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. The notary will not certify such a decision. This is not the opinion of one office, nor a matter for negotiation. Increasing the share capital from the company’s own funds is governed by the Law on Companies (ABĮ), specifically Article 51(3) ABĮ. 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 which cost clients most often notice too late.
What the notary offices said
In practice, there was a case where a company wanted to increase its share capital from retained earnings even though its balance sheet showed losses. Several notary offices were approached, not just one. All of them refused to certify such a decision.
Two things follow from this. First, looking for another office will not save time – the answer will be the same. Second, this is not a court’s interpretation but consistent notarial practice, so there is no one to argue with here and nothing to argue about.
The most expensive form of this mistake looks like this: the decision is prepared, an appointment with the notary is booked, the visit is paid for, and only there does it turn out that the document will not be certified. The whole process starts again.
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.
From our practice, two things matter. Such a reduction can be carried out electronically, without a notary’s services – which saves both the notary’s fee and about a week. 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.
From our letters to clients: 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: it is cheaper, because there is no notary’s fee, and quicker, because 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 cost that almost no one sees in advance. This question comes up in our letters more than once: the self-service route is cheaper and quicker, but it replaces the articles with the standard form. Clients choose the cheaper option and a few months later notice that provisions negotiated with the shareholders have disappeared – voting rules, restrictions on share transfers, a bilingual text. The notarial route costs more, but 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, this is not the place to save money.
In what order this is done
- The balance sheet is reviewed. If there are no losses, the question does not arise at all.
- If there are losses, they are covered – most often by reducing the share capital.
- Only then is the capital increase decided on.
- 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, the first step stalls at the notary’s office.
How to start
Tell us what you want to achieve: put in funds, cover losses, bring in an investor or grant shares to employees. An answer on which route is possible in your case, what it requires and how long it will take is free of charge.
Tel. +370 5 212 1506, email info@linden.lt
More about this service: share capital increases and decreases.
