The distinctions of the various forms of reduction of the share capital of the SA seem unnecessarily technical. And so do the issues, in general, related to the reduction of the share capital. They are, however – and as a whole, important as they provide solutions to in other ways unsolvable (or even intractable) problems. We have, repeatedly, referred to the special importance of share capital in the existence and development of SAs in the context of our previous articles. Given its importance, its amount, coverage and payment as well as its keeping at specific levels are governed, as we have seen, by specific rules. Their circumvention (through the reduction of the share capital) could only take place with specific, correspondingly strict, rules (articles 29-31 of Law 4548/2018). These rules and, in general, the concept of share capital reduction, its procedure and conditions as well as its legal consequences are some of the issues that will concern us in the present, but also in our articles to follow.
Share Capital Reduction Distinctions
The reduction of share capital, depending on the purpose it pursues and the way in which it is implemented, is distinguished as follows:
Actual & Nominal Reduction
The distinction between real and nominal reduction is characteristic of the corresponding increase in share capital (about which our previous article ). Particularly:
Actual Reduction
Actual reduction takes place by returning corporate property (more commonly: money) to shareholders. Or also, after the shareholders’ partial or total exemption from the obligation to pay capital. Always, of course, under the condition of observing the conditions of the law.
The actual reduction therefore constitutes a release of capital. It may be aimed at: (a) readjusting the capital to the real needs of the SA, (b) changing the correlation of forces and balances between its shareholders, (c) distributing property of the SA (instead of a dividend for tax purposes) to the shareholders of (or, as the case may be, to a specific shareholder thereof), (d) to increase the profitability of the equity capital of the SA.
Nominal Reduction
A nominal reduction, on the other hand, means the accounting reduction of the SA’s share capital. In other words, the share capital through the nominal reduction is reduced as accounting aggregates, but no payment to the shareholders follows. In other words, there is no real reduction in corporate assets.
The need for a nominal reduction is dictated, in practice, in cases of existence of damages – not, however, temporary and limited. In these cases, the nominal/accounting reduction aims at the consolidation of the SA, the readjustment of the share capital to the (corresponding) reduced corporate property and the satisfaction, in the end, of the interests of the shareholders as well as of the legal entity itself. In fact, if such a reduction is combined with a (simultaneous) increase in the SA’s share capital, it is, as a rule, a move to consolidate it.
Optional & Mandatory Reduction
The decision to reduce the SA’s share capital can be either optional or mandatory.
Optional Reduction
The decision on the reduction and its amount constitutes, in this particular case, a business decision. It is taken freely by the competent corporate body, which evaluates the individual data as well as the, in general, needs of the business.
Mandatory Reduction
In some cases, however, the company’s recourse to the reduction of the share capital becomes mandatory – even by law. Such cases, e.g., constitute:
(a) the case of the cancellation of the company’s own shares, since it was not possible for it to sell the share buybacks (§§6 & 7 of article 49 of Law 4548/2018).
(b) the case of the cancellation of shares that were not repaid – after the fruitless attempt of the SA to sell of them (articles 20 §9 and 21 §§6 & 7 of Law 4548/2018 (see also our previous article).
Uniform & Uneven Reduction
The distinction between uniform and uneven reduction is considered important for reasons of expediency and whether or not to maintain the equity relationships within the SA.
Uniform Reduction
In principle, the reduction of share capital should comply with the principle of equal treatment of shareholders. This means that the participation of each shareholder in the capital should, in such a case, be reduced proportionally. The uniform, consequently, reduction serves not only the principle of equal treatment but also the maintenance of the existing equity balances within the SA.
Uneven Reduction
On the other hand, in the case of the uneven reduction, the relevant decision may lead, in essence, to the return of funds (and/or a specific asset of the SA) to a single shareholder; even to the exit from the SA of one, and only one, shareholder. In other words: in the non-proportional (and non-equal for shareholders) reduction of the share capital.
