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Non-proportional free capital increase and management retention in equity

by Pietro Acerbi | Feb 10, 2022 | Blog

Free capital increase in limited companies

In joint-stock/limited liability companies it is possible to increase the capital by allocating to it the reserves and other funds entered in the balance sheet, insofar as they are available; in this case the shareholding of each shareholder remains unchanged.

It is envisaged (in the S.p.A.) that the newly issued shares must have the same characteristics as those already in circulation and be assigned free of charge to the shareholders in proportion to the shares already held, except for the possibility of increasing the value of those already in circulation (the latter is the only method allowed, with reference to the quotas, for the free share capital increase in the S.r.l.).


Requirements for the free capital increase

For the purpose of the free increase, the “reserves and other funds recorded in the financial statement” can be used insofar as they are available: these concepts have been analysed by legal doctrine and jurisprudence over time and therefore it is necessary to make an assessment on a case-by-case basis.

In any case, the following items, among others, are considered as available:

  • Legal reserve: despite the fact that, in the past, the tendency was not to consider it (totally or at least partially) usable for the purposes in question, a more recent opinion (which can now be considered consolidated, also by virtue of the maxim of the Notary Council of Triveneto H.G.32) considers that also the entire amount of the legal reserve can be used;
  • Shareholders’ loans: usable if the shareholder who has made them waives his right to credit against the company;
  • Shareholders’ contribution reserve;
  • Share premium reserve;
  • Revaluation reserve:
  • Merger reserve;
  • Other reserves that are not unavailable, including all voluntary reserves.

Among the reserves that are not available for this purpose, we point out, among others, i) the reserve for treasury shares (which is a necessary “balancing” of the value of outstanding treasury shares and therefore cannot be used for the free share capital increase), ii) the payments on account of future share capital increase (since they can be properly used only for the paid increase and are therefore “advance contributions” for this purpose), iii) as well as the fair value reserve.

It is debated whether the so-called “profits for the period” can be used, i.e. ” non-operating results” that have not yet been recorded in a proper financial statement (or in a similar document). According to one view – authoritatively supported by the Notary Council of Triveneto – profits for the period could not be used, while according to another view (and also in the opinion of the writer) even profits for the period, with certain modalities, could be used for the purpose of the free increase.

The free share capital increase cannot be carried out if the company has reported losses on the capital and must be resolved at the Shareholders’ Meeting (to be held also only by videoconference: see previous article on this point) according to the majorities provided for by the Articles of Association.




Non-proportional increase: feasibility and guidelines

As anticipated, the free increase must allow the shareholders to maintain unchanged their “weight” within the company: however, it is possible that the shareholders agree to allocate a greater share of the amount resulting from the increase to the allocation of the shareholding of one or more shareholders (thus realizing a non-proportional free increase): such a resolution (which is entirely admissible) must be taken by unanimity.



In the light of what has been summarized above, the free capital increase can be a valid instrument for the capitalization of the company where the shareholders cannot or are not interested in making new payments: despite the lack of resources contributed by the shareholders, in fact, the company can capitalize on those available within it (funds and reserves as available).

The free increase can also be non-proportional (if decided by unanimity), representing a “reward” modality for certain shareholders (especially those who are also part of the management) who have particularly distinguished themselves within the company, to whom the other shareholders recognize the right to increase their proportional share of the capital (and therefore, as a rule, unless otherwise indicated in the by-laws, also in the participation in profits).


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