Detailed Guide on Share Capital Increase and Reduction in a Cypriot Company

Introduction

In Cypriot corporate law, the share capital of a company plays a vital role in its financial structure, representing the funds contributed by shareholders to establish or expand the business. Share capital also serves as a measure of a company's strength and ability to secure loans, expand operations, and generate profits. However, there are situations where a company may need to adjust its share capital by either increasing or reducing it.

In this guide, you will find a detailed breakdown of the conditions and procedures for increasing and reducing the share capital of Cypriot companies, as provided in the Cyprus Companies Act (Cap. 113).

Understanding the Share Capital

What is Share Capital?

Share capital is the capital that shareholders contribute to the establishment or expansion of a company. It represents the financial foundation that allows the company to operate, invest and grow. In exchange for their contributions, shareholders receive ownership in the company in the form of shares, which give them specific rights, such as voting on key corporate decisions and receiving dividends.

According to Cypriot Legislation, there is no limitation as to the minimum and maximum amount of the Share Capital of a Cypriot Company. However, Cypriot companies operating in certain industries may be required by special legislation to have a minimum share capital.

Categories of Share Capital

Share capital is categorized into two main categories:

• Authorized Share Capital: This is the maximum amount of capital that a Cypriot company is allowed to issue, as defined in its Memorandum. It represents the total value of shares the company is permitted to distribute to shareholders. The authorized share capital can be modified, either increased or decreased, based on the company’s requirements, subject to shareholder approval and relevant legal provisions.
• Issued Share Capital: This is the part of the Authorized Share Capital that has been issued to the shareholders. Issued Share Capital Can also be increased by issuing more shares (from the Authorized Share Capital) or decreased through processes such as share cancelation.

Why Adjust the Share Capital of a Cyprus Company?

Α Cyprus company may decide to adjust its share capital for various reasons, such as:

Reasons for Share Capital Increase:

• Capital Expansion: To raise capital for new investments, acquisitions, entering new markets, launching new products or other operational needs.
• Attracting New Investors: The increase of Share Capital in order to bring in new shareholders (investors), providing additional resources and credibility to the Cypriot Company.
• Regulatory Requirements: Cypriot Companies that are active in certain business activities (e.g. provide financial services) may require a minimum share capital and the capital increase ensures compliance.
• Debt Conversion: Share Capital of a Cyprus Company can be increased to convert existing debt into equity, reducing liabilities and strengthening the financial structure of the Company.

Reasons for Share Capital Reduction:

• Cover Accumulated Losses: By reducing the share capital, a Cyprus Company can offset its accumulated losses so that it can present a healthier financial position and possibly continue dividend payments.
• Return Excess Capital: A Cypriot Company can return excess capital to shareholders if it has more capital than it needs for future operations or investments.
• Simplifying Share Capital Structure: Reduction can eliminate unpaid or partially paid shares, simplifying the company's share structure and making it more efficient.

Procedure for Increasing Share Capital

Necessary steps

The increase of the share capital of a Cypriot Company is governed by Article 60 of the Companies Law, Chapter 113, according to which in order for a company to proceed with the increase of its share capital it must follow the following steps:

Step 1: Authorization from the Articles of Association

In order for a Cypriot Company to increase its share capital, its Articles of Association must expressly provide for the right to increase. In the event that the Company's Articles of Association do not contain such a provision, then in order for the Company to proceed with the increase of its Share Capital, the Articles of Association must be amended following a Special Resolution of its Shareholders.

Step 2: Shareholders’ Resolution

Since the Articles of Association of the Cyprus Company contain a provision allowing the increase of Sare Capital, then the shareholders through a Resolution should approve the increase. Depending on the specific provisions of the Articles of Association, this may be an Ordinary Resolution (simple majority) or a Special Resolution (75% majority). The resolution should describe the terms of the increase, including the number of new shares and their price (par value or at a premium).

Step 3: Filing with the Registrar of Companies

Within 15 days of the approval of the Share Capital increase through the Resolution by the Shareholders, the Cyprus Company must file a certified true extract of the resolution with the Registrar of Companies. Along with this, the company must submit Form HE14 detailing the increase in share capital for calculating the capital duty due.

• Capital Duty: Capital duty is payable at the rate of 0.6% on the amount of the share capital increase or €20, whichever is greater. Once filed and paid, the increase becomes effective.

Issuance of New Shares

After the approval of the Share Capital increase, the Cyprus Company has the right to issue new shares to existing shareholders or new investors. If the company proceeds with the issue of new shares, then alongside the authorized share capital the issued share capital also increases, providing the company with the funds necessary for its activities.

