By AZIZAM AZIZAN
OPTIMIZING FINANCIAL STRUCTURE: EXPLORING THE OBJECTIVES AND PROCEDURES OF CAPITAL REDUCTION
Capital reduction refers to the process of decreasing a company‘s share capital. The Malaysia Companies Act 2016 introduces two methods for companies to carry out capital reduction, in contrast to the earlier Companies Act 1965 which only provided a mechanism requiring court confirmation for capital reduction. Section 115 of the Act specifies that capital reduction can be achieved either through a special resolution confirmed by the High Court or through a special resolution accompanied by a solvency statement. This article aims to explore the objectives of capital reduction, the approaches to executing capital reduction under the Act, and delve into the requirement of ensuring fairness and equity for the capital reduction scheme
Objectives of Capital Reduction.
1. To mitigate liability, a reduction in capital can effectively decrease the company‘s obligations by adjusting the shares to a more feasible extent that aligns with the company‘s financial situation.
2. In cases of excess capital, capital reduction serves as a means to address surplus capital, eliminating the need for the associated shareholders. This involves the cancellation of issued shares and subsequent reimbursement to these shareholders.
3. Capital reduction also aids in upholding the company‘s ability to sustain dividend payments. Through capital reduction, the company can better manage dividend disbursements to shareholders, enhancing sustainability by aligning the dividend payments with the reduced number of shares.
Within the framework of the Companies Act, there exist two avenues through which companies can carry out capital reduction, as delineated by Section 115:
1. Section 116 CA 2016: In this pathway, a company can execute capital reduction via a special resolution that subsequently obtains confirmation from the High Court.
2. Section 117 CA 2016: Alternatively, a company can embark on capital reduction by pursuing a special resolution, supported by a solvency statement collectively provided by all the directors of the company.
b. Nullifying any paid–up share capital that has been impaired or lacks backing from available assets.
c. Restoring excess paid–up share capital to shareholders that surpass the company‘s requirements.
Should a company choose to tread the path of a Court Order, it must fulfill specific legal requisites before the Court. This could potentially present challenges before the Court, especially if involved parties or creditors challenge the scheme that was previously executed via the Solvency Statement route. Subsequently, the discussion will delve into the prerequisites for a just and equitable capital reduction scheme.
Company KZM possesses 1,250,000 shares currently in circulation, and each share holds a value of $25, ultimately leading to a market capitalization of $31.25 million for the company. In a strategic move, Company KZM discloses its intention to carry out a share buyback initiative, effectively acquiring 500,000 of its own shares from the market. Subsequently, these repurchased shares cease to be available for public trading, consequently leading to a reduction in the total number of shares in circulation for the company. Consequently, the revised count of shares outstanding for Company KZM stands at 750,000, calculated by subtracting the bought–back 500,000 shares from the initial 1,250,000 shares. With 750,000 shares outstanding at a share price of $25, the company has a market capitalization of
$18.75 million. The buyback program resulted in a decrease of the company‘s market capitalization by $12.5 million.