It is a fundamental principle of Bermuda company law that the share capital of a company should be maintained.

However, a company limited by shares is free to reduce its share capital by a resolution of its members provided that the reduction is not prohibited by its Memorandum of Association and Bye-Laws and the company complies with the procedures set out in the Companies Act 1981, as amended (the Act).

Today, I will provide an overview of the ways in which a company can reduce its share capital under the Act, why a company might wish to effect a reduction and the procedure involved.

Companies limited by shares can reduce their share capital in one of three ways:

  • extinguish or reduce the liability on any of its shares in respect of capital not paid up;
  • either with or without extinguishing or reducing liability on any of its shares cancel any paid up capital (including for this purpose its share premium account) that is lost or unrepresented by available assets; or
  • either with or without extinguishing or reducing liability of any of its shares and either with or without reducing the number of shares pay off any paid up capital that is in excess of the requirements of the company (including for this purpose its share premium account).

A company may want to reduce its share capital in order to create distributable reserves and/or eliminate losses, return surplus capital to shareholders, assist a buyback or redemption of shares, or distribute assets to shareholders

In our experience, creating distributable reserves and/or eliminating losses is the main reason why a company reduces its share capital.

Losses can have a negative effect on a company's retained profit and may prevent the payment of dividends since a company may only pay dividends if the solvency test under the Act is met. A reserve arising from a reduction of capital can increase or create distributable reserves -- and reduce or eliminate losses.

Alternatively, a company can reduce capital to release a liability to pay up unpaid share capital.

Or it may wish to reduce its share capital in order to increase its distributable reserves to effect a buyback or redemption of its shares where it has insufficient distributable reserves to buyback or redeem shares, and it does not intend to issue new shares to fund the buyback or redemption.

Although it is relatively unusual for a company to reduce its share capital in order to distribute assets owned by the company to shareholders, it does happen. For example, the nominal value of shares could be reduced and assets distributed to shareholders in return.

Under the Act, a company is prohibited from returning share capital to shareholders:

  • unless it publishes a notice in an appointed newspaper not more than 30 days and not less than 15 days before the date on which the reduction of share capital is to take effect stating the amount of the share capital as last determined by the company, the amount to which the share capital is to be reduced, and the date on which the reduction is to have effect; and
  • if on the date the reduction is to be effected, there are reasonable grounds for believing that the company is, or after the reduction would be, unable to pay its liabilities as they become due.

The Act also requires both board and shareholder authorisation to reduce the authorised and issued capital.

Within 30 days after the date on which the reduction is to have effect, a company must file with the Registrar of Companies (stating that the provisions of section 46(5) of the Act have been complied with) as follows:

  • Form 8 "Memorandum of Reduction of Share Capital";
  • Form 8b "Memorandum of Reduction of Issued Capital";
  • Copy of the legal notice advertisement;
  • A certified copy of the resolution of the general meeting; and
  • Requisite filing fee.

As with any complex matters of law, it is always wise to consult a lawyer expert in the area.

Article first published in The Royal Gazette, February 2015

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.