Apr 7, 2025
Capital Changes in Norwegian Companies – Rules on Capital Reduction and Capital Increase
Changes in a company's share capital are subject to strict rules in Norwegian corporate law. Both capital reduction (reduction of share capital) and capital increase (increase of share capital) have significant legal and economic consequences for the company, its shareholders, and creditors. This article provides an overview of the legal framework and practical implications of such capital changes.
Capital Reduction
Purpose and Legal Framework
Capital reduction involves reducing the company's share capital. Since share capital is part of the company's bound equity that is meant to protect creditors, the ability to perform a capital reduction is strictly regulated.
If shareholders had free access to decide on the reduction of share capital and returning the funds to themselves, it would undermine the significance of the bound share capital as creditor protection. Therefore, a capital reduction concerns not only the company's shareholders, but also its creditors.
Decision-Making Process
As a general rule, a capital reduction must be decided by the general meeting with a majority as for amendments to the articles of association, cf. the Companies Act/Public Companies Act § 12-1 cf. § 5-18. This means that the decision requires a two-thirds majority of both the votes cast and the share capital represented at the general meeting.
Since the amount of share capital is stipulated in the articles of association, a capital reduction always results in an amendment to the articles of association.
Methods of Implementation
Capital reduction can be implemented in two ways:
By redemption of shares
By proportional reduction of the nominal value of shares
The choice of method depends on the purpose of the capital reduction and the company's ownership structure.
Legal Purposes for Capital Reduction
The Companies Act/Public Companies Act § 12-1, first paragraph, limits how the amount of the reduction can be used. The legal purposes are:
Covering losses that cannot be covered otherwise
Distribution to shareholders or cancellation of the company's own shares
Allocation to a fund to be used according to the general meeting's decision
This limitation on legal purposes expresses the legislator's intent to protect creditor interests.
Creditor Notice and Creditor Protection
If the amount of the reduction is to be used for distribution to shareholders, cancellation of own shares, or fund allocation, the Register of Business Enterprises shall announce the decision and notify the company's creditors. Creditors have a deadline of six weeks from the last announcement to notify the company if they have objections to the capital reduction.
A creditor with an undisputed and settled claim can block the capital reduction until the claim is paid. For unsettled claims, the creditor can require sufficient security.
This creditor protection is not necessary if the amount of the reduction is to be used exclusively to cover losses that cannot be covered otherwise, as such a capital reduction does not involve extracting value from the company.
Effectiveness of the Capital Reduction
The capital reduction becomes effective when it is registered in the Register of Business Enterprises. The decision on capital reduction must be reported to the Register of Business Enterprises within two months after it has been made. If the deadline is exceeded, the capital reduction cannot be implemented without a new decision.
If the entire amount of the reduction is to be used to cover losses, the reduction takes effect immediately upon registration. In such cases, distribution of dividends as a general rule cannot be decided until three years have passed since registration, unless the share capital has been increased again to its original size or a creditor notice has been issued.
The capital reduction also becomes effective upon registration if, at the same time as the reduction, a capital increase is carried out by subscription of shares with a contribution equivalent to the reduction amount, so that the company's bound equity is at least as high as before.
Practical Applications of Capital Reduction
In practice, capital reduction is used for several purposes:
Covering Losses: In case of accounting deficits, the company can write down the share capital to create a better balance between equity and share capital. This can facilitate the possibility for later dividends.
Distribution to Shareholders: Capital reduction with distribution to shareholders is a way to return capital to owners, often as an alternative to dividends.
Redemption of Shares: In case of forced redemption of a shareholder's shares according to the Companies Act §§ 4-24 or 4-25, a capital reduction may be necessary if the redemption amount cannot be covered by the company's free equity.
Tax Planning: In group scenarios, capital reduction combined with simultaneous capital increase can enable transfers of values that would otherwise be difficult due to lack of free equity.
Restrictions and Binding Pre-Commitments
A company cannot commit to carrying out a capital reduction at a future date. The rules concerning capital reduction are mandatory and aimed at protecting creditor interests. Therefore, the company cannot bind itself to what should be decided at future general meetings, and agreements that anticipate such decisions cannot be enforced.
Capital Increase
Capital increase is in many respects the counterpart to capital reduction. While capital reduction decreases the company's share capital, capital increase leads to an increase in share capital. Capital increase is an important tool for companies' capital acquisition and financing of further growth.
Two Main Forms of Capital Increase
Capital increase in limited companies and public limited companies can occur in two main ways:
Bonus Issue: Increase of share capital without new capital being paid
New Share Subscription with Contribution Obligation: Increase of share capital with the infusion of new capital
These two forms of capital increase have different purposes and are subject to different rules.
