What is a capital reduction?

A capital reduction is a financial operation that consists of reducing the nominal value of a company's share capital. This can be done for different reasons, e.g. to reimburse shareholders or to adjust the share capital to the company's needs.

A capital reduction may also have tax consequences. In some countries, a capital reduction may result in taxes for the shareholders or for the company. It is therefore important for the company to consult an expert before carrying out a capital reduction.

There are several ways to carry out a capital reduction, the most common being the reduction of the nominal value of the shares or the redemption of the shares. In both cases, the aim is to reduce the value of the company's share capital.

A reduction in nominal value consists of reducing the nominal value of the company's shares. Share redemption, on the other hand, involves the repurchase of the company's shares by the company. This means that the company buys back its own shares and takes them out of circulation, thereby reducing the share capital.

Capital reduction can have different objectives. For example, a company may reduce its share capital to return to shareholders excess capital that it does not need to operate. It may also do so to adjust the share capital to the company's financial situation or to simplify its capital structure.

In some cases, capital reduction may be necessary to comply with certain legal requirements. For example, if a company has suffered losses and its share capital has fallen below a certain threshold, it may be necessary to reduce the share capital to avoid liquidation of the company.

In any case, the reduction of capital must follow certain legal procedures. In many countries, companies must obtain shareholder approval to carry out a capital reduction. In addition, they must inform creditors and other interested third parties about the capital reduction and how it will affect their rights.

A capital reduction may also have tax consequences. In some countries, a capital reduction may give rise to taxes for the shareholders or for the company. It is therefore important for the company to consult a tax expert before carrying out a capital reduction.

How is a company's share capital reduced?

There are several ways in which a company can reduce its share capital, but the most common are as follows:

1. Reduction of the nominal value of the shares: This is a form of capital reduction in which the nominal value of the company's shares is reduced, i.e. the value printed on the shares representing the proportional part of the share capital that corresponds to each share.
2. Redemption of shares: In this case, the company acquires and removes some or all of its shares from circulation.
3. Reduction for accumulated losses: If a company has suffered losses that have reduced its share capital below a certain threshold, it may be necessary to reduce the share capital to avoid liquidation of the company. In some countries, this is done by reducing the nominal value of the shares.
4. Reduction of capital by distribution of reserves: If a company has accumulated reserves in excess of its needs, it may distribute them to shareholders as dividends or by reducing the share capital. In this case, the company can make a capital reduction that is offset by the distribution of reserves.

It is important to note that any capital reduction must follow certain legal and accounting procedures. In many countries, companies must obtain shareholder approval to carry out a capital reduction. In addition, they must inform creditors and other interested third parties about the capital reduction and how it will affect their rights.

When can a company's capital be reduced?

This operation can be carried out in different situations, such as:

1. Decrease in business activity: If a company has reduced its economic activity and does not need the share capital that has been issued, it can proceed to reduce it.
2. Accumulated losses: In case the company has suffered losses that have affected the share capital, the share capital can be reduced to adjust it to the actual level of the company's equity. This may be necessary to avoid liquidation of the company or to comply with laws establishing certain minimum share capital thresholds.
3. Distribution of reserves: If the company has accumulated reserves that are not necessary for its activity, it can proceed to distribute them to the shareholders through a capital reduction.
4. Return of contributions: In the event that more capital has been issued than necessary or in excess of what the shareholders have contributed, the capital can be reduced to return to the shareholders the amounts that have been issued in excess.

What is the procedure to carry out a capital reduction of a company?

First, the necessity and legality of the capital reduction must be verified. Before initiating any procedure, the company must verify that the capital reduction is necessary and that it complies with the applicable legal requirements. This may include obtaining shareholder approval, notifying creditors and obtaining permits and authorisations from regulatory bodies.

Next, a capital reduction plan must be drawn up, i.e. the company must prepare a capital reduction plan detailing the amount of the reduction, the manner in which it will be carried out, the time frame within which it will be carried out and the consequences for shareholders and third parties concerned. This plan must be approved by the shareholders and may require the assistance of a lawyer and an accountant.

The capital reduction must then be registered. The company must register the capital reduction with the commercial register or with the competent authority in the country. This may involve filing specific documents and forms, paying fees and complying with other legal requirements.

Creditors must then be notified. This may require filing updated accounting and financial reports, obtaining consents or negotiating agreements to modify the terms of contracts.

A new articles of association must then be issued. These bylaws must be updated in the commercial registers and may require shareholder approval.

The relevant regulatory bodies must also be informed of the capital reduction and how it will affect their business and their compliance with applicable law.