Table of contents
What is share capital?
Share capital is the funds that a company raises by issuing and selling its shares. Share capital advantages and disadvantages depend on the laws of each particular jurisdiction. This is because legislation defines the requirements for share capital and the rights it guarantees to shareholders. These rules affect many aspects such as shareholder rights and corporate governance. Such factors determine the advantages and disadvantages of share capital.
Since share capital may have different meanings in the laws of different jurisdictions. We will explore these definitions through the examples of Germany, the UK, the US, and China.
These countries have been selected with good reason. According to the latest International Monetary Fund report for 2023:
- The GDP of the USA is worth $26,854.599 billion.
- China’s GDP amounts to $19,373.586 billion.
- Germany’s GDP is worth $4,308.854 billion.
- The UK’s GDP amounts to $3,158.938 billion.
Collectively, the GDP of these countries is almost half of the world’s GDP, which makes our article relevant to half of the world’s economy.
According to the UK Companies Act, share capital means the amount that a company receives from the issue and sale of shares.
This term includes two main categories, Called-up share capital, and Equity share capital.
- Based on Section 547 of the Companies Act, “Called-up share capital ” means funds that investors paid or will pay for their shares. This includes the amount investors paid and the amount they promised to pay in the future.
- Based on Section 548 of the Companies Act, “Equity share capital” means funds from sold shares. It sets a max return for shareholders from profits or asset sharing.
- The Companies Act does not include a minimum authorized capital requirement for private companies. This allows private companies to have authorized capital starting from £1.
- However, based on Section 763, a public company must have a minimum of £50.000 in share capital, also known as “the authorized minimum.”
United States of America
In the United States, legislation is divided into two layers: federal and state. The definition of share capital is not fixed in a single federal law for all states, as it is in many other countries. As an example, we considered the legislation of Delaware as one of the most popular states for incorporation.
Under Section 102 (4) of Delaware’s General Corporation Law, total authorized shares (share capital) means:
- The amount of shares the corporation can issue, separated by class, with or without par value.
- If multiple classes of shares can be issued, the charter must state the total and per class share numbers.
This definition only applies to stock corporations. Non-stock corporations follow different rules.
According to the Stock Corporation Act (Aktiengesetz) and the Limited Liability Companies Act (GmbHG), share capital means the value of the shares issued by a company.
In Germany, the share capital of a company refers to the value of its issued shares, as stated in two laws:
- Under Article 7 of Aktiengesetz (Stock Corporation Act), the minimum share capital for stock corporations should be €50.000.
- According to Article 8, shares may be par-value or no-par-value. Par-value shares must be valued at least €1.
- The GmbHG (Limited Liability Companies Act) states in Section 5 that “Stammkapital,” or share capital of a limited liability company, is the total of the contributions of its participants and must be at least €25.000.
Under China’s Company Law, registered capital is the sum of all shareholder contributions.
Per Article 23:
- Companies mainly engaged in production or wholesale require a minimum registered capital of ¥500.000.
- Commercial retail companies require at least ¥300.000.
- Firms in technology development, consultancy or services need a minimum of ¥100.000.
Based on Article 24, shareholders may contribute to the share capital:
- material assets,
- industrial property rights,
- unpatented technologies.
Who are the shareholders?
Shareholders are also known as members of a company who own at least one share in this company. By owning shares in the company, they have the right to participate in management decisions. Shareholders of a company are also entitled to receive dividends and profits.
The definition of shareholders varies by jurisdiction. For example, according to Article 4 of China’s Corporate Law, shareholders are individuals or entities who own shares in a company. The size of the investment defines their rights to profit, influence on major decisions, and ability to select management. The company, treated as a separate legal entity, has its rights and responsibilities. If a company’s assets are state-owned, ownership remains with the state.
In corporate law, the key is not to define shareholders, but to define their rights in the company.
In US law, a shareholder is an individual or entity that owns at least one share in a company. As stated in the Securities Exchange Act of 1934, they can vote on major decisions and may earn dividends from the company’s profit.
Although the Securities Exchange Act is federal law, shareholder rights can vary from state to state.
Delaware’s laws protect companies more than California’s from hostile takeovers, especially in the event of an IPO. Such protection is not as robust in California.
