Capital Increase : What is it ?
A company’s share capital is the contributions made by its partners (in an LLC) or its shareholders (in a PLC). In other words, it is the money that a company raises by issuing shares (or stocks in the case of an LLC). The amount of share capital can change over time. In this case, it is called a capital increase.
The definition of capital may vary different depending on the context. Indeed, in accounting and legal terms, it has a more specific meaning. In accounting, share capital is the amount resulting from:
|The multiplication of the number of shares (stocks) by the face value.|
(Face value is also called “nominal value” or “par value”)
Jurists agree with accountants on this point. However, finance specialists give a broader definition of capital.
In financial terms, capital is the total amount raised by the company in share sales. Sometimes, issues can be made at a higher value than the nominal value. The difference is called an issue premium.
Issue premiums are recorded in the balance sheet as a component of the “Equity” section. They are regarded as legal reserves, that can be distributed.
For the remainder of this article, the term “capital ” (or share capital) is to be understood under the legal-accounting definition.
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A company’s capital is decided at its creation. In fact, the capital is specified in the Articles of Association (AoA). Still, the partners can decide, at any point in the company’s life, to increase its capital.
This increase can be made:
- Either by an equity issue (the issue of new shares)
- Or by the increase of the face value of the existing shares
To perform a capital increase, the shareholders can:
- First, provide new funds to the company (cash input)
- Second, opt for contributions in kind
- Or even, waive receivables from the company (in exchange of new shares)
Moreover, shareholders (partners) can convert the following in capital
- Accumulated reserves
- Capitalization of profits (transfer of Retained Earnings to capital)
These cases are sometimes referred to as a “Bonus Issue“.
|In summary, a capital increase can be done in several ways :
In any capital increase, it is important to take into account the subscription rights (or subscription privileges). In a Limited Liability Company, no new shareholder can enter unless he is approved by the existing ones. Moreover, to prevent stock dilution, the existing partners have a pre-emption right on newly issued shares/stocks in proportion to their capital contribution. As such, the proportional ownership of the company can be maintained.
LLC Capital increase under the provisions of the Moroccan Law
First of all, note that the LLC (Limited Liability Company) is the most commonly used company form in Morocco.
Since its revision, the law on Limited Liability Companies no longer requires a minimum capital. In other words, the partners can decide on the share capital that best suits them. Theoretically, it can even be of one dirham. Nevertheless, whatever the amount, the company’s capital must be divided into equal shares.
Afterwards, partners can always decide on a capital increase if needed. However, since said operation leads to the amendment of the company’s Articles of Association, it can only be decided by an Extraordinary General Meeting.
Capital increase: Cash input
In an LLC, a capital increase is solely decided through a shareholders’ general meeting. This decision must meet the majority conditions required for the amendment of the Articles of Association. Therefore, it requires at least a ¾ majority of the partners representing the company’s capital.
Article 75 of the LLC law: “Any amendment to the Articles of Association is decided by the shareholders representing at least three quarters of the share capital”
However, if the partners decide upon a capital increase through the capitalization of profits or accumulated reserves, half the shares suffices. Obviously, in the case of a single-partner limited liability company, his sole decision is sufficient.
When the capital increase is a cash input, partners must inject new funds to the company. In this case, the involved partners (or manager(s)) must deposit the relevant funds in a “frozen” bank account. In return, the bank provides a frozen deposit certificate needed to complete the remaining administrative formalities.
Capital increase: Contribution in kind
In the event of contributions in kind, the same rule applies: the capital increase is decided by a shareholder’s general assembly. However, there is one major difference to be taken under serious consideration: a contribution auditor must be appointed.
Contribution auditors must be chartered accountants and registered with the Chartered Accountants Board
As a general rule, shareholders must appoint a contribution auditor by a unanimous decision. If necessary, the president of the commercial court of the registered office may appoint him at the request of the manager.
Furthermore, in the event of a single-partner limited liability company, the sole partner appoints the contribution auditor.
The contribution auditor’s mission is to appraise the value of the asset(s) contributed in kind during the increase. The manager must file the report of the contribution auditor with the clerk of the commercial court.
In the absence of a contribution auditor or when the value retained is different from the one proposed by the contribution auditor, the managers of the company and the persons that subscribed to the increase in capital are severally liable for five years towards third parties for the value attributed to the said contributions (Art 53 of the law n°5-96)
Capital increase: Debt compensation
A capital increase can also be carried out by offsetting debts. In other words, shareholders can waive their loans to the company (e.g. shareholder’s current account).
All inputs of funds granted by a shareholder (in excess of the share capital) are recorded as a shareholder’s current account. This is one of the many sources of funding at the company’s disposal. In return, the amounts in the current account can result in the payment of interest to the corresponding shareholders.
When a loan is converted into capital, the shareholder waive its right to repayment (until the capital is reduced or the company is liquidated). Furthermore, when a shareholder converts its loan in share capital, they lose the right to interest. In return for his waiver, he receives shares in the company.
Furthermore, in this type of capital increase, the following conditions must be respected :
- The manager must make a statement of the amount in the accounts subject to the increase ;
- A chartered accountant must certify the accuracy of this statement
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Capital increase: Procedure
The main steps to follow for the capital increase of your LLC are the following:
- First : Prove that the capital has been paid up
- Cash input: deposit the relevant funds in a “frozen” bank account and get a frozen deposit certificate
- Debt compensation: make a statement of the amount in the accounts and certify said statement by a chartered accountant
- Contribution in kind: Proceed with the valuation of the contributions in kind by a contribution auditor.
- Second: Hold an Extraordinary General Meeting with the agenda of a capital increase
- Third: Sign, authenticate and register the minutes of the EGM
- Then : Submit the minutes of the EGM to the clerk of the Commercial Court
- In addition, complete the amending declaration of the trade register
- Then, make a publication in a Journal of Legal Announcements;
- Finally, make a publication in the Official Bulletin
Do not forget that, in the event of new partners, an approval procedure must be included in the minutes of the General Meeting.
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