Like all the elements that make up it, the company may need to reduce its share capital over the course of its life. Often perceived as a sign of weakness or a bad patch, it still represents a relevant solution for many situations. Indeed, the reasons for reducing a company’s share capital are many and varied, and it is always necessary to follow the formalities specific to your situation. Decrease in share capital: Understand everything it takes to run your operations.
Reduction in Share Capital: Definition and Some Reminders
A reduction in share capital is a legal operation — not an accounting one — that, as its name suggests, involves reducing the amount of a company’s capital. This makes it possible to restructure a company’s organization or regulate its cash flow. You have two options:
- the value of the shares has decreased;
- The number of shares is reduced.
Note, if the idea of reduction in share capital may sound appealing on paper, we should not neglect its consequences. In fact, beyond the internal aspect of the company, it also means a change in the image of the latter, especially with creditors. Furthermore, this operation sometimes represents a risk of multiracial abuse on the part of a few partners. That is why it is strongly advised to call a lawyer or a chartered accountant to assess and estimate the consequences of reduction in the share capital of the company. Finally, you should be mindful of the minimum amounts imposed by your legal status.
The decision to reduce the share capital of a company is taken by all the partners at an extraordinary general meeting and is subject to legal publication. Then you must definitely notify the administration about the reduction in the share capital of the company.
As a reminder, share capital represents the total value of contributions made by the partners.
Why reduce the share capital of a company?
There are many reasons for reducing share capital. In fact, it is possible to use this legal transaction to meet various business needs. Among these:
- clear company accounts;
- Regularize the position if equity represents less than 50% of the share capital;
- evict a partner or reduce his influence;
- optimization of taxation;
- decrease in the value of shares;
- preparation for retirement or inheritance;
Reducing a company’s share capital may make it possible to exit investors who no longer hold their positions within the company, to refocus the strategy around a core of partners, or even to eliminate that deviation.
From an accounting and tax point of view, this provides the company with the possibility to clear its accounts in the event of a significant loss, or to limit the amount of its share capital so as to (or no longer) exceed various thresholds (IS) corporate tax) and other taxes.
In order to reduce the share capital of a company, the motivation for this operation must be defined. Only two scenarios are possible: loss-induced capital shortfall and loss-induced capital shortfall.
Loss Driven Share Capital Reduction
In the event of a significant loss, you have no option but to reduce your share capital. In fact, if at one time or another the shareholders’ equity is less than half of the company’s share capital, you are legally obligated to perform this operation (Article L of the Commercial Code. 223-42).
In cases of reduction in share capital induced by financial losses, the partners receive nothing and the creditors cannot oppose the operation.
The reduction in share capital is not driven by losses
Shortage of share capital not induced by losses includes all reasons other than financial loss. To accomplish this, you must notify creditors, who may outright oppose the operation. Indeed, reducing capital represents a certain risk for them, the company’s share capital is a guarantee of its solvency.
Reducing the share capital of a company: 3 options
You have 3 options for proceeding with a reduction in a company’s capital:
- reduce the amount of shares by modifying their face value;
- Reduce the number of shares: This is equal to the buyback of shares by the company;
- By repurchase of securities by the company with a view to their cancellation.
The choice of how to reduce your company’s share capital depends on your situation and your objectives. Thus, in the context of reduction of the following losses, only a reduction in the value of the shares is possible. On the other hand, in the context of restructuring partners for example, you would favor a change in their value rather than a reduction in the number of shares to maintain the weight of the remaining partners.
Formalities for reducing share capital
Reduction in share capital responds to a very precise formality. Therefore after making a decision during an Extraordinary General Meeting (AGO) you should respect the following steps.
First, you must modify the company’s articles of association to suit the new status. Actually, share capital is a mandatory mention. That is why you should also publish legal notice of revision of share capital in JAL (Journal of Legal Notices) or SHAL (Site Authorized to publish Legal Notices). You have 30 days from the date of AG report. Finally, changes must be made to the registry by filing a complete file:
- A copy of the amended and certified Articles of Association;
- A copy of the GA minutes recording the decision, certified true, dated and signed;
- two copies of the M2 form;
- Certificate of Publication of JAL;
- A power if you delegate the formalities to a third party.
nice to know
Once you get your new Kbis, don’t forget to update all your legal and commercial documents: Share capital is a mandatory mention!
questions to ask
What is an “accordion kick”?
This involves making a capital reduction, often driven by a loss, then proceeding with a capital increase after clearing the accounting position.
How to reduce the par value of a share?
Quite simply by reimbursing each participant’s or shareholder’s portion of the initial investment.
When to reduce capital?
whenever needed! That is to say, when the equity becomes less than half of the share capital, or when your management strategy requires it. You have 2 years within the framework of the loss-induced capital deduction.