Definition of Share Capital Reduction
Share capital reduction refers to the process of decreasing the amount of a company’s shareholder equity. Share capital reduction may be performed through share cancellations and share repurchases. Share repurchases may also be known as share buybacks. The reduction of share capital may done by companies for any of various reasons. Some of these reasons may include the increasing of shareholder value and the creation of a more efficient structure of capital. After a share capital reduction, the number of shares in the company will decline by the amount involved in the reduction. While the company’s market capitalization will not change as a result of a share capital reduction, the number of shares outstanding and allowed to be traded will be reduced.
The act of capital reduction may also be performed in response to a decline in a company’s operating profits or a loss of revenue that cannot be recovered from a company’s expected future earnings. In some capital reductions, shareholders will receive a cash payment for shares which have been canceled, but in most other situations, the impact on shareholders is minimal.
Reasons Why Companies Choose to Reduce Share Capital
There are multiple reasons as to why a company might choose to reduce its share capital. One of these reasons may be that the company may have plans to return surplus capital which it no longer requires to the shareholders of the company. If the company does not have any distributable profits, it may be interested in reducing its share capital if it cannot afford to pay any dividends in the future. A company may also conduct a reduction of share capital in order to reorganize, simplify, or improve its capital structure. By changing the capital structure of the company, the company might potentially be able to engage in greater debt financing. This subsequently increases the influence which the company has and therefore also increases the company’s corporate growth rate. Reducing share capital also helps ensure the availability of distributable funds. If distributable funds are available, a company will be able to maintain sustainability of dividend payments. This is because fewer dividends are to be declared by a company which has reduced its share capital.
Regardless of whether your company’s financial plan involves the reduction of share capital, you may use our services to create a viable financial plan. We at Paul Hype Page & Co will work with you so that your company has a strategy which will generate the largest amount of profits possible. You will soon find out that working with us will have done much good for you and your company.
Share Capital Reduction and Company Owners
The reduction of share capital provides several advantages to the owner of a company. A company’s owner may intend to reduce the share capital of the company in order to create distributable reserves, reduce financial losses which have been suffered by the company, return excess amounts of capital to shareholders, release a liability for the payment of other share capital which is yet to be paid, assist in the repurchase or redemption of shares, or distribute company assets to shareholders.
In most cases, creating distributable reserves or reducing financial losses is the main reason as to why the owner of a company chooses to reduce the share capital of the company. This is because financial losses have a negative impact on a company’s overall profit and may prevent the rightful payment of dividends to shareholders because the company would not be able to do so if its losses are too great. Financial reserves created through a reduction of share capital can increase or create distributable reserves. They also serve to reduce or eliminate losses.
Some company owners choose to reduce the company’s share capital in order to increase its distributable reserves so that a buyback or redemption of shares can be made possible. This may be the case if the company does not have sufficient distributable reserves to redeem shares and does not plan to issue new shares to finance the redemption of those shares.
Although it is not common for a company owner to reduce the company’s share capital in order to distribute the company’s assets to its shareholders, it can and does happen occasionally. In such an instance, the nominal value of the shares in question is reduced and the assets are subsequently distributed to the shareholders.
In any case, if you would like to have a company of your own, we at Paul Hype Page & Co are always willing to be of assistance. We will help you set up your company in Singapore according to the laws and regulations of the country. We will even contact government authorities on your behalf to save you the trouble of doing so.
Consequences of Having Excessive Share Capital
If a company has excessive amounts of shares, it is usually a negative turn of events for stockholders because it represents the issuance of additional stock shares. These issuances reduce the value of existing shares currently owned. However, the additional share capital may also benefit investors. This is because it may also lead to increased returns on equity through higher dividend payouts or capital gains.
How a Company Owner in Singapore May Reduce Share Capital
Many company owners in Singapore have made plans to reduce the share capital of their company. At the moment, there are two ways by which a company owner may obtain approval to reduce share capital. One is the court-approved method; the second is the non-court approved method.
In neither method does the Accounting and Corporate Regulatory Authority (ACRA) require any fees to be paid during the entire process.
Reducing Share Capital with the Approval of the Court
For share capital reduction with court approval to occur, a special resolution for the share capital reduction must be passed. Once this has taken place, the court is to confirm the reduction.
However, before any of this may take place, the company must send ACRA a notice stating that the special resolution has been passed. Before the court approves this resolution, it must agree to the fact that each qualifying creditor has either consented to the reduction or assured the court that all debts have been adequately protected. A qualifying creditor is a creditor whose debt or claim would be admissible in proof if the company were to begin the liquidation of the company on a certain date which would be determined by the court.
Once the court has approved the reduction of share capital, the company is to receive approval for the reduction from ACRA. This is to be done via the BizFile+ website. It involves the submission of a copy of the court order which granted approval as well as a notice containing information about the reduction within 90 days of the approval.
On the BizFile+ website, the company is then permitted to edit its shareholdings according to the approved share capital reduction. The share capital reduction will take effect once ACRA has officially recorded the information which has been lodged.
Reducing Share Capital Without the Approval of the Court
Share capital may sometimes be done without the approval of the court. However, before a share capital reduction without official court approval may take place, a special resolution from the company’s shareholders must be passed. Following this, the company’s board of directors will make an official statement if such is required of them. The company must also comply with the any other requirements. Once all of these matters have been addressed, the reduction proceeds in a similar way to the court-approved method.
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Categories: Singapore Incorporation and Company Registration