“Equity” (category of capital premiums) are in the companies’ activities, although not regulated with the attention that would have been necessary in the summary of current capital movements. That is why, in the framework of acquisition projects in the field of investments, in which the issue of new shares or social shares is taken into account through the method of equity, a unitary and somewhat more detailed regulation would have been useful.
In order to understand the legal and commercial significance of “equity”, we start from the legal definition in which it is established that “equity” represent “the difference between the issue price of new shares or shares and their nominal value”.
Summarizing current, the issue premium method is a regulation of the investment of the capital increase which is made in exchange for new cash contributions, by issuing new shares or shares (and not by increasing the nominal value of the existing shares or shares). On the occasion of such an increase in the social capital, existing shareholders and/or third parties participating in it pay to the company sums of money greater than the nominal value of the shares they subscribe to. The difference between the final amount paid (i.e. the “issue price”) and the nominal value of the shares underwrite this issue premium category, which is recorded separately in the company’s accounting, in a special capital premium account.
The “price” is paid both for the “privilege” of becoming a shareholder in that company and to compensate for the dilution of the percentages of the existing shares or, if only a part of the shareholders subscribe, for the dilution of the percentages of the other shares.
The operation described above can be exemplified by the situation where an investor wants to make available to companies a significant amount in the form of own capital (or “equity”) and not in the form of a loan (“debt”). Normally, this would mean a contribution by the respective investor to the share capital of the companies.
Since investments usually mean important infusions of money, to avoid the reduction and even “probustion” of the participation quotas in the social capital of the shareholders/associates who do not in turn contribute amounts within the increase operation (proportional to the value of the new investment in order to keep his participation in the share capital) the amount made available to the company by the investor will be divided into contribution to the share capital plus issue premium, in a proportion in which the value of the contribution to the share capital is not likely to produce a significant collapse of the shares held by the existing shareholders/associates.
The issue premium method can also be used in the situation where the directly interested persons do not want to know the exact value of the investment in the company in the form of equity. Thus, two payments will be made within the operation: a payment as a contribution to the social capital and a payment as an issue premium, and the payments made as an issue premium will only be found in the company’s internal documents.
Another circumstance that could lead to the decision to use the equity is the one in which it is necessary to increase the capital of joint stock companies. This necessity results from the legal obligation that the company’s net assets represent at least half of the share capital.
Questions related to equity
Is the issue premium mandatory?
It is not mandatory
What should be the amount of the issue premium?
The applicable legislation does not impose any limitation regarding the amount of the issue premium.
Therefore, we believe that, from the point of view of the applicable regulations, the conclusion that is supported is that the parties have full freedom to establish, from the total investment of a shareholder/third party in the company’s equity (“equity”), how much share capital and how much is the issue premium. The only requirement is that such an investment also includes a contribution to the social capital (as an investment only in the form of equity is not allowed). Practically, such an investment can also be materialized by issuing a single share, and the rest of the investment to represent the issue premium.
How should the equity be reflected in the documents related to a share capital increase?
The equity can be paid separately from the amount representing the share capital, at different terms, according to the agreement of the associates/shareholders or globally, through a single payment that includes both the sums representing the share capital and the share capital), a situation in which it is useful for the payment documents to mention how much is the premium and how much is the share capital.
Is the issue premium also applicable to SRLs?
Yes, it is applicable
Are equity allowed when setting up commercial companies?
According to “Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012” equity can be used under certain conditions for the establishment of joint stock companies, for contributions to the social capital of a different nature than cash contributions.