Whenever shareholders inject funds into a company (or seek to recover such funds), one key issue arises: the rules governing the maintenance of share capital.
The principle of the intangibility of share capital is a cornerstone of Portuguese corporate law and operates as a counterweight to shareholders’ (abstract) entitlement to participate in profits. Put simply, not every distribution or outflow of corporate assets is legally permissible, especially where it may affect creditor protection and the company’s capital integrity.
The first route, comparable to third-party financing, is the loan of funds by shareholders to the company. Such a loan is classified as a shareholder loan (shareholder loan with a long-term character) where the credit is of a permanent nature, where the repayment term exceeds one year. Claims arising from shareholder loans are not subject to share capital maintenance rules, meaning that, in principle, they may be repaid even where the company has accumulated losses. That said, in an insolvency scenario, shareholder loans may be subordinated vis-vis third-party creditors, which should be carefully assessed in distressed situations.
Another classic mechanism for capitalizing the company is a share capital increase. This instrument is particularly suitable where the company seeks to:
- obtain financing from sources outside the existing shareholders.
- allow the entry of new investors; and
- protect existing shareholders, ideally through the charging of a share premium (ágio / issue premium).
However, where the capital increase is subscribed entirely by existing shareholders and the objective is to reinforce net equity, it may prove inefficient. This is because increasing share capital also raises the “threshold” for the loss of half of the share capital, meaning that the practical reinforcement of equity may be more limited than it first appears.
A further route is the making of supplementary contributions (or, in public limited companies, ancillary contributions with a supplementary nature), which often constitute a more effective alternative where the aim is to strengthen the company’s net assets. These contributions are always made in cash and directly increase the company’s equity, without altering share capital.
Repayment of such contributions is only permitted if, following repayment, the company’s net assets do not fall below the combined amount of its share capital and legal reserve. Nevertheless, compared to a share capital increase, the recovery of the invested amount tends to be more flexible and adaptable, and may allow, where applicable, for tax-efficient structuring.
Where capitalization is intended as a response to an equity deficit, it is often essential to consider complementary measures — notably a reduction of share capital to cover losses.
This solution may be particularly effective where: (i) shareholders have limited capacity to inject funds; and (ii) it is necessary to align the capital structure with the company’s actual financial position.
In conclusion, shareholder capitalization should be carefully planned, rather than adopted as a reflex response. The decision should consider: (a) the effectiveness of the mechanism in reinforcing net equity; (b) the conditions and timing for recovering the investment; (c) corporate and tax implications; and (d) the benefit of combining measures (for instance, a capital reduction alongside supplementary contributions). Strategic planning is often decisive in restoring financial stability and maximizing the utility of the amounts invested.
Belzuz Abogados, S.L.P. – Portuguese Branch is an Iberian law firm, with offices in Lisbon and Porto, providing legal advice on the analysis and structuring of corporate capitalization operations, including shareholder loans, share capital increases, supplementary contributions, and capital reductions, ensuring full support throughout the relevant corporate and contractual procedures.