There may be many reasons to why you wish to consider a reorganisation of your company and a tidy up of your share capital and balance sheet. It could be that the regulatory or economic climate has changed or that you wish to take the business in a different direction to exploit an opportunity that has come to you, a few of which are listed below:
Why reorganise your existing group structure and tidy up your share capital?
• To create distributable reserves, possibly to pay a dividend or to buy back or redeem shares;
• To return surplus capital to shareholders which is no longer required by the company;
• To eliminate or reduce losses of the company, which currently prevent it from declaring or paying dividends to shareholders;
• To distribute non-cash assets to shareholders;
• To separate out different business assets as part of a demerger of a business.
Whatever the reason, there may be tough decisions to be made and many legal hurdles to overcome. The Companies Act 2006 stipulates that, in general, subject to a company always having at least one non-redeemable share in issue, a company may reduce its share capital “in any way”. This could include cancelling a number of the issued shares; reducing the nominal value of the shares in issue (for example from £1.00 to 10p); or reducing the amount paid up on the shares in issue.
For the purposes of a reduction of capital, a company’s statutory reserves are treated under the Companies Act 2006 as part of its paid-up share capital. This means that a company can also reduce or cancel its share premium account, capital redemption reserve or redenomination reserve, under a capital reduction.
It used to be the case that any company which wished to reduce its share capital could only proceed if the capital reduction application was approved by a court order, which could be time-consuming and expensive. The Companies Act 2006 introduced the solvency statement procedure as an alternative to the court approved procedure for reducing share capital for private limited companies.
The solvency statement procedure involves the following key steps:
• Statement of solvency signed by all of the directors; and
• Approval of shareholders by special resolution (i.e. a resolution requiring the support of shareholders holding 75% or more of the issued shares).
Many of our clients have taken advantage of the solvency statement procedure to reduce their share capital, with an increasing number doing this as part of a capital reduction demerger. For an example of this, take a look at our involvement in the recent capital reduction demerger at Extrinsica Global Limited.
If you are interested in finding out more about capital reductions (either on their own or as part of a demerger or group reorganisation), please feel free to contact Peter Woolley on +44 1628 470016 (DDI)Peter.Woolley@moorcrofts.com.