You cannot increase share capital from retained earnings while the balance sheet shows losses

If a company’s balance sheet shows uncovered losses, you will not be able to increase the share capital from retained earnings. This is not a matter for negotiation. Increasing the share capital from the company’s own funds is governed by the Law on Companies (ABĮ), and Article 51(3) ABĮ provides that where losses are entered in the company’s balance sheet, the share capital may be increased only from the revaluation reserve. The practical conclusion is simple: deal with the losses first, and only then talk about increasing the capital. Below – which routes work, which of them need no notary, and what is worth weighing in advance.

What Article 51 ABĮ provides

Article 51(1) ABĮ allows the share capital to be increased from the company’s own funds, that is, from retained earnings, share premium and reserves (other than the financial assistance, own shares and mandatory reserves). Paragraph 3 limits this: while losses are entered in the balance sheet, only the revaluation reserve remains available.

Because this is a statutory rule, there is no point looking for another notary who would certify such a decision.

First step: reducing capital to cover losses

If the balance sheet shows losses, they are covered first. One way of doing so is to reduce the share capital to cover the losses. This purpose and the procedure for it are set out in Article 52(2)(1) ABĮ, together with Article 53(4)(3) ABĮ and Article 53(6)(2) ABĮ.

Two things matter. If the articles follow the model form and the other conditions of point 46 of the Regulations of the Register of Legal Entities (JAR nuostatai) are met, such a reduction can be carried out electronically, without a notary’s services. And there is a condition to check in advance: the losses must be visible on the balance sheet. If the balance sheet does not show them, this route does not work and the documents will have to be prepared again.

The shareholders’ holdings do not change after such a reduction, because the reduction is proportional. What the company loses is not money but an accounting figure.

Reducing the nominal value

A separate step is reducing the nominal value of the shares. It is governed by Article 53¹(1) ABĮ and Article 53¹(2) ABĮ.

This step is useful when new investors are planned or when shares are to be granted to employees. The reason is practical. When a single share is large, a shareholding cannot be divided the way negotiations require; once the nominal value is reduced, it can be divided more finely.

This is not a mandatory stage of a capital increase. It is a preparatory step worth taking before negotiations, not in the middle of them.

When new money is needed: convertible bonds

If the aim is not an accounting reshuffle but new funds, one of the routes is convertible bonds. They are governed by Article 56(2) ABĮ. The decision falls within the competence of the general meeting of shareholders – Article 28(1)(9) ABĮ – and is adopted by a 2/3 majority of votes.

The practical point of this route is that the money comes into the company straight away, while the question of what share the investor will ultimately hold is settled later. The voting majority means that the will of the largest shareholder alone is not enough – this needs to be checked before negotiations begin, not after them.

When the articles are standard: self-service instead of a notary

When a company’s articles of association are in the standard form, the capital increase can be carried out through the self-service system of the Centre of Registers (Registrų centras). The procedure is laid down in Article 49(1) ABĮ and Article 49(4) ABĮ, together with point 46 of the Regulations of the Register of Legal Entities (JAR nuostatai).

What this gives you: no notary is needed, and original documents do not need to be submitted. Point 46 JAR nuostatai ties the self-service route to the model form of articles of association and three further conditions: the name does not use the short name of the State, “Lietuva”, the objects of the company are chosen from the Classification of Economic Activities (Ekonominės veiklos rūšių klasifikatorius), and the shares are paid for by a monetary contribution.

And here there is a consequence worth seeing in advance. The self-service route replaces the articles with the standard form. If the articles contained provisions negotiated with the shareholders – voting rules, restrictions on share transfers, a bilingual text – they will not survive in the standard form. The notarial route preserves the individual text.

Before choosing, it is worth reading the current articles of association and answering one question: do they contain anything that the standard form does not? If they do, the self-service route is not the one to choose.

In what order this is done

1. The balance sheet is reviewed. If there are no losses, the question does not arise at all.
2. If there are losses, they are covered – for example, by reducing the share capital.
3. Only then is the capital increase decided on.
4. The route is chosen: self-service if the articles are standard and there is nothing in them to lose; a notary if the articles are individual or preference shares are being issued.

This sequence is not a formality. If the order is reversed, a decision to increase the capital from retained earnings would conflict with Article 51(3) ABĮ.

More on setting up a company

• Establishment of legal entities: service page
• Beneficial owners in JADIS: who files the data and how to get an extract
• UAB shareholders changed: what to file in JADIS, and who does it
• Converting an IĮ into a UAB or MB: liability, assets, contracts, staff
• Changing a company’s name or articles: who to notify, when it takes effect
• Does the head of a UAB need an employment contract, and who can be one?
• Converting a loan into UAB shares: set-off, valuation, pre-emption
• Foreign company raising a UAB’s capital: documents, signatures, deadlines

How to start

Tell us what you want to achieve: put in funds, cover losses, bring in an investor or grant shares to employees. We will tell you which route is possible in your case, what it requires and how long it will take.

Tel. +370 5 212 1506, email info@linden.lt

More about this service: share capital increases and decreases.