Share Capital Reduction for Singapore Companies

7 min read|Last Updated: December 6, 2023|

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If there’s one thing that a company should not have too much of, it’s their share capital. Having excessive share capital can be detrimental to a company, and many are looking at ways to reduce their share capital.

Types of Shares In Singapore

In Singapore, companies have the flexibility to issue various types of shares, each with its own set of conditions. The two most commonly utilized types of shares in Singapore companies are ordinary shares and preference shares.

Ordinary shares are the typical and widely held shares in a company. Owners of ordinary shares enjoy voting rights and are entitled to receive dividends at variable rates. These shares provide shareholders with a voice in decision-making processes and allow them to participate in the company’s profits.

On the other hand, preference shares grant special rights and privileges to their owners, primarily concerning dividend distribution. Shareholders holding preference shares are entitled to receive dividends before ordinary shareholders. Furthermore, preference shares can be redeemable, meaning that the company may choose to repay the shareholders their initial investment at a predetermined date or when specified conditions are met. The terms and conditions regarding redeemable preference shares must be clearly stated in the Memorandum or Articles of Association of the company.

In general, shares can be freely transferred unless any restrictions on transfer are explicitly outlined in the company’s Articles of Association. These restrictions may include pre-emption rights, which grant existing shareholders the first opportunity to acquire shares being transferred by another shareholder.

What Is Share Capital Reduction

The process of decreasing the amount of a company’s shareholder equity is called share capital reduction. There are many ways that this can be executed such as share cancellations and share repurchases, which is also known as share buybacks.

To create a more efficient capital structure and increasing the shareholder value, companies will look to reduce its share capital. It is important to note that while the company’s market capitalisation will not change because of the share capital reduction, the number of outstanding shares and traded shares will decrease.

Another scenario where capital reduction may be executed is to respond to a decline in operating profits or 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 cancelled, but in most other situations, the impact on shareholders is minimal.

Consequences of Having Excessive Share Capital

If a company has excessive amounts of shares, it will usually reduce the value of existing shares currently owned by stockholders. While this is not the ideal situation for stockholders, it is an attractive situation for investors. This is because it may also lead to increased returns on equity through higher dividend pay-outs or capital gains.

Reasons to Reduce Share Capital for Singapore Companies

There are multiple reasons as to why a company might choose to reduce its share capital. These include:

  • Return of surplus capital
    If the company plans to return surplus capital, it will no longer require shareholders of the company.

  • Unable to pay future dividends
    This happens when the company does not have any distributable profits.

  • Change in capital structure
    When reorganising, simplifying, or improving its capital structure, a company may look to reduce share capital. This may help the company to engage greater debt financing and ultimately increases the influence of the company and growth rate.

  • Ensuring availability of distributable funds
    This empowers the company to maintain the sustainability of dividend payments

Impact of Share Capital Reduction for Singapore Companies

Besides the reasons above, a company owner may reduce the share capital of the company to:

  • Create distributable reserves
  • Reduce financial losses
  • Return excess amounts of capital to shareholders
  • Release a liability for payment of other share capital which is yet to be paid
  • Assist in the repurchase or redemption of shares
  • Distribute company assets to shareholders

If no creditor objections are raised, the company must submit the special resolution, solvency statement, director’s declaration, and notice containing the reduction information to ACRA via BizFile+ within eight weeks of the resolution date.

The capital reduction will only be effective once ACRA records the reduction information in the register.

The decision to opt for a court-approved or non-court-approved capital reduction method rests with the company itself.

Typically, companies prefer the court-approved method due to its conclusive nature. Once the court approves the capital reduction, it becomes challenging for creditors to challenge the decision based on fairness.

Moreover, as mentioned earlier, this method reduces potential liability for the board of directors, as there is no requirement to prepare a solvency statement.

However, the non-court approved method offers simplicity, speed, and eliminates the need to pay fees to the court.

Opportunity For Creditors to Object to the Capital Reduction

Creditors have the option to seek court intervention within six weeks of the resolution date if they wish to challenge a company’s application for a non-court approved capital reduction.

