The reduction of capital; modalities and requirements

The Capital Companies Law regulates in Chapter III its modalities and requirements. In particular, in Article 317 and subsequent of the Law. These articles establish the necessary and required conditions for the reduction to be carried out.

We must begin by indicating that the reduction of capital stock is an operation by means of which the funds available to a company are reduced.

Its regulation is quite exhaustive. This is due to the fact that this type of operation can entail numerous damages for the shareholders and third party creditors. The Law, with certain caution, considers the reduction, as well as the processes that can derive from it.

Below, we will cover the causes that originate it, as well as its purposes and the requirements to carry it out.

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Which are the different types of capital reduction?

Having understood what a reduction of capital stock is, we will now analyze the existing modalities.

Firstly, the capital can be reduced by reducing the nominal value of the shares/units. Secondly, by amortization (“elimination”) of the shares or participations. Lastly, the grouping of shares or units for exchange and redemption.

The first two methods are the most common for this type of operation. For this reason, more detail is provided below.

1.       Reduction of the nominal value.

The capital stock is reduced by reducing the par value of the shares/units of which it is composed. This does not mean that shares/participations are eliminated, their number will be maintained by reducing, exclusively, their nominal value.

2.       By amortization of the shares or participations.

On the contrary, in this type of reduction, a certain number of shares/units is eliminated. The number necessary to reach the new figure of reduced capital.

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Contributions from shareholders that do not represent a capital increase

the contributions of the partners are not regulated in our Legal System. They are assets delivered by the partners acting as such, by virtue of operations not described in other accounts.

What are the purposes or reasons for the capital reduction?

The reduction of capital must pursue one of the legally established purposes. The following are the most common ones:

On the one hand, the purpose commonly known as reduction for losses stands out. That is, the reduction to reestablish the equity balance as a consequence of losses.

As can be deduced, the company has losses that cause its net worth to be reduced below the legal minimum. In particular, below half of the share capital.

To reestablish the lost equity balance, one option is to reduce the share capital.

On the other hand, the reduction of capital for the return of contributions is another option. This consists of returning to the shareholders/partners, by means of a reduction, part of the value of their contributions.

Requirements and characteristics

1.       Common requirements

All capital reductions must be agreed at a General Shareholders’ Meeting in compliance with the legal requirements for the amendment of the bylaws.

• This resolution must indicate, at least:
• The amount to be reduced.
• The purpose of the reduction.
• The procedure by which the reduction is to be carried out.
• The term to execute the operation.
• The amount to be paid to the Partners (if applicable).

In the case of Corporations, the agreement must be published:

• In the BORME.
• On the Company’s website.
• Or, if the Company does not have a website, in a newspaper of wide circulation in the Province of the registered office.

Regardless of the type of company, the capital reduction must:

• Be executed in public deed.
• To be registered in the corresponding Mercantile Registry.

2.       Special features depending on the intended purpose: reduction for losses

In the reduction for losses, the following special features must be taken into account:

• It must affect all shares/units equally in proportion to their nominal value. This is known as the “principle of parity of treatment”.
• Capital may not be reduced due to losses:
  • In SLs as long as the Company has any type of reserve.
  • In S.A.’s as long as the Company has any kind of voluntary reserve or the legal reserve, after the reduction, exceeds 10% of the capital stock.
• The operation must be supported by a balance sheet, at the latest, 6 months prior to the date of the agreement. This balance sheet must be audited and approved by the shareholders’ meeting.

3.       Special features depending on the purpose pursued: return of contributions

In the reduction for the return of contributions, the following specialities must be taken into account:

• If the reduction does not affect all  Partners equally, the following is required:
  • In SLs the individual consent of the Partners affected.
  • In joint stock companies, the separate agreement of the majority of the partners concerned.
• The return of contributions must be made pro rata to the paid-up value of the shares/participations. And this unless, by unanimous agreement, another system is agreed upon.

Conclusion.

In summary, the reduction of capital stock can be carried out in different ways. The two most common modalities and purposes in practice have been analyzed in this article. As mentioned at the beginning of this article, the wording of the law is very strict. That is why to carry out this operation it is necessary to follow very specific steps. And take into account the specialties applicable depending on the type of company and the type of reduction.

If this article has been of interest, we also suggest you to read the following article published on our website: What can I do with my “n” percent of the capital stock of a company?