Capital reduction

Capital reduction

Reduction in the capital stock of a stock corporation

A capital reduction is undertaken in order to pay back capital to shareholders or to avoid showing a negative net worth position. It is indicated as a separate item in the profit-and-loss statement and may take one of three different forms: an ordinary capital reduction, a simple capital reduction, or a capital reduction through calling in shares.

An ordinary capital reduction involves reducing the nominal value of the shares or grouping shares when the amount of capital stock no longer meets the minimum requirement. The shares must be handed over to the company, where they are declared null and void. New shares are issued immediately at the official exchange price by an exchange broker.

An ordinary capital reduction must be approved by a three-fourths majority at the annual general meeting. A simple capital reduction serves to compensate for a decrease in the value of the company, offset other losses or allocate contributions to the company's reserves. Before a simple capital reduction can be effected, the revenue reserves must be reversed and the profit carried forward must be appropriated. The portion of the statutory and capital reserves that exceeds the remaining capital stock by more than 10 percent must also be reversed. The funds released through these measures cannot be distributed to the shareholders.

A capital reduction through calling in shares takes place when shares are either bought back or called in by the company; in the latter case, it is mandatory for shareholders to hand over their shares. This type of capital reduction must be authorized by the company's charter or by the annual general meeting.

Important regulations pertaining to reductions in the capital stock are contained in the German Stock Corporation Act in sections 222-240.

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