An analysis of the methods of increase of share capital: concepts and applications.

Subscription of the share capital of which is essential for the formation and growth of a company, analyze the best means for increase of a situation.

Introduction

The subscription of capital is the starting point for the creation of the company, representing one of the first of the commitments made by its members in order to commence operations and to support the growth of your business. The ability of a firm to adjust its capital stock, by means of various methods to increase reflects their adaptability, and ambition to grow.

This article focuses on the key ways to increase the share capital by analyzing its practical applications, and the scenarios in which each type would be more appropriate. In this way, the main objective is to promote an understanding of the strategic value of social capital and empower the business owners and managers to make informed decisions, and which are in line with long-term goals of the company.

The concept of social capital

Social capital is the value of the home provided by the partners in the creation of the company, with the aim of facilitating the beginning of its activities, and to ensure the execution of their purpose. It can be made up of financial assets, whether material or immaterial, as long as it can be measured in money, as stated in art. 7 of the law 6,404/76.

It was established in the articles of association or by-laws, the social capital is not only a commitment of the partners, but it also serves as the legal guarantee in relation to third parties. After having been fully paid-up, evidence of the financial ability of the company to honour its obligations, the initial, creating credibility and trust in relationships, business, and law.

The act of compounding takes place in two steps to sign up and pay for shares. According to Coelho (2022): ‘The first is a measure of the amount of resources committed by the members, the company, under the heading’ capitalization, and the second one corresponds to the resources once they have been transferred to the corporate assets.’

In the simplest of terms, a subscription that symbolizes a pledge to the investment of the shareholders or stockholders, as the payment that represents the concrete realization of the investment in the company. That is, the subscription, the member agrees to contribute a certain amount to the company. When you make a full payment of such amount, he will complete the phase of creation.

It is important to highlight the distinction between social capital and net assets. The equity-refers to the collection of assets that the company owns. Already, the share capital represents the expression number, the currency, the value of the heritage that has been, or must be built-in to the company because of the contributions of the members.

In this context, it is important to note the analogy is made for a Grandson, and France, in chapter XV, ” Social Capital,’ in the work of the Treaty of Corporate Law, Vol. II, Ed. 2023 (2023):

‘To compare it with a glass dthe water explains the function of the glass shows you, at a moment in time (the end of each fiscal year), the capital and assets with values that are equal to, or will be, a result of the financial and without loss, and without profit; and if the water is overflowing from the glass, there is a profit; if the glass is not enough to fill it, there is a loss. Vivante compared to the capital stock of a container, the gauge of the spirit, and of the stockholders, to the grain that they can be overcome, the extent and in such cases, there will be a profit), whether or not the reach, in which case there will be a loss); and Garrigues, like a dam that holds back the water (and the assets), until they can overcome it, representing the net income which is of a distribution to the shareholders.’

Also, it is necessary to emphasize that, despite the fact that the capital to be established in the contract, or by statute, it is not immutable, and you can increase it or reduce it, as long as they meet the terms and requirements of applicable law. For example, the value of the capital stock cannot be changed after the establishment of the company is to meet the changing demands of strategy, it is an expansion, restructuring, as well as the adaptation to the circumstances of economic and market needs.

The structure of the share capital in limited liability companies, and anonymous

In this topic, we will explore the differences between a LTD company, limited, and the A/S – joint-stock company, especially in relation to the subscription, and the payment of the capital stock of each of these types of companies. Although the two share some characteristics, there are important differences in the composition and organisation of the share capital, which have a direct impact on the functioning and governance of each type of company.

In a limited partnership, as its name suggests, the liability of the members is limited to the value of its equity interests represented by shares, which, in turn, have a match in the capital. The concept of a quota, it is well-illustrated by me But hot Pepper, that is, describing the following:

‘Share it, then, a term which identifies the contribution of each and every one of the members, to the formation of a number of goods, and financial resources to what is called social capital. The sum of the arithmetic of the monetary expression of the shares of each and every one of the members, that corresponds to the value of the share capital of the company.'(Black PEPPER, 2023, p. 201).

All of the members, however, are jointly and severally liable for the payment of the share capital. The rule of limited liability of the shareholders in this company, it is excetuada if the value of the subscript is not a fully paid-up, in which case, the partner who did not, which was the full amount promised, this is referred to as the remisso, and you can be expelled from the society.

On the other hand, the S. A. joint stock company stands on a legal framework aimed at a profit, and in which the share capital is comprised of the shares representing the fractions of wealth and the control of the company. To the contrary, the limited partnerships in which the partners hold shares in the joint-stock company, the liability of the shareholders is limited to the value of the shares they have subscribed to or purchased. As stated Rabbit (2024): ‘social capital’ in this type of company is divided into units, which are represented by stock. Its members are called shareholders and they are liable for corporate obligations, up to the limit of what is yet to pay up the shares that they hold.’

