Introduction
Every company reaches a point where increasing its share capital becomes necessary—whether to attract investors, expand operations, or strengthen financial stability. Understanding the legal procedures, requirements, and implications of increasing share capital is crucial for business owners and stakeholders.
In this guide, we will explore the legal frameworks governing share capital increase, the various methods available, regulatory compliance, and notable case laws that provide insight into this corporate action.
What is Share Capital?
Share capital refers to the amount of money a company raises by issuing shares to its shareholders. It represents the financial foundation of a company and determines its ability to raise further funds. Share capital is typically classified into:
- Authorized Share Capital: The maximum amount of capital a company is legally allowed to issue.
- Issued Share Capital: The portion of authorized capital that has been issued to shareholders.
- Paid-up Share Capital: The amount shareholders have actually paid for their shares.
Why Companies Increase Share Capital
A company may decide to increase its share capital for several reasons, including:
- Raising Additional Funds: To finance expansion, research, or new projects.
- Debt Reduction: Issuing new shares to replace loans or liabilities.
- Meeting Regulatory Requirements: Some jurisdictions require companies to maintain a minimum share capital.
- Mergers and Acquisitions: Facilitating business restructuring.
Legal Framework for Increasing Share Capital
The process of increasing share capital is governed by company laws and regulations in different jurisdictions. In Nigeria, the Companies and Allied Matters Act (CAMA) 2020 provides the legal basis for increasing share capital.
Key Legal Provisions Under CAMA 2020
- Board and Shareholder Approval
- Section 127(1) of CAMA 2020 states that a company can increase its share capital through a resolution passed by its members.
- The board of directors must approve the proposed increase before it is presented at a general meeting.
- Filing Requirements with the Corporate Affairs Commission (CAC)
- Companies must file a notice of the increase with the CAC within 15 days from the date of the resolution.
- The company must update its Memorandum and Articles of Association (MEMART) accordingly.
- Payment of Stamp Duties and Other Levies
- Share capital increases attract statutory fees and stamp duties, which must be settled before approval is granted.
Methods of Increasing Share Capital
1. Issuing New Shares
This is the most common method of increasing share capital. New shares can be issued:
- To Existing Shareholders: Through a rights issue, allowing current shareholders to buy additional shares.
- To the Public: Via a public offering, enabling external investors to buy shares.
- To Employees: Under employee stock option plans (ESOPs).
Case Law Example: Fiduciary Trust Company Ltd v. Nigeria Deposit Insurance Corporation (NDIC) (2014) – The court ruled that the issuance of additional shares must follow due process to prevent unfair dilution of existing shareholders’ interests.
2. Capitalization of Reserves
Companies can convert retained earnings or reserves into share capital instead of issuing new shares. This is commonly done through bonus shares, where existing shareholders receive additional shares at no extra cost.
Case Law Example: Re Walter Jacob & Co Ltd (1984) – The court emphasized the need for clear resolutions when capitalizing reserves to avoid shareholder disputes.
3. Mergers and Acquisitions
When companies merge, the share capital of the new entity often increases to reflect the combined assets and liabilities.
Case Law Example: Union Bank of Nigeria v. Sparkling Breweries Ltd (2000) – The court upheld that share capital increases following a merger must comply with disclosure and fairness requirements.
4. Debt-to-Equity Conversion
Companies can convert debt into equity by offering shares to creditors in exchange for debt relief. This is useful for financially distressed companies seeking stability.
Regulatory Compliance and Documentation
When increasing share capital, companies must ensure compliance with:
- Corporate Affairs Commission (CAC) Regulations:
- Filing required forms (e.g., Form CAC 2.7).
- Updating MEMART.
- Securities and Exchange Commission (SEC) Rules (if publicly traded):
- Compliance with disclosure and prospectus requirements.
- Tax Implications:
- Payment of capital gains tax (if applicable).
- Stamp duties on share issuance.
Challenges and Risks in Increasing Share Capital
- Dilution of Shareholding: Existing shareholders may lose control if too many new shares are issued.
- Regulatory Delays: Government approvals may take longer than expected.
- Market Perception: Investors may view capital increases as a sign of financial weakness.
Conclusion
Increasing a company’s share capital is a strategic decision that requires careful planning, compliance with legal frameworks, and alignment with business goals. Whether through issuing new shares, capitalizing reserves, or mergers, companies must follow due process to avoid legal and financial risks.
For expert legal guidance on corporate governance, share capital increases, and regulatory compliance, CHAMAN Law Firm is here to help. Our experienced corporate law team ensures seamless transactions while safeguarding shareholder interests.
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