PURPOSE OF SHARE CAPITAL REDUCTION
Capital reduction can serve different purposes, among the most significant are:
- Restoring the equity balance when accumulated losses severely affect the financial statements.
- Adjusting the company’s structure to a new economic reality by removing excess or unused capital.
- Protecting the rights of creditors and shareholders by avoiding discrepancies between actual equity and the registered capital amount.
- Preparing for liquidation processes when the remaining capital is insufficient to continue with the corporate purpose.
Thus, capital reduction has not only financial, but also legal and organizational implications.
TYPES OF CAPITAL REDUCTION IN CORPORATIONS
VOLUNTARY CAPITAL REDUCTION RESOLVED BY THE COMPANY
An extraordinary general meeting may voluntarily resolve to reduce the company’s share capital. This decision must be authorized by the relevant administrative authority and officially published for public awareness, particularly to inform creditors.
In this scenario, creditors may object if they believe the reduction jeopardizes their ability to recover outstanding debts. If objections arise, the company must either provide sufficient guarantees or pay the debts before proceeding with the process.
Practical example: A company with excess liquidity that no longer needs its full share capital may decide to reduce it and return part of the value to shareholders, as long as the legal framework is respected.
CAPITAL REDUCTION DUE TO ACCOUNTING LOSSES
When losses reduce a company’s equity to the point of creating an imbalance with the registered capital, capital reduction may be applied to reflect this new reality.
In such cases, the goal is to “clean up” the accounting records and present capital figures that reflect the company’s actual economic situation. This also enhances the transparency of financial statements for investors, authorities, and third parties.
Practical example: A company that has accumulated negative results over several fiscal years may reduce its capital to eliminate those losses and present clearer financial projections.
MANDATORY CAPITAL REDUCTION DUE TO LOSSES
The law requires mandatory capital reduction when losses exceed fifty percent of the capital, including free reserves.
In such cases, the company must notify the relevant authority and publish the corresponding resolution. If the reduced capital becomes insufficient to fulfill the corporate purpose, the company must proceed with dissolution and liquidation.
Practical example: A company with a registered capital of BOB 2 million that suffers losses exceeding BOB 1 million is legally required to reduce its capital. If, after doing so, it can no longer continue operations, it must be liquidated.
SHARE CERTIFICATE EXCHANGE AFTER CAPITAL REDUCTION
A key aspect of capital reduction is the requirement to adjust share certificates. Outdated certificates must be exchanged or revalidated to reflect the new capital amount.
This process is carried out through a banking institution, which collects the annulled certificates and issues new ones showing the updated shareholder participation. This step is mandatory and prevents fraud or circulation of shares with invalid values.
LEGAL PROCEDURE FOR CAPITAL REDUCTION
The process for reducing share capital includes several stages to ensure legality and transparency:
- Resolution by the extraordinary general meeting approving the capital reduction.
- Authorization from the competent corporate authority.
- Official publication to inform creditors and third parties.
- Time period for creditors to raise objections, during which they may demand guarantees or early payment.
- Exchange or revalidation of share certificates, managed through an authorized bank.
Each step aims to balance the interests of the company, its shareholders, and creditors, preventing abuses or harm to third parties.
CREDITOR PROTECTION DURING CAPITAL REDUCTION
Capital reduction can affect creditors, as it reduces the assets available to guarantee their claims. For this reason, the law provides protective mechanisms:
- Mandatory publication of the corporate resolution.
- Creditor’s right to object.
- Requirement for the company to offer guarantees or settle debts before proceeding.
These measures are designed to prevent capital reduction from being used to evade financial obligations.
In conclusion, capital reduction is a complex yet essential legal process that ensures transparency, financial stability, and the legal continuity of a corporation. It may be carried out voluntarily, due to losses, or mandatorily—always under strict legal controls that protect both creditors and shareholders. Proper implementation allows a company to accurately reflect its financial condition and comply with legal requirements in Bolivia.
Our law firm provides comprehensive legal assistance in capital reduction processes, including resolutions and procedures before regulatory and financial authorities. Contact us for personalized legal advice.
Frequently Asked Questions (FAQs)
What is share capital reduction?
It is the legal process through which a company decreases its registered capital to reflect financial changes or accumulated losses.
What types of capital reduction exist?
Voluntary, due to accounting losses, and mandatory when losses exceed 50% of the share capital.
What happens if a company fails to comply with mandatory reduction?
The company may be subject to dissolution and liquidation if it does not adjust its capital as required by current regulations.
How are creditors protected?
Creditors are granted the right to object, and the company must either provide adequate guarantees or pay the debts before continuing with the capital reduction.
What happens to share certificates after a capital reduction?
Certificates are exchanged or revalidated through an authorized bank to reflect the updated capital amount and shareholder participation.
The content of this article does not reflect the technical opinion of Rigoberto Paredes & Associates and should not be considered a substitute for legal advice. The information presented herein corresponds to the date of publication and may be outdated at the time of reading. Rigoberto Paredes & Associates assumes no responsibility for keeping the information in this article up to date, as legal regulations may change over time.
