In Kenya, share capital reorganization is provided for under the Companies Act which provides clear guidelines on how businesses can restructure their share capital effectively and legally. Below, we simplify the key aspects of share capital reorganization for businesses and shareholders.
What Is Share Capital Reorganization?
Share capital reorganization refers to the process of altering a company’s share structure to adapt its financial structures to changing business needs. It can include reducing, increasing, subdividing, consolidating, or cancelling shares. These changes help companies align their capital with operational and strategic goals.
Methods of Share Capital Reorganization in Kenya
The Companies Act, 2015 outlines several ways companies can reorganize their share capital. Each method has unique rules and requirements. Let’s look at them in detail.
1. Share Capital Reduction
Share capital reduction involves decreasing the company’s share capital. According to Section 407 of the Companies Act, companies may reduce share capital to:
- Cancel paid-up capital that is lost or unrepresented by assets.
- Repay excess paid-up capital.
For Public Companies:
Public companies must pass a special resolution and seek High Court approval for capital reduction. Creditors can object to this process, ensuring their interests are protected. Once approved, the company must file the court order with the Registrar of Companies.
For Private Companies:
Private companies can reduce share capital without court involvement. They need to pass a resolution supported by a solvency statement. Directors must certify the company’s ability to pay its debts during the year following the resolution. The solvency statement must be filed with the Registrar within 14 days.
2. Sub-Division of Shares
Sub-dividing shares (or share splitting) creates a larger number of shares with smaller nominal values. This makes shares more affordable and attractive to investors. Shareholders must approve this process through an ordinary resolution. The company must notify the Registrar of the change within one month, including a statement of capital.
3. Consolidation of Shares
Consolidating shares results in fewer shares with larger nominal values. This method is often used by listed companies to manage the number of shares available in the market. Like sub-division, shareholders must approve the change, and the company must file details with the Registrar within one month.
4. Cancellation of Shares
A company may cancel issued or unissued shares in certain situations, such as:
- Forfeited shares not reallocated within three years.
- Shares bought back by the company.
Although share cancellation reduces the total share capital, it is treated separately from share capital reduction.
Increasing Share Capital
Companies can increase their share capital to raise additional funds. The Companies Act mandates payment of a 1% stamp duty on the value of the increase. If unpaid, a 5% quarterly penalty applies. After increasing share capital, companies must allot all new shares as either paid-up or unpaid.
Bonus Shares and Tax Implications
Companies can convert retained earnings into bonus shares, issuing them to shareholders. However, under the Finance Act, 2018, the Kenya Revenue Authority (KRA) considers such conversions as dividends, making them subject to withholding tax. This tax impacts shareholder funds, so businesses should plan carefully.
Why Reorganize Share Capital?
Reorganizing share capital helps companies optimize financial efficiency and achieve strategic objectives. For instance:
- Reducing capital can eliminate past losses and free up reserves for future distributions.
- Share buybacks can improve earnings per share and utilize surplus cash.
- Sub-divisions make shares accessible to smaller investors, boosting market participation.
Final Thoughts
Share capital reorganization provides companies with tools to manage their finances better and adapt to market needs. Whether through capital reduction, sub-division, or consolidation, it’s essential to follow the Companies Act’s provisions to ensure compliance and protect stakeholder interests.
If your company is considering share capital reorganization, consult a qualified legal advisor to navigate the process seamlessly.
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