Increasing a SARL's Share Capital

Increasing the capital of a French SARL is how a company brings in new money, admits new shareholders, or turns accumulated reserves into permanent capital. It can be done in three ways - a cash contribution, an in-kind contribution, or the incorporation of reserves - and each has its own majority, formalities and traps. A cash increase needs the existing shares fully paid first, the funds deposited within eight days, and the extraordinary majority for amending the articles; an in-kind increase turns on the valuation and the contribution auditor; and an incorporation of reserves is the simplest, needing only a half-of-shares majority. This guide sets out how to increase a SARL's capital: the three methods, the majorities, the subscription and payment rules, how existing shareholders are protected, and the formalities that make the increase valid.

Why and how a SARL increases its capital

Over a company's life, several circumstances can make a capital increase necessary or useful: the growth of the business, the entry of new shareholders, or the permanent transfer to the company of reserves or undistributed profits. Whatever the reason, the increase is a modification of the articles, so it runs through the shareholders' decision-making and ends in an amendment of the statutes and the usual publicity.

There are three routes to a larger capital. The company can issue new shares for cash - subscribed by existing shareholders or by third parties. It can issue new shares for a contribution in kind - an asset brought into the company in exchange for shares. Or it can incorporate reserves - moving sums already in the company from the reserves line to the capital line, without any new money coming in. A single increase can combine routes - for example, part in cash and part by incorporating reserves.

The costs of a capital increase can be treated in the accounts either as a charge of the year or, by option, spread - a choice made when the operation is booked. The tax side is light: acts recording a cash increase, or an increase by incorporating profits, reserves or provisions, are exempt from registration duty, and where such an operation is not recorded in a deed, no declaration to the tax office is required either. This is a marked contrast with a share transfer, which attracts the 3% duty - putting money into the company through a capital increase is not itself a taxable event, which is one reason a capital increase is often preferred to other ways of funding the company.

Increasing capital by a cash contribution

The most common route is a cash increase, and it carries a strict precondition. On pain of nullity of the whole operation, the existing shares must be fully paid up before any new cash shares are subscribed. Where earlier cash shares were only paid up to the minimum 20% (one-fifth), the shareholders concerned must have paid in the remaining 80%, on the manager's call, before the increase. If the sums due on the earlier contributions have not all been paid, no cash increase can go ahead.

The new shares carry the same rules as on formation. The funds subscribed in cash must be deposited within eight days of receipt into a company account - at the Caisse des dépôts, a bank or a notary - opened under the heading "capital increase to be carried out", the same mechanism as at incorporation. At least one quarter of the nominal value of the new shares must be paid on subscription, with the balance (up to three-quarters) callable by the manager over a maximum of five years from the date the increase became final.

The majority for a cash increase

A cash increase is decided by the majority required to amend the articles - shareholders representing at least two-thirds or three-quarters of the shares depending on when the company was formed, with a one-quarter quorum for companies created after 3 August 2005. The decision can be taken in a meeting or, if the articles allow, by written consultation or a unanimous act. Unanimity is required only where the increase is carried out by raising the nominal value of the existing shares, because that adds to every shareholder's commitment. Where new shareholders come in, their approval as shareholders may also be required, on the same footing as a share transfer to a third party.

Subscription, payment and set-off against a debt

The operation can be structured in one step or two, and the choice affects the formalities. In the simplest case, the terms are agreed, all subscriptions are paid and the funds deposited, and a single extraordinary meeting both decides the increase and records that the legal formalities are complete. Where the funds are collected after the decision, two decisions are taken: the first decides the increase in principle and fixes its main terms, leaving the manager to receive the subscriptions; the second, after the funds are deposited, records that the formalities have been accomplished. The second decision must reach the articles-amendment majority - but if it does not, the first decision approving the increase in principle is not undone.

Cash shares can be paid up by set-off against a debt the subscriber holds on the company - most often a shareholder current account. The set-off is a genuine cash payment for this purpose, but it works only where the debt is liquid and payable. In practice, the act recording the increase should clearly show that the payment by set-off is against a liquid and due claim. Prudence is warranted: while a SARL can have the set-off accounts certified by its auditor, or by a chartered accountant where it has none, an irregular set-off can engage the civil and criminal liability of those behind it. Paying up an increase by capitalising a current account is a common and useful move - turning a repayable loan into permanent capital - but it must be documented properly.

Increasing capital by a contribution in kind

A capital increase can be paid not in cash but by a contribution in kind - an asset (property, equipment, a business, shares in another company) brought into the SARL in exchange for new shares. The act or minutes recording the increase must contain the valuation of each contribution in kind, and that is where the care goes, because an over-valued contribution injures the other shareholders and the company's creditors.

