What is 'Capital Reduction'

Capital reduction is the process of decreasing a company's shareholder equity through share cancellations and share repurchases. The reduction of capital is done by companies for numerous reasons, including increasing shareholder value and producing a more efficient capital structure. After a capital reduction, the number of shares in the company will decrease by the reduction amount.

BREAKING DOWN 'Capital Reduction'

The act of capital reduction is enacted by reducing the amount of issued share capital in a response to a permanent reduction in a company's operations or a revenue loss that cannot be recovered from a company's future earnings. In some capital reductions, shareholders will receive a cash payment for shares cancelled, but in other situations, there is minimal impact on shareholders.

Specific Examples of Capital Reduction

Many companies decide to reduce capital through repurchase agreements or share cancellations. For example, AS Tallink Grupp, an Estonian shipping company that operates in the Baltic Sea and provides high-quality mini-cruises to its customers, reported that it would reduce its share capital on June 14, 2016. The company decided that it would move forward with a reduction of its share capital through the reduction of the book value of its shares. The €40 million capital reduction is to be paid out to the company's shareholders in December 2016.

The company is required to reduce its share capital through a set of specific steps. First, a notice must be sent out to creditors of the resolution of the capital reduction, which was published on June 15, 2016. Second, the company has to then submit an application for entry of the reduction of share capital no earlier than three months after publication of the notice. Share capital reduction is then expected to be paid to shareholders no earlier than three months after the entry of reduction in the commercial register.

Using another example, StarDSL AG, a German-based company that provides satellite telecommunications services and products in the field of data and voice services, announced a capital reduction on July 21, 2016. The capital reduction is to be performed through a reverse stock split with a 10:1 ratio. After the company consolidates its shares, capital is expected to be reduced by €11.3 million.

Finally, GAM Holding AG, an independent, pure play asset management group based in Switzerland, reduced its capital on April 27, 2016. The capital reduction was carried out through a share buyback program, and the company eventually cancelled 3,100,000 repurchased shares because adequate reductions in capital had already been made. The share capital as of July 13, 2016, is equal to 8 million Swiss francs.

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