This type of company may issue common stock, which will give the right to vote, and is preferred, which focused on the dividend, but they usually do not give the right to vote. The valuation of the shares reflected in the share capital as well as the perception of the profitability of the company in the market. The stock, which is reflected in the share capital in the joint-stock companies, are also used as a mechanism to differentiate between the partners, and managing the rights and obligations of each of them.

Another feature of the limited partnership and to the capital stock with respect to the formalities in the proof. While on LTD. is provided in the report of the evaluation of the property, whether material or immaterial, who make up the company’s capital, by the indication of its value to the contract, the a/S to Thes of this document, it is a must. Here, it was for the subscription in cash, there is no need for the presentation of the report of the trial, regardless of the type of company.

So, for example, in the formation of the LTD with a capital consisting of real property, simply describe them in the articles of association, by assigning them values. After the subscription, you shall be carried out on the update of the registration to the event, so that the ownership of those goods is to be transferred from the partner to the LTD. this is called the conference of the goods. For the S/S to Thes, and the process is the same, but with the by-laws, which will also be described, and the properties and their values should be given in the evaluation report.

In addition to this, the possibility of an increase and a decrease in social capital, limited liability company, may increase or reduce its share capital, as provided for in art. 1.081 at 1.084 of the CC, as long as all of the shares to be paid in full before any changes are made.

With the increase of the share capital of which is carried out by means of a simple modification of the articles of association, which, according to the stresses and Pepper (to 2023) p. 201), in order to increase the share capital, it is essential that all of the shares subscribed shall be paid in full, is given to the shareholders of the right of pre-emption in the subscription of the new shares, for a maximum period of 30 days after the approval of an increase in the assembly meeting of the company. Already, the reduction of the share capital of which is a complex and bureaucratic process, in an attempt to preserve the rights of the creditors of the company, after all, the capital serves as the legal guarantee in relation to third parties.

In joint-stock companies, and the increase of capital, it also is ok, but it’s not so simple, its execution as it is in the limited partnership. Here, the rise in support of the issuance of the new shares, subject to the prior meeting of shareholders, which will result in a change in the by-laws, the preparation of a subscription, and effective, with the book-keeping of the books of the company, the adjustment of the shares of the partners, and/or the admission of a new partner.

Modes of increase of share capital

As discussed throughout the article, while social capital is defined in the contract, or by statute, it is not set in stone. Alfredo Lamy Filho, and José luis Bulhões Pedreira, discuss all the ways for expansion in the capital and, by categorizing the transactions of the unilateral and bilateral arrangements, as outlined in his work, the Law of Companies (2 in. ed. Rio de Janeiro: Forense, 2017). Let’s see:

‘The increase of capital, it is a legal transaction that modifies the contract for the company, this could be one-sided (in the capitalization of profits or reserves), or bilateral, when what it means is the manifestation of the will of the company, which decides to create the actions, and the people who get. 

They are the modalities of the deal bilaterally: (a) the purchase of treasury shares, and (b) the conversion into shares of common or of the parties to the beneficiary; and (c) the exercise of the warrants, and the exercise of an option to purchase shares of stock.’ (The SON, the QUARRY, 2017, p. 997).

The distinction between the types of the increase in the capital – one-way two – way- it is important to understand the various opportunities for the expansion and consolidation of the share capital of the company. In this chapter, we will discuss the concepts and methods of the main ways of increasing the capital stock.

Increase in the subscription of new shares

With the increase of the share capital, by the subscription of the new shares is an alternative strategy for companies that want to inject capital into its own, without resorting to external borrowing. In this case, our partners are responsible for the increase in the turning of the values of the investor in the subscription of the shares.

This kind of increase can also be a strategy to attract foreign investment. In this case, it is common that only a portion of these investments are to be converted to equity, in which case the other party as a capital gain.

With the increase of the share capital are subject to capital gain makes it possible to attract foreign investment, and the current members are not being fully diluted earnings per share. This is because, if you do not have a reservation on the part of the values, such as goodwill, all of the money spent by a third party, would be converted into the share capital increase, and the current members had their levels of interest in, fully diluted earnings per share. For this reason, it is often the operations of the subscription of the new shares arising from the capture of foreign investment are accompanied by the reservation of a certain part of the capital stock as a capital gain, so that an investor partner to join in the company with only a percentage of the interest he promised during the negotiations.

Also the increase of the share capital reserve capital gain, it is important to note its effect, deferred tax assets, since different depending on the type of company. In limited partnerships, the capital gain is taxable, and, as such, it can be found. In joint-stock companies, the capital gain is not subject to tax (at least up to this point, which makes popular, this type of company.

The amounts set aside as capital gain, however, is expected to be rolled out in the overvaluation of the stock.

