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Reduction of capital with return of contributions

The rules on capital reductions in a company are regulated in the Capital Companies Act (hereinafter LSC), specifically in Articles 317 et seq. and in the Companies Register Regulations.

There are various types of capital reduction (reduction due to losses, reduction to provide the legal reserve and reduction to return the value of the contributions), and any of them must be carried out in a public deed before a notary and subsequently registered in the Commercial Register.

Some of the purposes for which this type of corporate operations are carried out are to restore the balance between the company’s capital and net worth, which has been reduced as a result of losses, to create or increase the legal reserve or voluntary reserves, or to return the value of contributions. It is on the latter case that we are going to focus in this article and point out its singularities.

The particularity of the capital reduction by return of contributions is that the value of the contributions, whether in monetary amount or in movable or immovable assets, actually leave the company and return to the hands of the shareholders, with the latter ceasing to participate in the company or reducing their percentage in the company. This model of reduction often solves the problem of the departure of one of the partners who does not wish to continue in the company, for whatever reason. Moreover, like any other type of capital reduction, it requires prior agreement by the shareholders of the company and this must be agreed at the General Meeting. Always with the prior knowledge that the disbursement can never reduce the share capital below the minimum established by law (3,000 euros for limited companies).

The resolution to reduce capital at the General Meeting must include at least the following information:

  • The amount of the reduction.
  • The purpose.
  • The type of procedure.
  • The time limit for implementation.
  • The sum to be paid, if any, to the shareholder(s).

In the event that a return in movable or immovable assets has been chosen, which is the least usual, then the assets must be described and the value for which they were acquired must be indicated, as well as the details of the title by which the assets were contributed to the company must be included in the agreement.

The agreement must also include the personal circumstances of the shareholders (name, surname, ID card number, address, profession and marital status), to whom the values or, as the case may be, the assets have been returned. This information must also be included in the public deed in order to avoid defective deeds after the application for registration in the corresponding commercial register, as the law emphasises.

The agreement to reduce the value of the contributions with a refund has a special feature set out in Articles 329 and 330 of the LSC. This speciality applies in cases where the return of the contributions does not affect everyone in the same way. In this circumstance, in limited companies, the individual consent of the holders of these shares will be necessary, and in public limited companies, the separate agreement of the majority of the shareholders concerned.

Shareholders whose previous contributions have been returned should be aware that they are jointly and severally liable among themselves and with the company for the payment of company debts incurred prior to the date on which the capital reduction was enforceable against third parties. The aforementioned liability of each of them shall be limited to the amount received as repayment of contributions and a limitation period of 5 years from the date on which the reduction was enforceable.

This liability will cease to apply in the event that a profit reserve or free reserve is set aside for an amount equal to the amount received by the shareholders as restitution of the shareholder’s contribution. Consequently, this reserve will be unavailable for 5 years, thus replacing the liability of the shareholders, hence the importance of knowing the law or taking good advice, as future liability can be saved by endowing this reserve.

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