However, it is argued (and rightly so) that a condition for such an uneven reduction (for the benefit of specific shareholders only) is the unanimous, relevant decision of the General Assembly (167/2012 Legal Council of the State).
Reduction By Payment Of Cash & Capital Reduction In Kind
The actual reduction of share capital, the return, i.e., of corporate property to shareholders, is further distinguished based on the type of property returned.
Reduction With Cash Payment
In this case (which is also the most common one) the capital reduction takes place by paying cash to the shareholders.
Capital Reduction In Kind
The actual reduction of the share capital can also be realized through a direct return to the shareholders of corporate property in kind. In fact, Law 4548/2018-in contrast to the previous regime, regulates the relevant case.
This is one of the two special ways of reducing share capital (Article 31 of Law 4548/2018), as they are analyzed immediately below. More specifically: (a) the reduction by payment in kind (§1) and (b) the reduction for the purpose of forming a special reserve (§2).
Special Ways of Reducing Share Capital
Reduction By Payment In Kind
The reduction of the share capital, with a payment in kind, can prove to be particularly beneficial not only for the beneficial shareholders but for the SA itself. Especially in cases where a large part of its assets are e.g. products, real estate, shares of other companies. In such cases, the liquidation of the assets and the reduction of the capital by payment in cash could prove not only difficult but also harmful to the SA.
The previous regime
The possibility of reduction by payment in kind was not specifically regulated under the previous regime. Objections regarding the permissibility of such a reduction were therefore raised by a portion of the legal theory.
The opposite position was, however, of course also supported. That is to say that “…the reduction of the share capital of an SA by payment in kind to its shareholders, although it is not expressly provided for in the statutory law of SAs (law. 2190/1920), can be chosen, under conditions, by the competent corporate body based primarily on the interest of the company’s creditors and secondarily of its shareholders…” (167/2012 Legal Council of the State -by majority).
The current regime
Under the current regime, any dispute regarding the permissibility of capital reduction by payment in kind is waived. Now, as underlined in the Explanatory Report of the law on SAs (: on article 31 of law 4548/2018), “the possibility of reducing capital in kind is expressly provided for…”.
However, a valuation of the assets to be returned to shareholders due to the reduction is required beforehand. Therefore, the provisions for the valuation of contributions in kind apply (: articles 17 and 18 of Law 4548/2018). At the same time, it is expressly provided that – apart from the exceptions of Article 18 of Law 4548/2018 – “…valuation of the contributions in kind is not required, if the shareholders unanimously decide on the way to implement the reduction” (Article 31 §1, Section c).
Reduction for the Purpose of the Formation of a Special Reserve
The other special way of reducing the share capital concerns the reduction for the purpose of forming a special reserve. Under the previous regime, doubts had been expressed about the permissibility of the relevant reduction method. Whereas, a relevant legislative provision was provided only for listed SAs.
Law 4548/2018 also expressly regulated the specific method of reduction. According to the legislative provision, however, the “special reserve can only be used for the purpose of its recapitalization or its offsetting to amortize losses of the company” (Article 31 §2 in fine). This means that this special reserve cannot be distributed to shareholders. On the contrary, it increases the share capital (according to §1 of article 159 of Law 4548/2018).
As mentioned in the introduction, the ways of reducing the share capital and the related distinctions seem unnecessarily technical. It is, however, particularly important to know them as they often provide us with solutions to intractable, otherwise, absolutely tangible, problems. The (legal) transfer of property from the SA to its shareholders, the reduction of the shareholding (and/or financial support) of some of them, the consolidation of the company, are some of those problems that are successfully managed by the reduction of the share capital. For the comprehensive approach to the specific subject one should talk about the techniques, the conditions and the reduction process. Also for the protection of creditors and the consequences of the reduction. And why not for depreciation purposes as well. But about them, see our next article.
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 8th, 2022).
Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.