This is the kind of expansion of capital, is not only a chance to finance, but it is also a strategy of participatory governance, and the protection against dilution. The second Son (2023), the process involves three elements: (i) the payment of the share capital prior to 3/4 (three quarters), at a minimum, (ii) the approval by a majority of 75% of the shareholders; and (iii) the exercise of the right of the screen. It also contributes to the stability of the corporate, and provides safety to the investor, who will remain on the company, with the same percentage, and the level of control.

The main benefit of a capital increase through a subscription with the ability to obtain the resources to go into debt, strengthening the company’s financial and improving its image in the market. However, it should be treated as such. If the shareholder or shareholders do not exercise their right to purchase, at the risk of facing a dilution of the stake, which would weaken their influence in the decision making process. Instead, these owners may choose to sell their subscription rights, they were to protect the economic value of participation, it means renouncing part of the control over the target company. (‘s grandson, 2023).

The increase in terms of market capitalisation of profits or reserves

The capitalization of profits or reserves, makes it possible for a company to convert a portion of their retained earnings, or to make a reservation at the capital, without the need to raise new funds from outside.

This allows you to increase the share capital with the built-in features, leading to the issuance of the new shares to the shareholders of the increase in the value of the existing shares, in proportion to the number of shares that you already own (law 6,404/1976, art. 169). Thus, the practice of preserving the representation of the shareholders, thus avoiding the dilution of their equity, and ensuring the security and stability of the investment in the company.

Is worth to remark that the accumulation of reserves may change in the par value of the shares or to result in the distribution of new shares to the shareholders ‘ meeting. In companies where the shares have no nominal value, the capitalization can be done without changing the total number of shares. Rezende (2023, p. 87).

For the Rabbit (2019), in this way the increase of the share capital without the capture of new knowledge, since it was only a correction of the internal resources of the company. In teaching, it is referred to as an ‘increase in free of social capital’, as it does not impact the shareholders ‘ equity of the company. In this context, Bunny quotes Galgano (1988, p. 368-369): ‘When you operate in the capitalization of profits or reserves, the company issues new shares to be distributed to them in proportion as between the shareholders or to keep the same number, in which case it will be the par value, if any, that is raised up’.

So, in this kind of case is it beneficial, as it enhances the stability of equity to prevent the spread of the investments, strengthening the company’s reputation as a self-sustainable. However, this approach may have limitations because of the dependence of the accumulated profits and reserves, it makes the increase of the capital of which is more limited in the times of the profitability is low or when the funds will be used for the purposes of operating, such as innovation and expansion.

Increase in inflation

The inflation of the share capital of which is a procedure that is used to grind the face value of the financial assets of a company, due to variations in inflation. This is important in order to preserve the power of social capital in periods of high inflation. In this way the increase of the share capital of which is regulated under the art. 167 of the corporations law (the law 6.404/76), which allows for the capitalization of capital reserve arising on the restatement of the paid-up capital, subject to the approval of the ordinary shareholders ‘ meeting.

This practice has gained a special importance in the economy inflation, because of what happened in Brazil, prior to the stabilization brought about by a real, or the law 9.249/95. According to Carvalho (2018), the inflation in that time period has reached such a magnitude that the monetary correction is no longer an option for shareholders, making it a requirement that is left to the assembly, only the type-approval of a value that is calculated by the government. The main purpose of this adjustment is to preserve the capital of the company at their actual value, thus protecting the equity of the investor against the dilution of value to you.

Following the provisions of the article mentioned above, the monetary adjustment is applied each year based on the balance sheet as of the closing of the fiscal year, creating a capital reserve which can be built-in in the capital. This embedding is usually does not involve the issuance of new shares, which allows them to preserve the aspect ratio of the participation of the shareholders ‘ meeting.

In those cases in which the shares have a par value, the amount is adjusted according to inflation. In private companies, the shares of a nominal value, and the shares, without par value, the adjustment is made separately for the shares of a nominal value, thus ensuring the maintenance of the principle of proportionality and the rights of the owners.

To maintain the economic value of the real capital stock, upgrading to the monetary help to preserve the attractiveness of the company to investors, especially in times of economic uncertainty. However, as noted by Detailing it, the company relies on an increase of share capital in order to face the difficulties with time-sensitive. As a rule, causes an increase in the capital when it is proposed to effectively extend the range of your business’ (cited in Carvalho, 2018).

Final thoughts

In conclusion, the increase of the share capital of which is a strategic tool which allows the firm to adjust its financial structure in response to the demands of the marketplace and your goals, expansion and growth. The choice of modality is the most appropriate depends on the specific goals of the organization is to facilitate the growth, the strengthening of the capital base, or to lure new investors. By subscribing, capitalization, profits, reserves, or for any other alternative, the company can choose the method that best aligns with their needs and to strengthen the equity or fund-raising. Thus, the financial structure is intended to support the growth and competitiveness, in order to ensure its strong position in the market.

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