15/03/13

Capital Increase in Kind and Requirement to Issue New Shares

On 28 January 2013, the Belgian Institute of Statutory Auditors (Instituut van de Bedrijfsrevisoren / Institut des Réviseurs d’Entreprises; the “IBR-IRE”) published its opinion on the need to issue new shares in case of a capital increase in kind by a limited liability company.

In its opinion, the IBR-IRE starts with a textual argument. Indeed, the Belgian Companies’ Code requires that, subject to certain exceptions, a statutory auditor (commissaris / commissaire) or, in case the company did not appoint a statutory auditor, an auditor (bedrijfsrevisor / reviseur d’entreprise) establish a special report when a limited liability company proceeds with a capital increase in kind. Such a report should describe the contribution in kind, the valuation methods used and whether the applied valuation methods justify the number of issued shares (and, as the case may be, the issue premium). According to the interpretation of the IBR-IRE, the reference to “the number of issued shares” implies that new shares must always be issued on the occasion of a capital increase in kind.

In order to find support for this textual argument, the IBR-IRE also refers to the relevant sections of the Belgian Companies’ Code which provide that, in case the statutory auditor and the board of directors do not have to establish a special report in relation to the contribution in kind (See, VBB on Belgian Business Law, Volume 2008, No 11, p. 8, available at www.vbb.com), the board of directors must prepare a special statement indicating “the nominal value of the shares” or, in the absence thereof, “the number of shares issued as a counterpart for each contribution in kind”. Again, according to the interpretation of the IBR-IRE, this provision means that new shares must always be issued on the occasion of a capital increase in kind.

However, in our view, this text argument does not exclude the possibility to refer in such reports or statements to the fact that no new shares have been issued, but that the par value per existing share has been increased, in keeping with past practice. This is especially the case if all shareholders contribute proportionally to their existing participation to the capital increase. Should shareholders not contribute proportionally to their existing participation, such non- or lesser-participating shareholders will receive a benefit from the other, participating shareholders through the increase of the par value of their shares, which should be explicitly valued and legally qualified in such reports and statements, and taxed accordingly.

Further, the IBR-IRE considers that the issue of new shares ensures more tax security. However, the IBR-IRE does not indicate why this should be the case. It is true that it is more complex to reconstitute the taxed part of a share with an increased par value relating partly to capital increases (in cash or in kind) and partly to, for instance, capital increases in cash through the incorporation of untaxed reserves. However, this has been common practice in the past, and is, as such, not an argument to have to issue shares in case of a capital increase in kind.

Finally, the IBR-IRE also considers that a capital increase in kind without the issue of new shares might result in an unjust enrichment of the company. However, this argument is not further developed. It is also not clear why the company would be unjustly enriched, if the par value of the existing shares were increased for such a capital contribution in kind.

To conclude, we agree with the IBR-IRE that a capital increase in kind with the issue of new shares is recommendable. However, the arguments provided do not in themselves preclude a capital increase in kind without the issue of new shares, should there be pertinent reasons to do so. This is in keeping with past practice.

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