The court will revoke a capital reduction order under two conditions:

  • If any creditor who has applied for the reduction has outstanding debt or claims that have not been adequately secured or protected, and it is deemed necessary to safeguard these debts or claims considering the company’s remaining assets after the reduction.

  • In the event of creditor objections:

    1. The company must promptly notify the Accounting and Corporate Regulatory Authority (ACRA) about the creditor objection(s).
    2. The court must dismiss the creditor objection(s).
    3. Within 15 days from the dismissal of the last creditor objection, the company must lodge a solvency statement, a statement from the directors confirming the dismissal of all creditor objections, the court order(s) dismissing the objection(s), and a notice containing the reduction information.

In most cases, creating distributable reserves or reducing financial losses is the main reason to reduce the share capital of the Singapore 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. Financial reserves created through a reduction of share capital can increase or create distributable reserves and 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.

Eric - Chief Executive Officer

How to Reduce Share Capital for Singapore Companies

Many company owners in Singapore have made plans to reduce the share capital of their company. There are 2 ways to reduce share capital for Singapore companies:

1. Reducing share capital with the approval of the Court

A special resolution for share capital reduction must be passed for this option before the court confirms the reduction. This is usually done by the company secretary.

However, before doing so, the company must send the Accounting and Corporate Regulatory Authority (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.

Eric - Chief Executive Officer

Upon approval, the company is required to submit a copy of the court order on the BizFile+ website within 90 days of approval. The company can then edit its shareholdings according to the approved share capital reduction and this will take effect once ACRA has officially recorded the information.

2. Reducing share capital without the approval of the Court

Similar to the first option, a special resolution from the company’s shareholder must be passed before share capital reduction takes place. Once completed, the company’s board of directors will make an official statement if required, and they must also comply to any other requirements. The reduction proceeds as per the court-approved method once all matters have been addressed.

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FAQs

What sets apart a member from a shareholder within a company’s structure?2024-05-17T17:04:03+08:00
  • Each company must have at least one member as a legal requirement.
  • Membership status is attained when an individual’s details are officially registered in the company’s membership records.
  • Simply possessing shares does not automatically confer membership status; they are distinct roles.
  • While it’s common for shareholders to also hold membership, exceptions exist.
  • For example, ownership via a nominee may make one a shareholder, while the nominee, registered in the company’s records, is the official member.
  • In companies operating under a guarantee, members are not shareholders, given the absence of share capital.
What is the Minimum share capital in Singapore2023-05-24T10:07:54+08:00

In Singapore, every company limited by shares is required to deposit a minimum share capital of 1S$. The ownership structure of a company is determined by its shares. When individuals purchase shares in a company, they gain the entitlement to receive a portion of the company’s profits, commonly referred to as dividends. Shares can be acquired by subscribing with either monetary funds or assets.

The share capital holds significant importance for companies, particularly private limited companies, as it serves as their primary source of funding. It’s worth noting that Singapore has done away with the concept of authorized share capital, streamlining the regulations surrounding share capital requirements.

What mistakes are often made by those intending to reduce their company’s share capital?2021-09-10T10:33:50+08:00

Those who are not experienced in matters related to share capital reduction may sometimes make mistakes. This is especially true of new company owners. Many of these mistakes are related to areas such as share exchange agreements, book value valuation, and obtaining relevant approvals from the authorities.

Do certain companies in Singapore automatically have more share capital than others?2021-09-10T10:34:40+08:00

All companies, whether those based in Singapore or abroad, will have different amounts of share capital. The amount of share capital possessed by a company depends upon its level of external investment as well as the company’s efforts to change the amount of share capital.

Are there instances in which share capital should not be reduced?2021-09-10T10:35:32+08:00

The vast majority of the results of a share capital reduction are positive. For this reason, it is almost impossible for circumstances to be such that a company’s share capital should not be reduced. However, in rare cases, it can be possible.

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