Share capital of a commercial company

Concept and characteristics

Share capital (hereinafter also referred to as “capital”) is a commercial law term, more specifically a term of company law, and its basic definition is provided by the Commercial Code (hereinafter also referred to as “CC”) in Section 58(1), which reads “The share capital of a company is the monetary expression of the total monetary and non-monetary contributions of all partners to the company.” The Supreme Court of the Slovak Republic supplements this definition as follows “Unlike business assets, share capital is essentially only an accounting variable that usually does not correspond to the actual state of the company’s assets. The actual value of the company’s assets depends on its financial results, i.e., it may be higher or lower than the share capital.” Current professional literature also defines share capital as a “fixed abstract number.” Each of these definitions contributes in its own way to a comprehensive understanding of share capital. However, it is important to note that share capital is always expressed in money, even if it is not in the form of money deposited in a commercial company (hereinafter also referred to as “company”). For the sake of completeness, it should be noted that if the contribution obligation is fulfilled by a non-monetary contribution, the subject of the contribution must be valued by an expert opinion and must be identified in the articles of association; For example, if a partner wishes to use a gold chain for the purpose of a contribution, its value must be quantified by an expert appraisal and the agreement must expressly state that this chain fulfills the contribution obligation. Furthermore, in connection with the registered capital consisting of a non-monetary contribution – real estate, it should be emphasized that when registering in the commercial register, the court has the obligation to examine whether the real estate can be transferred to the ownership of the company. Last but not least, a non-monetary contribution may also be a claim, right, or other asset whose value can be determined in monetary terms.

Now that we have defined share capital, we can move on to the commercial companies that are required to create it and enter it in the commercial register, namely: limited liability company (hereinafter also “LLC”), joint stock company (hereinafter also “JSC”) and simple joint stock company (hereinafter also “SJSC”). From the above, it can be clearly concluded that share capital is a concept relating to capital companies or companies that are required to create share capital. In addition to these companies, it should be noted that limited partners in a commercial company also have a contribution obligation, but in this case we are not talking about share capital. This initial contribution or share capital must be entered in the commercial register, as well as the extent of its repayment. The extent of repayment is an important factor in relation to the registered capital, as failure to meet the contribution obligation by a partner causes him to be liable for the company’s obligations up to the amount of his unpaid contribution entered in the commercial register. Once the contribution obligation has been fulfilled, the partner is no longer liable for the company’s obligations; only the company is liable for them, with all its assets.

The entry of the registered capital in the commercial register is constitutive in nature when a commercial company is established, and therefore the act of registration represents expressis verbis the establishment of the registered capital, as a result of which the company acquires ownership rights to the contributions of the shareholders.

The share capital currently has a mandatory minimum value, which varies depending on the legal form of the company. In a limited liability company, the mandatory minimum is €5,000, in a joint-stock company €25,000, and in a public limited company the amount is €1. In principle, for all three legal forms of companies, the value of the share capital can only be changed by amending or changing the articles of association or statutes, which is done by a resolution of the general meeting. It should be added that increasing the share capital is a simpler process than reducing it, where the basic condition is that the resulting reduced share capital must not be lower than the mandatory minimum required by law.

Share capital as a determinant of a shareholder’s participation in a company

In the introduction, we mentioned the term “determinant of a business share in a company.”

In general, in capital companies, the scope of a shareholder’s rights is determined by the ratio of their contribution to the registered capital. In a limited liability company, the business share is governed by the provision of Section 114(1) of the Commercial Code, which reads: “A business share represents the rights and obligations of a shareholder and their corresponding participation in the company. Its amount is determined by the ratio of the shareholder’s contribution to the company’s registered capital, unless the articles of association provide otherwise.” In a joint-stock company, the registered capital is divided into a certain number of shares with a certain nominal value. The above provision gives the share capital a specific attribute, namely the determination of the extent of the shareholders’ participation in the company (share). We can apply this provision to a simple case. If the share capital has a total value of €5,000 and we have four persons who all contribute the same amount, for example, a cash contribution of €1,250 to the company, they become equal partners, and thus each of them acquires a ¼ (quarter) share in the company. However, the addition “unless the articles of association provide otherwise” cannot be overlooked. The legislator explicitly leaves it up to the partners to agree on the proportions of business shares in the articles of association or statutes differently, even if, for example, the partners’ contributions represent the same amount, as we have demonstrated in the case. This means that, in practice, the partners may also agree that if the registered capital is expressed as 8/8 (eight eighths), three partners may have rights in the amount of 1/8 of the share capital and the remaining partner will have rights as a majority 5/8 share, even though their contributions are financially equivalent.

Share capital as a means of financing a company

Share capital essentially belongs to the equity of a commercial company and its natural function is to finance the company. In addition to share capital, a company can be financed, for example, by contributions to capital funds, loans or bond financing. The fact that share capital is intended to serve as a means of financing the company is also confirmed by commercial law, which explicitly states that, even before the establishment of a commercial company ( ), a certain amount of share capital must be paid up, depending on the legal form of the company. This can be demonstrated by a limited liability company (s. r. o.), in which the mandatory minimum capital is €5,000. In this case, half of this amount, €2,500, must be paid into the company before it is established. As a result, the capital is created not only de jure but also de facto (in full or in part) at the same time, which means that it is immediately available to finance the company immediately after its establishment. Among other things, it should be noted that operating with share capital is directly expected, especially when starting up a commercial company’s business activities. It is therefore not an untouchable asset that must be kept intact. This can be demonstrated in practice with a simple example. If two partners establish a limited liability company with a registered capital of €5,000 and their business plan is to sell ice cream from a mobile van, they can easily use the funds representing the registered capital to purchase a specially modified van. With such a purchase, the company’s assets (the van) are financed from its own resources (share capital). From an economic point of view, such an act represents the use of the company’s assets (liabilities) to acquire the company’s assets (assets).