Impact on Shareholder Percentages

Issuance of new shares directly affects existing shareholder ownership percentages. If new shares are issued to new investors and shareholders do not exercise their pre-emptive rights (if any), their ownership percentage will be reduced. However, existing shareholders can retain their ownership percentage by participating in the issue and purchasing additional shares.

• Pre-Emption Rights: Many companies grant existing shareholders the pre-emption right to purchase new shares in proportion to their current holdings. This allows them to maintain their ownership percentages and avoid dilution.

Key Points to Note:

• If the articles of association of a Cypriot Company do not allow the increase of its share capital, in order for the Company to proceed with the increase in question, its Articles of Association must first be amended by a special resolution of the Shareholders.
• The increase takes effect from the date the decision is issued and filed with the Registrar of Companies.

Procedure for Reducing Share Capital

Necessary steps

Reducing the share capital of a Cyprus Company is a more complicated process (compared to increasing the share capital) due to the potential impact on creditors and shareholders. The said procedure is governed by Sections 64 to 68 of the Companies Αct (Cap. 113), and includes the mandatory obtaining of court approval so that the reduction can take place.

Step 1: Authorization from the Articles of Association

In order for a Cypriot Company to reduce its share capital, its articles of association must expressly provide for the right of reduction. In the event that the Company's Articles of Association do not contain such a provision, then in order for the Company to proceed with a reduction of its Share Capital, the Articles of Association must be amended following a Special Decision of its Shareholders.

Step 2: Shareholders’ Resolution

Since the Articles of Association of the Cypriot Company allow the reduction of its share capital, the process begins with a special resolution approved by at least 75% of the shareholders. Said resolution must specify the terms of the reduction.

Step 3: Application to the Court

Once the special resolution has been approved by the shareholders, the Cyprus Company must proceed by filing an application with the District Court in the jurisdiction where it is registered. The District Court will proceed to review the said application and approve or not, ensuring that the rights of creditors and shareholders are not unfairly affected. The primary concern of the court is to protect creditors from a possible reduction in the company's ability to satisfy its debts.

• Required Documents for Court Application: The application must include:

1. The company's Certificate of Incorporation.
2. The Memorandum and Articles of Association.
3. The special resolution approving the reduction.
4. The most recent financial statements or management accounts.
5. Consents from creditors or evidence that their debts have been repaid or adequately secured.

• Court's Evaluation: The court will examine the fairness of the reduction, ensuring that:

1. Shareholders and creditors are treated equitably.
2. Proper explanations for the reduction are provided.
3. No creditors or third parties’ interests are jeopardized.

The court may require the company to obtain creditor consents or take steps to ensure that creditors’ rights are protected (e.g., securing their claims or obtaining guarantees).

Step 4: Registration with the Registrar of Companies

Once the court issues the decision approving the reduction of the share capital, the company must file the court decision and a copy of the special resolution with the Registrar of Companies. The reduction only takes effect on registration with the Registrar, at which point the Registrar will issue a certificate confirming the new capital structure.

Key Points to Note:

• If the articles of association of a Cypriot Company do not allow the reduction of its share capital, in order for the Company to proceed with the reduction in question, its Articles of Association must first be amended by a special resolution of the Shareholders.
• The court’s approval is necessary to protect creditors and ensure the reduction is justified.
• The process is only effective after registration with the Registrar of Companies.

Conclusion

Increasing or decreasing the share capital of a Cypriot company is a very important corporate decision that can have significant implications for its financial stability and the interests of its shareholders and creditors. While increasing share capital provides additional funds for growth and expansion, reducing it can optimize the company's financial structure or return excess capital to shareholders.

It is important that Cyprus Companies ensure compliance with the procedural requirements of the Companies Act (Cap. 113) and their Article of Association, and seek professional legal guidance to navigate the complexities of these transactions, particularly when dealing with reductions that require court approval.

How We Can Help

At Polycarpos Philippou & Associates LLC, we have extensive experience in handling corporate law matters, including increases and decreases in share capital of Cypriot Companies, for both local and international clients. Our team of experienced lawyers are well versed in Cypriot corporate law and can provide tailored advice to meet the specific needs of your business. Whether you want to restructure your company's capital or simply want to ensure that all legal procedures are followed correctly, we are here to help.

Our Law Firm is committed to providing top quality legal services, ensuring that your Cyprus Company complies with all regulatory requirements while achieving its financial and strategic goals.

For more information or assistance with equity adjustments, please do not hesitate to contact us. We are ready to guide you through every step of the process and help your business thrive in the favorable corporate environment of Cyprus.