Increase and Decrease of Capital in Joint Stock Companies
Pursuant to Article 157 of the Amended Bill of the Commercial Code, capital in a joint stock company may be increased through two methods:
- Increasing the nominal value of shares.
- Issuing new shares.
The required majority for increasing capital through raising the nominal value depends on whether the increase creates new obligations for shareholders.
Shareholders’ Rights in the Process of Capital Change
A distinction must be made between two situations:
- First situation: Where the increase of capital through raising the nominal value results in new obligations for shareholders, unanimous approval of all shareholders is required pursuant to Article 159 of the Amended Bill of the Commercial Code. An obligation is created when there are no distributed profits or voluntary reserves available, and shareholders must personally pay the increased amount.
- Second situation: Where the increase of capital through raising the nominal value does not create new obligations for shareholders, meaning that the increased amount is funded from undistributed profits or voluntary reserves of the company, the required majority is that applicable to the Extraordinary General Assembly under Articles 84 and 85.
In a capital increase through share capital, the additional amount must be paid in cash.
In the case of capital increase through issuance of new shares, payment for the new shares may be made in the following ways, as provided in Article 158 of the Amended Bill:
- Cash payment for new shares.
- Conversion of matured claims against the company into new shares, including:
- Conversion of undistributed profits into capital.
- Conversion of voluntary reserves into capital.
- Conversion of proceeds arising from share premium into capital.
- Conversion of bonds into new shares.
Where a company intends to sell new shares to third parties and to remove the preemptive rights of existing shareholders, the new shares must be sold at their real value.
The difference between the nominal value and the real value, pursuant to Article 160, may be distributed among shareholders, granted to former shareholders in the form of shares, or allocated to reserves.
At the time of incorporation, whether in public or private joint-stock companies, shareholders’ contributions may be in cash or in non-cash forms, such as goods or property.
The question arises whether non-cash contributions are also permissible in capital increases. The answer differs:
- In private joint-stock companies, under the interpretation of Note 1 to Article 158, non-cash contributions, such as property, are permitted.
- In public joint-stock companies, during a capital increase, contributions must be made in cash only.
Preemptive Rights of Existing Shareholders in Capital Increase
Existing shareholders have preemptive rights to purchase new shares in proportion to their current holdings. These rights are transferable.
Pursuant to Articles 166 and 167 of the Amended Bill, the period for exercising such rights may not be less than 60 days, commencing from the date specified for subscription.
Preemptive rights may be removed by decision of the Extraordinary General Assembly, which has authorized the capital increase. For companies listed on the stock exchange, both share transactions and transfers of preemptive rights must be conducted through authorized stockbrokers.
Authority to Grant the Board of Directors Power to Increase Capital
Unlike the issuance of bonds, where both the Extraordinary General Assembly and the articles of association may authorize the Board of Directors, in matters of capital increase, only the Extraordinary General Assembly may grant such authority pursuant to Article 162.
This authorization must be for a specified period not exceeding five years. Under Article 164, the articles of association may not independently grant the Board of Directors authority to increase capital.
Reduction of Capital
Mandatory Reduction of Capital
Mandatory reduction of capital, pursuant to Article 141 of the Amended Bill, arises where at least half of the company’s capital has been lost due to accumulated losses. In such a case, the Board of Directors must convene an Extraordinary General Assembly to decide either on the dissolution of the company or on the reduction of capital. If no such decision is made, any interested party may petition the competent court for dissolution.
Voluntary Reduction of Capital
A voluntary reduction of capital occurs when the Board of Directors proposes a reduction and the Extraordinary General Assembly approves it.
Frequently Asked Questions About Increase and Decrease of Capital in Joint Stock Companies
Under Article 157 of the Amended Commercial Code, capital may be increased either by raising the nominal value of existing shares or by issuing new shares.
If increasing the nominal value of shares creates new financial obligations for shareholders, unanimous consent of all shareholders is required pursuant to Article 159.
If the increase is funded from undistributed profits or voluntary reserves and does not create new obligations, the majority required is that applicable to the Extraordinary General Assembly under Articles 84 and 85.
Payment may be made in cash, by conversion of matured claims, conversion of undistributed profits, conversion of voluntary reserves, conversion of share premium proceeds, or conversion of bonds into shares, as provided in Article 158.
In private joint stock companies, non cash contributions such as property are permitted. In public joint stock companies, capital increases must be made through cash contributions only.
Existing shareholders have transferable preemptive rights to purchase new shares in proportion to their holdings. The exercise period must be at least 60 days. In listed companies, transfers must be conducted through stockbrokers.
Only the Extraordinary General Assembly may grant such authority. It must be limited to a period of not more than five years. The articles of association cannot independently grant this power.
Mandatory reduction arises when at least half of the company’s capital is lost. The Extraordinary General Assembly must decide on dissolution or reduction of capital; otherwise, any interested party may seek dissolution from the competent court.
Voluntary reduction of capital is proposed by the Board of Directors and must be approved by the Extraordinary General Assembly. How can capital be increased in a joint stock company?
When is unanimous approval required for capital increase?
What majority is required if no new obligation is created?
How may payment for newly issued shares be made?
Are non cash contributions allowed in capital increases?
What are the preemptive rights of shareholders?
Who may authorize the Board of Directors to increase capital?
What is mandatory reduction of capital?
How is voluntary reduction of capital carried out?