Bonus Issue
A bonus issue involves increasing the share capital without any payment to the company occurring. A bonus issue is carried out either by increasing the nominal value of the existing shares (attribution to shares) or by granting new shares to shareholders (free shares).
Accountingly, a bonus issue is conducted by transferring funds from the company's free equity to share capital. The fund for unrealized gains and the fund for valuation differences cannot be used for a bonus issue, as these are already bound equity.
Significance and Consequences of Bonus Issue
A bonus issue does not supply the company with new capital – it is merely an accounting operation that reclassifies existing equity from free to bound. The main consequences are:
Locking of Equity: Previously free equity becomes bound, reducing the company's leeway for distributions to shareholders.
Signal Effect: A bonus issue can reinforce the impression of the company's solidity and financial position.
Adjustment of Share Price: In listed companies, a bonus issue may help adjust the share price, as experience shows that prices often fall less than the dilution of share capital would suggest.
Decision-Making Process for Bonus Issue
A bonus issue must be decided by the general meeting with a majority as for amendments to the articles of association. All shareholders have the right to partake in the increase, and there is no access to deviate from pre-emptive rights or conduct a so-called "directed issue".
Share Split – Not to Be Confused with Bonus Issue
Share split must not be confused with bonus issue. In a share split, the number of shares increases while the share capital remains unchanged, and the nominal value of each share decreases. Share split also requires a majority as for amendments to the articles of association.
A share split is often used when a company considers the price of its shares too high, leading to reduced liquidity in the share. By decreasing the nominal value and increasing the number of shares, the share price can be adjusted downward, often resulting in increased trading.
Issue with New Subscription and Contribution Obligation
When a company wishes to infuse new, fresh share capital, an increase of share capital through new share subscription (new issue or contribution issue) with a contribution obligation is conducted.
In contrast to a bonus issue, which is merely an accounting operation, an issue with a subscription results in the company genuinely receiving new funds or debt being converted into equity. This makes an issue with new subscription a real source of financing for the company.
Rules on Whom Can Be Invited to Subscribe
For limited companies, there is the limitation that only shareholders or specific, named individuals can be invited to subscribe for new shares. This limitation does not apply to public limited companies, which can freely invite the public to subscribe for shares.
In practice, the difference is, however, smaller than it may seem, as a limited company can market a planned capital increase to the public and then invite interested (now named) individuals to subscribe for shares. The central difference is that shares in limited companies cannot, under any circumstances, be listed on the stock exchange, which public limited companies can do.
Decision-Making Process
The decision to increase share capital through new subscription is made by the general meeting with a majority as for amendments to the articles of association. The general meeting can also authorize the board to conduct issues, which is common practice to give management the necessary freedom of action.
Such board authorization allows the company to quickly respond when a need for capital infusion arises, without having to convene an (extraordinary) general meeting. This can be valuable when needing to strengthen equity, counter unwanted takeover attempts, or plan restructurings.
Pre-emptive Rights and Directed Issues
Existing shareholders generally have a statutory, proportional pre-emptive right to new shares in a capital increase through new subscription. This protects their ownership share from dilution.
However, this pre-emptive right can be waived with a two-thirds majority at the general meeting. Such a waiver opens for so-called "directed issues," where the company addresses selected potential new shareholders.
Directed issues can be motivated by various considerations:
Strategic Partners: The company may wish to align with individuals or firms with particular expertise or strategic resources.
Efficient Capital Procurement: A directed issue may be more efficient than an issue where all existing shareholders are to participate.
Defense Against Takeover: Directed issues can be used as a defense against unwanted takeover attempts by bringing in new "friendly" shareholders.
Potential for Abuse in Directed Issues
Directed issues may be potentially abused by the shareholder majority to secure advantages for the majority and their affiliates at the minority's expense. This is particularly relevant when the board has an "authorization issue in the drawer" that can be used when it seems opportune.
In such cases, sidelined shareholders may invoke the prohibition against abuse of authority in the Companies Act/Public Companies Act § 5-21.
Summary
Capital changes, whether in the form of capital reduction or capital increase, are subject to strict rules under Norwegian corporate law. These rules balance considerations for the company's financing needs, shareholders' interests, and creditor protection.
Capital reduction allows the company to adjust capital downward in case of losses or return surplus capital to owners, but is subject to strict rules to protect creditors.
Capital increase is an important tool for companies needing an infusion of new capital, either through new share subscription or as an accounting operation (bonus issue).
Both in capital reduction and capital increase, it is important to follow the legal procedures and deadlines, as well as to be aware of possible minority protection issues in directed issues or disproportionate capital reductions.
