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Usefulness of corporate capital reductions in France

Home > French Business Law | Published 2010-11-17

In civil institutions and partnerships having no minimum capital, the partners are indefinitely liable for their assets; therefore it is rare that these companies have capital and operations that significantly weigh on their capital. The cuts are much more frequent in LLCs, even if the amount of capital is freely determined by the statutes, even more so in commercial companies including public limited companies.

The law distinguishes between capital reduction operations motivated by losses and reduction operations not motivated by losses. Only two articles, L 225-204 and L 225-205 of the Commercial Code, govern capital reductions in companies per share including stock companies, therefore it is a commonplace operation throughout major long term businesses.

First, reductions in capital losses are driven by accounting transactions that involve a transfer of losses to that of capital from one year. A company may decide to pay off its losses by deducting capital if it is an amount greater than the losses. These transactions are intended to reduce capital by charging without any distribution of assets between the shareholders, therefore, the creditors of the company may oppose the transaction because there is no distribution and the operation does not impair them. The capital reduction entailing a variation of association of the company, only an extraordinary general meeting can decide it. In LLCs and joint stock entities, companies are required by law to effect a capital reduction of which the net assets cannot be less than half the nominal capital. Thus, it should either vote to dissolve, which is an EGM, or to clear the situation of the company thereby reducing its capital.

Secondly, the reduction in capital may not be motivated by losses but determined by a change in the current status of social life. This allows the creditors of the company the right to object to the transaction within 20 days after the resolution of the EGM deciding on the capital reduction. Creditors have the right to object but not to interfere with the operation. Thus, if an opposition is filed, the judge may either receive opposition from creditors and have it resolved by ordering the immediate repayment of debt, or ask the company to provide additional collateral to the creditor. This right of objection is suspended in the execution of capital operations. Moreover, Article L 221-205 of the Commercial Code provides for equal distribution of assets in connection with the portion of the share held by the shareholder in the company, under penalty of nullity. The shareholders may unanimously waive the benefit of distribution to the advantage of one or more of them. The reduction of capital may appear as a way to exclude one or more partners. Therefore to protect its rights, it is wise to surround oneself with the advice of knowledgeable professionals, including French lawyers acclimated and familiar with such transactions.

This article is available online for public information purposes. It is updated regularly, as needed. Due to the constant evolution of the laws and the legal system, we cannot guarantee that the information in this article is still applicable. We invite you to contact us with any legal questions or concerns you have regarding this topic at +33 1 56 79 11 00. In no way can this firm be held liable for articles that contain inaccuracies or are now out of date.

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