Capital reductions operations

Capital reductions operations

A capital reduction is a mercantile operation carried out to reduce the amount of the capital stock that appears in the company’s bylaws. 

In a capital reduction operation, the aim is to reduce the company’s funds by modifying the capital stock. 

It is usually considered favorable to carry out a capital reduction in the Company when it is desired to face the losses that it has been able to have, being the net worth lower than the capital stock. In these situations, it is advisable to carry out the necessary operations to reestablish the balance of the company so that the net worth continues to be a guarantee before third parties. 

It is also important to bear in mind that it is important for a company to comply with the requirements relating to the legal reserves established in the Capital Companies Law, being especially important so that it can have the capacity to offset any losses that may occur.

What is a capital reduction made?

Among the different reasons for carrying out a capital reduction, we can start with the aforementioned loss compensation. This is usually one of the most common reasons for carrying out a capital reduction. 

Secondly, it is usually necessary to endow the legal reserves of the company, and this reserve must represent at least 20% of the share capital. In these cases, it is necessary that the company does not have any reserves available for this purpose.

Thirdly, a capital reduction can be carried out to increase the company’s voluntary reserves, reducing the net worth. In this case, the creditors will see their guarantees reduced, which is why they are usually given the right to oppose the reduction in return. 

Finally, another of the usual reasons for carrying out a capital reduction operation is usually to return the value of the contributions made by the shareholders. 

In this case, the aim is to return to the shareholders the value of the amounts they contributed for the purposes of the incorporation of the company. This requires the individual consent of all the shareholders. It is usual to carry out capital reductions with these characteristics for those cases in which the contributions must be returned to the shareholder, such as, for example, the exclusion of shareholders or the exercise of the right of separation.

What types of capital reductions are there?

On the one hand, there are capital reductions due to a decrease in the real value of the shares or equity interests. In this case, the total number of shares issued would be maintained with the particularity that their nominal value would be lower. 

Another of the possible options is to carry out a redemption of the shares or stockholdings, eliminating the number of shares necessary to reach the desired amount of reduced capital. In this case, it is necessary to proceed with the reimbursement of the social contributions to the shareholders. 

The third type of capital reduction is through the grouping of shares or partnership interests for their exchange, grouping several interests to proceed with the allocation of one interest.

What is involved in the reduction of a company’s capital?

In the first place, a capital reduction will necessarily result in the corresponding amendment of the bylaws of the company with its corresponding public deed and subsequent registration in the mercantile registry. 

For this reason, the necessary resolution of the Shareholders’ Meeting approving the capital reduction will be necessary and must be approved by a qualified majority for this purpose.

Can the capital stock be increased and reduced simultaneously?

In practice, for different reasons and in order to simplify the procedures with the Mercantile Registry, it is usually convenient to carry out a capital increase at the same time as a capital reduction. 

This type of operation is called “accordion operation” and generally seeks to clean up the company’s finances at the same time as it reintegrates part of the capital stock. 

It is common for this type of operation to be carried out by first reducing the capital to zero or below the legal minimum and then carrying out a capital increase to cover at least the legal minimum.

LETSLAW

At Letslaw we are experts in carrying out capital reduction transactions. Our professionals have more than 10 years of experience advising in this type of operations.