Share capital is the equity of a company divided into shares, as laid down in its articles of association. In the Netherlands only a private limited company, the B.V., and a public limited company, the N.V., can have it; a sole proprietorship or a general partnership cannot issue shares at all. The figure matters in two directions at once: it determines what shareholders have contributed and what they may claim, and it sets the boundaries within which the company may issue new shares later.
Although the term looks like an accounting concept, almost every question that arises around it is a legal one – what the articles permit, how a transfer may be restricted, and what a shareholder is entitled to. This article sets out the structure.
Which companies have share capital?
Shares can only be issued by a B.V. or an N.V., and both are incorporated by notarial deed. Both have legal personality, which means the company itself is the bearer of rights and obligations: it can enforce its rights against third parties, and its obligations can be enforced against it rather than against the people behind it.
Holding shares gives two things: a say in the company, exercised at the general meeting, and a claim to a share of the profits if and when a distribution is made. The difference between the two company forms lies chiefly in transferability. Shares in a B.V. are registered, and every transfer passes through a civil-law notary. An N.V. may have registered shares as well as bearer shares, which is what makes a stock exchange listing possible. Physical bearer certificates no longer circulate in the Netherlands; bearer shares are now held through a securities account rather than as a document that can be handed over.
Is there a minimum share capital?
For a B.V. there is none. Since the Flex-B.V. legislation, a private limited company can be incorporated with a nominal capital of one eurocent, and the old requirement of eighteen thousand euros has gone.
For an N.V. the minimum issued and paid-up capital is forty-five thousand euros. Where the authorised capital is higher than that minimum, at least one-fifth of it must be issued, under Article 2:67 of the Dutch Civil Code. The capital must be available to the company on incorporation, which is evidenced by a bank statement.
The abolition of the minimum for the B.V. removed a formality rather than a risk. Creditors still look at what is actually in the company, and a company incorporated with a nominal capital of a few cents will be asked for security that a better-capitalised competitor is not.
What are the components of share capital?
Authorised capital
The authorised capital is the maximum amount, stated in the articles of association, for which shares may be issued. For a B.V. it is optional; for an N.V. it is not. The part of the authorised capital that has not yet been issued is held in portfolio, and issuing from that portfolio is how a company raises further equity without amending its articles.
Issued capital
Issued capital is the total nominal value of the shares actually issued to shareholders. It rises when new shares are issued, including where a stock dividend is distributed. Shares can be issued at par, above par or below par; issuing above par creates a share premium reserve for the difference, which is equity but is not part of the nominal share capital.
Paid-up and called-up capital
Paid-up capital is the part of the issued capital for which the company has actually received payment. Where issued shares have not been paid up in full, the company retains a claim on the shareholder for the remainder. Once the company has resolved that the outstanding part must be paid, it is called-up capital and the claim becomes immediately enforceable – a point that shareholders in a company heading for insolvency tend to discover late.
How can the transfer of shares be restricted?
A blocking arrangement limits a shareholder’s freedom to sell to whomever he likes, and its purpose is straightforward: to keep the other shareholders from suddenly finding themselves in business with a stranger. Two forms are used.
Under an offer arrangement, the shareholder must first offer the shares to his fellow shareholders, and may only sell to an outsider once they have declined. Under an approval arrangement, the intended transfer requires the prior approval of the co-shareholders.
For the B.V., Article 2:195 of the Dutch Civil Code provides an offer arrangement as the default, which applies unless the articles of association provide otherwise. Since the Flex-B.V. legislation the articles may depart from it, and may even exclude the restriction altogether. For an N.V. the law imposes no such arrangement, although the articles may provide for one in respect of registered shares; bearer shares, by their nature, are freely tradeable.
Share capital, equity and company value
Share capital sits within equity, which is the value of the company’s assets less its liabilities. Equity is not the same as what the company is worth on a sale, and confusing the two causes trouble in negotiations. Enterprise value is the operational value of the business without regard to how it is financed; equity value is what the seller actually receives for the shares, being the enterprise value less net interest-bearing debt.
Nor does share capital tell you what a share is worth. The nominal value is the figure in the articles; the market value is whatever a buyer will pay, and for a listed company it is set by supply and demand on the exchange. Only an N.V. can be listed.
Frequently asked questions
Is share capital a debt of the company?
No. Share capital appears on the liabilities side of the balance sheet, but it is equity, not borrowed money. The company owes shareholders no repayment; what they hold is a residual claim, which is why they rank behind creditors in a liquidation.
Can a B.V. really be incorporated with one eurocent of capital?
Legally, yes. Whether it is sensible is a different question: banks, landlords and larger counterparties look at the company’s actual financial position, and directors of an undercapitalised company run a greater risk of personal liability if it cannot meet its obligations.
Does a shareholder have a right to a dividend?
Not automatically. The general meeting decides what happens to the profit – full distribution, partial distribution or none at all – and in a B.V. the board must also test whether the company can continue to pay its debts before a distribution may be paid out.
What is the share premium reserve?
Where shares are issued for more than their nominal value, the excess is booked as share premium. It is part of equity and strengthens the company, but it does not increase the nominal share capital and it is governed by its own rules on distribution.
Advice on share capital and shareholding
Most disputes in this area are not about the figures but about the articles: an offer arrangement that no one read before signing a term sheet, a share issue that dilutes an existing shareholder, a call on unpaid capital at the worst possible moment. Our guide to the Dutch business register covers what is publicly recorded about a company. Are you setting up a company, issuing shares or negotiating a shareholders’ agreement? Please contact Law & More; our corporate lawyers are happy to advise you.
