Change in share capital LLC

In accordance with the Companies Law, the minimum capital share of a limited liability company equals to 100 Dinars. A special law can provide that the minimum amount of capital share be greater than 100 Dinars for companies practicing certain activities. However, over their period of business operation, companies face numerous challenges which may result in the company’s need to increase or reduce their accumulated capital. In this text, we will answer the questions related to the changes of share capital which concern the increase and reduction of share capital, which cannot be below the prescribed minimum amount.

The increase of the LLC’s share capital

In accordance with the Companies Law and Article 146 of the Law, there are several different ways of increasing share capital:

• New investments from existing members or a member joining the company,
• Turning company reserves or profit into share capital,
• Turning or conversion of claims toward the company into share capital,
• Status changes which have an increase of share capital as its consequence,
• Turning (converting) additional payments into share capital.

The company board’s decision represents the first step towards capital increase. With the board’s decision on the increase of company’s share capital, it is also necessary to prepare the Bank’s confirmation about payment of monetary contribution. The only exception is when there is a new member becoming a part of the company, so the decision can be brought before the new member’s capital is fully paid in (or invested), but only under certain conditions. The new member must time fully pay in the capital or invest his contribution into the company at the same. If the share capital is increased by a non-monetary contribution, it is necessary to execute an Agreement by the company members on the evaluation of non-monetary contribution or a confirmation from the competent authority of the evaluation of non-monetary contribution (when increasing the share capital through new investments or turning additional payments into share capital). When the share capital increase is carried out through turning company reserves or profit into share capital, it is necessary to submit the annual report (unless the report is registered in accordance with the law). It is also important to specify that if the capital is increased by contribution of immovable property into the company, the decision on capital increase must be certified by notary public in the form of a solemnized document. Seeing as how the decision on the increase of share capital must be registered in the Business Registers Agency, the following documentation must be prepared for the increase of share capital:

• Registration application for the increase of the LLC’s share capital,
• Board’s decision about the increase of share capital,
• Bank’s confirmation about payment of money contribution (or the member’s memorandum about the evaluation of non-monetary contribution or the authorities’ confirmation about the evaluation of non-monetary contribution),
• Annual financial report,
• The proof of paying the fee for change of data about share capital.

 

The reduction of the LLC’s share capital

In accordance with the Companies Law and paragraph 147. of that Law, a limited liability company can reduce its share capital. In that case, the amount can’t be lower than the legal minimum (100 Dinars). Legitimate reasons for the reduction of the capital are explicitly prescribed by the Law, therefore the company can reduce its share capital for the following reasons:

• Covering the company’s losses,
• Creating or increasing the company’s reserves for covering future losses or for the increase of share capital from the company’s net property,
• Relief from payment commitment, or investing the investment in the company,
• Withdrawal or cancellation of stake,
• Cancellation of own stake due to it no longer being at disposal.

As in the previous case, the decision about the change and reduction of share capital is made by the company’s board. This decision must be registered in the Business Registers Agency and the deadline for its registration is three months from the adoption date of the board’s decision. The decision which has not been registered within the specified deadline shall become null and void and produce no legal effect. The reduction of share capital of the company distinguishes between the situation when the reduction is carried out without applying the provisions regarding creditor’s protection and when it is necessary to incorporate the provisions about creditor’s protection in the process of capital reduction itself, i.e.:

• Reduction without applying the provisions on creditor’s protection – carried out in one step,
• Reduction with applying the provisions on creditor’s protection– when it’s carried out in two steps.

The decision on share capital reduction must have an invitation for the creditors to report their claims for securing them in accordance with the provisions of creditor’s protection. In the first case, when the procedure of capital reduction is carried out in one step it is implied that the application and change are submitted only to the Business Registers Agency. In the second case, when provisions on creditor’s protection are applied, the change and reduction of share capital is carried out in two steps. First the decision on change is registered and published on the website of the Business Registers Agency for a period of three months. The decision on capital reduction is carried out in executed in second step. The reduction of capital of limited liability company is carried out in one step only in certain instances, and that is when:

• Own stakes in the company which have been acquired unencumbered and which stakes are fully subscribed, i.e., contributed are cancelled
• When fully subscribed, i.e., contributed stakes are withdrawn and cancelled by payments at the burden of the reserves’ funds that may be used for such purposes
• It covers the company losses from the previous fiscal year (an option only when the company has no retained profit and reserves that may be used for such purpose, and in the amount which cannot be greater than the losses to be covered),
• Reserves for covering future company losses or increasing the share capital are generated or increased from the net company assets (after the capital reduction was carried out, these reserves may not exceed 10% of the share capital).

  When reducing capital without the application of provisions on creditor’s protection, only the board’s decision on capital reduction is submitted to the Business Registers Agency (along with the registration application for the reduction of share capital and proof of relevant tax payment).

In all other instances, it is necessary to apply the provisions on creditor’s protection and register and publish the decision on the reduction of share capital, which must include an invitation for the creditors to report their claims for securing them.

The second step, which in fact represents the reduction of capital, together with the registration application and payment of relevant taxes, must include the statement from the competent company authority that all creditors’ claims have been secured, i.e., settled.

The company’s share capital is considered reduced with the registration date thereof in the Business Registers Agency.

The changes of company’s share capital represent a necessity and a reality in a dynamic system of limited liability companies, and our advice is that you seek professional assistance and advice from attorneys at law so that you would resolve any dilemmas in an efficient and professional manner.