reduction in compliance with current regulations.
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