Share capital as a form of guarantee for the fulfillment of obligations

In older corporate law, the prevailing view was that share capital also served as a form of guarantee of solvency in the repayment of claims to creditors. This was interpreted to mean that share capital belongs to the company’s equity, which is on the liabilities side, and given its nature, it will primarily serve to cover the company’s liabilities.

In modern corporate law, on the contrary, the view is held, taking into account the mandatory minimum amount of share capital for ordinary commercial companies (especially limited liability companies), that share capital does not provide sufficient protection for creditors. We agree with this statement, which can be demonstrated with a simple example. Let us refer to the limited liability company from the previous example, in which the value of the capital represents the mandatory minimum of €5,000. This example responds to the current economic reality that a large number of limited liability companies in fact only create the mandatory minimum share capital. If this company has liabilities to its creditors in the amount of €80,000, then in relation to the registered capital, it is not possible to speak of any guarantee function, as the difference between the value of the liabilities and the value of the registered capital is obviously enormous. In such a case, it makes sense to speak only of one of the possible sources of coverage of the company’s liabilities that can be used to satisfy creditors, but the share capital cannot be generalized as a form of guarantee. It is true that the actual creation and maintenance of share capital in a company and its mandatory part of commercial law regulation leads to some degree of guarantee, but this is very low given the mandatory minimum value of share capital.

The guarantee function of share capital is also partly questioned by the legal principle stating that the Commercial Code does not impose an obligation on a company to maintain share capital in an immediately accessible and available form, but also in the form of other assets. In principle, it is logical that if the share capital is also to serve as a form of solvency guarantee, it should be immediately available and accessible for its purpose, so that obligations can be fulfilled in a timely manner and without unnecessary delays.

Conclusion

At the end of the article, we can answer the initial questions. Based on the article, it can be concluded that unless the articles of association provide otherwise, the share capital serves as a determinant of the business share, which is based on the ratio between the (monetary) value of the contribution and the total value (sum) of the capital. The share capital also serves as a means of financing the company, not only, but especially in its early stages. However, it is not entirely correct to refer to the share capital as a form of guarantee, given its mandatory minimum requirements in current commercial companies. Share capital is therefore not only prima facie a mandatory entry in the commercial register, but also an institution that currently has its functions, but it should be added in the same breath that the planned recodification of commercial company law will initiate changes to it.

Sources and literature used

Literature

CSACH, K., OVEČKOVÁ, O., ŽITŇANSKÁ, L. Commercial Law 2 (Commercial Companies and Cooperatives). Wolters Kluwer, 2020, 428 p. ISBN: 978-80-5710-291-5

KUBÍČEK, P.; ŠKRINÁR, A.; NEVOLNÁ, Z.; KOLKUSOVÁ, R.; ĎURICA, M. Commercial Law. 2nd edition, Plzeň: Aleš Čeněk, 2018, 398 pp. ISBN: 978-80-7380-731-3

Legislation

Act No. 513/1991 Coll. Commercial Code, as amended

Legislative intent to recodify commercial company law LP/2020/627 [online: https://www.slov-lex.sk/legislativne-procesy/SK/LP/2020/627]

Case law

Decision of the Supreme Court of the Slovak Republic ref. no. R 90/2003

Decision of the Supreme Court of the Slovak Republic ref. no. R 105/1994

Decision of the Supreme Court of the Slovak Republic ref. no. 6 Tdo 40/2010

Decision of the Supreme Court of the Slovak Republic ref. no. 2 Sžo 250/2008

We present the registered capital of a commercial company and the definition of its functions based on legal doctrine, legislation, case law, and the legislative intent of recodifying commercial company law.

#sharecapital #commercialcompanies #commercialcompanylaw #corporate law #law #commercialcode

References

1. Decision of the Supreme Court of the Slovak Republic, ref. no. 6 Tdo 40/2010
2. CSACH, K., OVEČKOVÁ, O., ŽITŇANSKÁ, L. Commercial Law 2 (Commercial Companies and Cooperatives). Wolters Kluwer, 2020, p. 363 ISBN: 978-80-5710-291-5
3. For more details, see Decision of the Supreme Court of the Slovak Republic ref. no. R 105/1994
4. For more details, see Section 59(5) of the Commercial Code
5. The legal status of limited partners is governed by the provisions on limited liability companies. A limited partner is required to make a minimum contribution of €250 to the company. For more details, see the provisions on limited partnerships in Section 93 et seq. of the Commercial Code
6. Latin term meaning “expressly”
7. Decision of the Supreme Court of the Slovak Republic ref. R 90/2003
8. Latin term translated as “by law”
9. Section 154(1) of the Commercial Code
10. CSACH, K., OVEČKOVÁ, O., ŽITŇANSKÁ, L. Commercial Law 2 (Commercial Companies and Cooperatives). Wolters Kluwer, 2020, p. 362 ISBN: 978-80-5710-291-5
11. KUBÍČEK, P.; ŠKRINÁR, A.; NEVOLNÁ, Z.; KOLKUSOVÁ, R.; ĎURICA, M. Commercial Law. 2nd ed. Plzeň: Aleš Čeněk, 2018. p. 90. ISBN: 978-80-7380-731-3
12. Legislative intention to recodify commercial company law LP/2020/627 [cited 11/4/2021] Available online: https://www.slov-lex.sk/legislativne-procesy/SK/LP/2020/627
13. Decision of the Supreme Court of the Slovak Republic, ref. no. 2 Sžo 250/2008