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.
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 canceled, but in most other situations, the impact on shareholders is minimal.
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 payouts or capital gains.
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
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
In most cases, creating distributable reserves or reducing financial losses is the main reason 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. 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.
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.
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.
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.
