Newsletter
RULES FOR CAPITAL REDUC-TION
In an interpretation dated 25 September 2002, the Ministry of Economic Affairs (MOEA) stated that if a company limited by shares wishes to improve its financial structure by reducing its capital to offset losses, and wishes at the same time to raise new funds and register an increase in capital, then under Article 168-1 of the Com-pany Law, the board of directors, before the end of the relevant fiscal year, should submit finan-cial reports and a proposal for such offsetting of losses to the company's supervisors for inspec-tion, and then present them to a shareholders' meeting for approval by resolution.
For this reason, when a reduction in capital and an increase in capital are to be registered in a single application, the resolution approving the reduction in capital to offset losses, and the resolution to issue new shares, should preferably have been passed in the same fiscal year. The law does not prescribe a minimum or maximum number of days that should intervene between the record date for the reduction in capital and the record date for the increase in capital, so the company may decide the length of this period for itself. But when the company applies to register the changes, it should register the reduction and increase in capital in a single application, and the time limit for the application is based on the re-cord date for the increase in capital.
For limited companies, the Company Law does not make any provision similar to Article 168-1, so it has been a matter of great doubt whether a limited company may offset losses by reducing its capital. With regard to this question, the MOEA issued an interpretation on 18 October 2002 in which it stated the view that since the Company Law contains no provision prohibiting such a reduction, a limited company may offset losses by reducing its capital. As for whether losses should be offset pro rata to shareholders' investments, the MOEA stated that if the com-pany's articles of incorporation require that the company's profits and losses be apportioned to shareholders pro rata to their individual capital contributions, then until such requirement are removed by consent of all shareholders, the ap-portionment should be made pro rata.