What is share capital?
Share capital is equity divided into shares of a company. It is the capital stipulated in the company agreement or articles of association. A company’s share capital is the amount at which a company has issued or can issue shares to shareholders. Share capital is also part of a company’s liabilities. Liabilities are debts and charges.
Only private limited companies (B.V.) and public limited companies (N.V.) issue shares. Sole proprietorships and general partnerships (VOF) cannot. Notarial deeds incorporate private limited companies and public limited companies. These companies have legal personalities, meaning they are bearers of rights and obligations. This allows the company to enforce its rights against third parties and its duties are enforceable. Control in companies is divided into shares. In other words, by holding shares, one has shares of control, and the shareholder can receive profit distributions in the form of dividends. Whereas in a private limited company, the shares are registered (and therefore limited transferable), in a public limited company, the shares can be issued both in bearer form (a form of a share, where the person who can show that he owns it is also considered the rightful owner of the share) and in registered form. This allows a limited company to go public, as the shares are freely transferable. The transfer of shares in a limited liability company always goes through a notary.
The registered and issued capital must be at least the minimum capital for public limited companies. This minimum capital is €45,000. If the authorized capital is higher, at least one-fifth must be issued (Art. 2:67 of the Civil Code). The minimum capital must be paid into the company’s bank account at incorporation. A bank statement will be issued for this purpose. The private limited company is now no longer subject to minimum capital.
Enterprise value versus equity value
Enterprise value is the company’s value without considering the financing structure. In fact, it is the operational value of the company. Equity
value is the amount the seller receives for the sale of its shares. In other words, the company value minus the net interest-bearing debt. Each share in a B.V. or N.V. has a nominal value, or the value of the share according to the articles of association. The issued share capital of a B.V. or N.V. is the total amount of the nominal value of the shares issued by that company. These are both the company’s shares and shareholders outside the company.
A share issue is the issue of shares. Companies issue shares for a reason. They do so to raise equity capital. The purpose is to make investments or to grow the company. When you start a company, you can decide how many shares to issue and what they are worth. Often entrepreneurs choose a larger number, so you can sell them in the future if necessary. In the past, there was a minimum amount for the value of a share, but that rule has now been abolished. However, it is wise to put enough weight on it, as other companies would like to see your creditworthiness. Shares are a tool you can use to finance your business. This way, you attract the money you need for your operations and further company growth. The money you raise by issuing shares is available to you indefinitely and is called equity. If you have a share in a company, it is also a certificate of ownership of part of that company. As a shareholder, it also entitles you to a proportionate share of the profits. For a company, it is beneficial to have this share capital in the company to use for ongoing business and investments. Only when profits are made can shareholders ask for a dividend distribution. If a company makes a profit, it is not always sure whether you, as a shareholder, will receive a dividend payment. At the annual shareholders’ meeting, shareholders decide what happens with the profit: total, partial, or no distribution.
Components of share capital
Share capital consists of several components. To clarify, a brief definition of these components follows first:
- Issued share capital
These are the shares issued by a company to its shareholders. The issued share capital increases when new shares or stock dividends are issued. Stock dividend is all about giving new shares to shareholders as a reward for their contribution to the company. Shares can be placed in three ways, namely at par (at the value stated on the share), above par (then the amount is higher than the value on the share), and below par (lower than the value of the share).
Paid-up share capital (fully) paid-up share capital is the part of the issued capital from which the company has received funds or, in some cases, goods. If the capital is not yet 100% paid up, the company has the right to call up the remainder from the shareholders. A relevant concept is the ‘called-up part of the capital .’This is the issued capital to the extent that it has not been paid up, but the company has decided it should be paid up. In this case, the company has a direct claim against the shareholders.
- Nominal share capital
Nominal share capital is legally attached to shares and equal to the issued share capital. Many shares on the stock exchange have a price much higher than their nominal value. For example, the market value of a share may be several euros in nominal terms. If a company issues new shares above the nominal value, a so-called share premium reserve is created for the difference. The share premium reserve is a term from the investment world. It describes the financial reserve of a Public Limited Company or Private Limited Company created by issuing shares above par value.
- Authorized share capital
The authorized capital is the maximum amount specified in the articles of association at which shares may be issued. For a B.V., the authorized capital is optional. For an N.V. in the Netherlands, at least the minimum capital or at least one-fifth, if higher than the minimum capital, of the authorized capital must be issued. This is the total capital that a company can obtain by placing shares. The authorized share capital is divided into shares in a portfolio and issued share capital. Between the two, the company can shift and make changes. Portfolio shares are the shares you can still issue as a company. Suppose you want to finance your company further or make investments, you can decide to issue shares. Doing so allows shareholders to buy them, and the number of shares in the portfolio decreases; conversely, if a company buys back its shares from shareholders, the shares in its portfolio increase.
Companies may also decide to sell shares to the general public. They can do this by going public on the stock exchange. On a stock exchange, supply and demand determine the value of each share. A company then gets a particular stock market value. Incidentally, only N.V.s can do this because the shares are registered in the case of a private limited company.
The blocking arrangement is an arrangement that limits the possibility of transferring ownership of shares of a company.
This scheme restricts shareholders’ freedom to transfer their shares to someone else. This is to prevent co-shareholders from being faced with a strange shareholder just like that. There are two types of blocking arrangements:
- Offer scheme
The shareholder must first offer his shares to the co-shareholders. Only if it turns out that the co-shareholders do not want to take the shares may the shareholder transfer ownership of the shares to a non-shareholder.
- Approval scheme
The co-shareholders must first approve the proposed share transfer. Only then may the shareholder transfer his shares.
Whereas previously, the shares of the private limited company could not simply be transferred to a third party (blocking arrangement), the law – after the introduction of the Flex B.V. Act – provides for an offering arrangement, which can be deviated from in articles of association (Art. 2:195 of the Dutch Civil Code). The statutory scheme applies if there is no provision in the articles of association for a deviating offering or approval scheme.
There is no blocking arrangement for registered shares in a public limited company. Most shares will consist of bearer shares in a public limited company is seen, making them freely tradable.
So share capital falls under equity. This accounting term represents the value of all the company’s assets minus debt capital. Equity is an important indicator of how you are doing as a company, but it is different from the market value of your company. In fact, equity represents the financial value shareholders would receive in a company liquidation. Equity is important because it is often seen as a buffer to absorb financial setbacks.
After reading this blog, do you still have questions, or are you an entrepreneur who needs advice and guidance on setting up a company? Then it is wise to engage an expert in corporate law. Then contact Law & More. Our corporate lawyers will be happy to help you.