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Capital reduction and increase operations

The purpose of this article is to establish the basis on which a capital reduction and increase should be considered appropriate. Restructuring the equity of a company is an option provided by the Spanish Law in order to solve the imbalance in equity or the departure of one of the shareholder.

The legal consequence when a company suffers from business losses involves the reduction of capital in order to restore the balance between social capital and equity. This is necessary in order to avoid one of the most flagrant cases of liability of directors and not refer the debts to the management of the company.

If that same company continues with the problems or if those problems are such that the amount required to restore the balance between social capital and equity would leave the company below the minimum share capital, a simple reduction of capital is not a valid option and it is mandatory to proceed with a more complex modification in the equity.

In this situation we can lay out two possible options:

– The first one implies a capital reduction to compensate the business losses and the conversion of the company into a Sociedad de Responsabilidad Limitada (similar to Private Limited Liability Company), which is not recommended as in most cases the costs of notary and registry are considerably expensive.

– The second one is a capital reduction and increase.

The second option, in which a capital reduction and increase would be advisable, would involve the separation or exclusion of one of the shareholders of the company. Once the General Meeting of Shareholders accepts the agreement, the company may either acquire shares or reduce the share capital. In this second case, if the capital of the company is less than the legal amount, the company shall increase its capital.

We can also find a third option in which the capital reduction and increase may be applied. In order to avoid legal contingencies, this third possibility implies an agreement of all the shareholders of the company, and will consist in the distribution of an asset to a shareholder as a payment for it is shares. The advantage of this option over a simple sale of shares is that the shareholder may receive an asset along with an economic compensation.

In short, a capital reduction and increase is a complex equity operation that requires the assistance of professionals in this area of the Law.

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