California provides more protection for minority shareholders than Delaware, providing them with more rights, especially in the event of corporate changes such as IPO. In contrast, Delaware’s legislation is less stringent.
California requires a majority of each class of shares to effect a corporate change, such as a merger, acquisition, or IPO.
Increase in share capital
Generally, a company can increase its share capital at any time during its lifetime.At the same time, the legislation usually provides for anti-dilution protection. This is essential to protect the rights of the original shareholders.
Under the UK Companies Act:
- Increase in Capital: Under Section 617, a company may increase its share capital by allotting new shares.
- Notification to the Registrar: Under Section 619, if a company changes its capital, it needs to notify the Registrar within 1 month.
- Statement of Capital: According to Section 619, the company’s notice to the Registrar must include a Statement of Capital. The statement must include how many shares there are and their total nominal value.
- Non-compliance Consequences: Section 619 stipulates penalties for non-compliance. Both the company and any defaulting company officer may face fines.
Reduction of share capital
Generally, companies may reduce share capital under certain conditions. For example, the UK Companies Act provides for the following requirements:
- Reduction Process: A company can reduce share capital by a special resolution, supported by a solvency statement, or court confirmation (Section 641).
- Notification: The company must notify the Registrar about the reduction (Section 644).
- Director’s Role: The company’s director has key duties. They must make a solvency statement.
- Share Capital Advantages: A reduction in share capital advantages can provide financial flexibility, eliminate unnecessary capital, and improve company efficiency.
- Penalties: Non-compliance can lead to fines or imprisonment for the company or its officers (Section 644).
- Bank Account Impact: Reduction may affect the bank account, as it might change the amount of the company’s available funds.
Advantages of share capital
Here are some advantages of owners capital:
- Access to Capital
Share capital helps companies get a lot of money. They can sell shares to investors and use that money to expand, invest in new projects, or buy assets.
- Shared Risk
Share capital lets a company divide its financial risks among lots of shareholders. If the company has money troubles or loses money, the shareholders share the responsibility based on how many shares they have. This helps protect individual shareholders from bearing all the risk alone.
- Equity Financing
Share capital is a type of financing where companies don’t have to pay back the money they raised by selling shares. Unlike borrowing money, they don’t have to make interest payments or repay the principal amount.
- Lower Risk
Usually, when a business relies more on money from shareholders instead of borrowing, it has less chance of going bankrupt. If a business faces difficulties and can’t pay back the money it borrowed, the lenders can force it into bankruptcy. But shareholders don’t have that power.
- Advantage of selling shares
The advantage of selling shares is that it allows a company to raise money for business growth. By selling shares, the company can attract investors who contribute their money and become part owners of the company. These funds can be used for expansion or investments.
Disadvantages of share capital
There are also a certain number of disadvantages of Share Capital:
- Loss of Control
When a company sells shares to raise money, it transfers some control to the new shareholders. The new shareholders may have different ideas and goals. This can lead to conflicts and less control for the original shareholders, especially if the new investors have more shares.
- Dividend Obligations
If a company makes a profit, it may need to share some of it with shareholders as dividends. This can be a disadvantage if the company wants to keep the money for reinvestment or expansion. Also, consistent dividend payments can strain the company’s finances when it’s not making much profit.
- Higher Cost
Equity, unlike debt, doesn’t require regular interest payments. However, it can be more costly overall. Shareholders face greater risk than creditors because they are the last to receive payment if the company goes bankrupt. As a result, equity investors demand a higher return on their investment. To compensate for this risk, when you raise equity, you may need to offer more shares at a lower price.
- Reporting and Compliance
Companies that sell shares have to follow rules and regulations. They should share information with shareholders and follow good corporate practices. Realizing these duties can take a lot of time and money, so the company must be clear and accountable.
Remember that the advantages and disadvantages of share capital can change. It depends on the company’s industry and its size.
Primary factors in share capital management encompass company and shareholder objectives, and the presence/absence of IPO plans. Also, some additions may be required for asset protection, investment structuring, and tax planning needs. It’s crucial to choose the right jurisdiction and legal regulation. Here at Fintech Harbor Consulting, we have extensive experience in structuring various projects including fintech and crypto, and are ready to help you with these challenges.