In the business operations of a joint stock company, changing the charter capital is a crucial decision that must comply with strict legal regulations. Specifically, in the case of a capital reduction, the company must ensure that all debts and other financial obligations are fully paid after the capital decrease.
1. Reasons for share capital decrease in a Joint Stock Company
Poor Business Performance
When business results do not meet expectations, the company may decide to reduce the charter capital to adjust the scale of operations and capital structure.
Example: Ha Tien 1 Cement Joint Stock Company – In 2018, the company decided to reduce its charter capital from VND 3,000 billion to VND 2,500 billion after facing difficulties in maintaining revenue and profit due to rising production costs.
Corporate Restructuring
Corporate restructuring or a change in business model may lead to a capital reduction as part of the strategy.
Example: General Electric (GE) – In 2017, GE decided to downsize the company, selling off unprofitable divisions and reducing capital to focus on core sectors like energy and aviation.
Shareholder Withdrawal
The company may reduce its charter capital when one or more shareholders decide to withdraw their investment from the company.
Example: Vinaconex Corporation – In 2019, after a major group of shareholders decided to withdraw their capital from Vinaconex, the company reduced its charter capital from VND 5,000 billion to VND 3,000 billion.
Capital Return to Shareholders
When the company no longer needs a high capital level, returning capital to shareholders and reducing charter capital can be done.
Example: Microsoft Corporation – In 2004, Microsoft carried out a massive capital return program worth USD 75 billion after the company accumulated a significant cash surplus, making it unnecessary to maintain such a large charter capital.
Legal Compliance
Capital reduction may be required to comply with legal regulations or requests from regulatory agencies.
Example: Bank for Investment and Development of Vietnam (BIDV) – In 2015, BIDV had to reduce its charter capital after the State Securities Commission required an adjustment to ensure the minimum capital adequacy ratio.
2. Share Capital Decrease Procedure for Joint Stock Companies
To reduce the charter capital, the joint stock company needs to follow these steps:
- Notification of business registration content change: This document is signed by the legal representative, notifying the Business Registration Office of the capital reduction.
- Resolution and minutes of the General Meeting of Shareholders: For a joint stock company, the decision to reduce the charter capital must be approved by the General Meeting of Shareholders and recorded in the resolution and minutes of the meeting.
Forms required:
- Minutes of the General Meeting of Shareholders on capital reduction
- Resolution of the General Meeting of Shareholders on capital reduction
- Appendix II-1 Notification of business registration content change
3. Importance of Following Share Capital Decrease Procedures
Reducing charter capital is not just an administrative procedure but a key element in protecting shareholder rights and maintaining the company’s financial stability. Properly following the process and complying with legal regulations will help avoid disputes and legal risks.
4. Case Study: Dispute Over Share Capital Purchase Agreement
The Case of Mr. Nguyen Quoc A vs. Electrical Construction Corporation – JSC
A typical example of the importance of complying with legal procedures is the share capital purchase dispute between Mr. Nguyen Quoc A and the Electrical Construction Corporation – JSC, which was adjudicated by the High People’s Court in Hanoi on July 20, 2023. In this case, the Corporation’s failure to complete the registration of share ownership led to a prolonged and complicated dispute. The court required the Corporation to complete the share ownership registration procedures for Mr. Nguyen Quoc A within 60 days. If not complied with, Mr. Nguyen Quoc A has the right to contact the relevant companies to carry out the share ownership registration.
This case will be analyzed in detail in a subsequent article to help readers understand the importance of following legal procedures when reducing charter capital or conducting other share-related activities.
Conclusion
Reducing charter capital is an important decision that must be carried out carefully to avoid legal and financial risks. Real-life examples from Vietnam and around the world show that capital reduction can help companies adjust their scale and capital structure to suit current business conditions. Ensure that your company follows the necessary legal procedures when reducing charter capital. For more details or to get professional advice, you can contact Unilaw at +84 (0) 912266811.
For more details on company name change procedure, please see our comprehensive guide on company formation (HERE). If you need further advice, contact Unilaw for detailed and professional support (HERE).
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