The valuation is, in principle, made on the report of a contribution auditor (commissaire aux apports), appointed unanimously by the shareholders or, failing agreement, by the court on the application of a shareholder or the manager. The report is annexed to the minutes recording the final completion of the increase. There is a relief for smaller contributions: the exemption from a contribution auditor for in-kind contributions not exceeding €30,000, available at formation, applies equally to a capital increase - so the shareholders can unanimously decide not to appoint an auditor where each in-kind contribution is below that threshold.

The exemption is a convenience, not a licence to over-value. Where the shareholders proceed without an auditor, they take on the valuation risk themselves: if the contribution is later found to have been overstated, they can be exposed. For a contribution of any size or complexity - a business, real estate, intellectual property - the safer course is usually to appoint the auditor even where the €30,000 line would allow skipping it, because the independent report is what protects the operation from challenge. In-kind contributions on an increase follow the same tax regime as contributions made at formation.

Increasing capital by incorporating reserves

The third route brings in no new money at all. Incorporating reserves - or profits - into capital is done, in practice, by a simple transfer from the reserves account to the capital account, without any prior distribution. Doing it that way is simpler and, above all, cheaper in tax terms than distributing the sums and having the shareholders contribute them back: a prior distribution would be more complicated (a shareholder might not put the sum back into the capital) and more costly.

The increase can be carried out either by raising the nominal value of the existing shares or by creating new shares allotted free to the existing shareholders in proportion to their holdings. Either way, no one subscribes and no one pays - the shareholders' wealth in the company is unchanged, only its form shifts from reserves to capital. Raising the nominal value is often preferred where allotting new shares would produce awkward fractions (rompus) - odd part-shares that cannot be cleanly distributed - unless the articles oblige shareholders to sort out the buying or selling of allotment rights themselves to reach a whole number of new shares.

A point catches out companies with an industry contributor. Although the Civil Code does not spell it out, a contributor of industry (contributed work or skill) is generally accepted to have a right, through their entitlement to undistributed reserves, to be allotted new shares created on a reserves increase - and the shares they receive are ordinary capital shares, not industry shares. The articles can set out how the industry contributor's rights work on a reserves increase, which avoids a dispute when new shares are created.

The majority is the great advantage of this route. A decision to increase capital by incorporating profits or reserves is taken by shareholders representing at least half the shares - not the reinforced two-thirds or three-quarters majority the general rule requires for amending the articles. The decision can be taken in a meeting or by written consultation; recording it in an act would require every shareholder's signature. This lower majority makes incorporation of reserves the most straightforward way to strengthen a SARL's stated capital, which can help its standing with lenders and suppliers without asking anyone for fresh funds.

Protecting existing shareholders: the DPS and the premium

A cash increase can dilute the existing shareholders and hand new subscribers a share of reserves they did not build. French law leaves it to the SARL to guard against this, because - unlike a joint-stock company - a SARL shareholder has no statutory preferential subscription right.

The preferential subscription right

The articles can validly stipulate that shareholders have, in proportion to their shares, an irreducible preferential right (droit préférentiel de souscription, DPS) to subscribe the new cash shares - and can add that shares left unsubscribed go, on a reducible basis, to the shareholders who exercised their preferential right, in proportion to their capital and within their requests. A DPS set in the articles applies to every cash increase and can only be removed by amending the articles. Alternatively, a preferential right can be created by an extraordinary decision for a given increase. The right, though not negotiable, can be transferred, the articles setting the form of the transfer. A shareholder who has shown they will not put in new funds is presumed to have waived a preferential right that the articles provide.

The issue premium

The other protection is an issue premium (prime d'émission). Where the company has reserves on the balance sheet, or hidden reserves in latent gains on its assets, the shareholders who do not take part in the increase risk being injured - and could seek to annul the operation. Requiring subscribers to pay a premium above the nominal value of the new shares corrects this: the premium goes into the company's accounts, and both old and new shareholders then enjoy rights over it in proportion to their share of the enlarged capital. The law fixes no formula for the premium, which can be paid in several instalments. The two devices can be used together - a DPS lets a departing shareholder sell their subscription right for value, while a premium keeps the value of the reserves inside the company for all.

The formalities that complete the increase

Whichever route is used, the increase is only effective once the formalities are complete. The decision - in a single meeting, or the two-stage version for a cash increase - must record the essentials: the decision to increase, the amount, the sums paid by each subscriber and how, the depositary of the funds, the number and nominal value of the new shares allotted to each subscriber, the payment of at least a quarter of the new cash shares, any premium, any approval of new shareholders, and the resulting amendment of the articles. The payment and allotment of the shares must be reflected in the articles themselves, which are amended accordingly.

The articles, once amended, are filed and the increase published so it is enforceable against third parties, the funds being released to the company on completion. A poorly run increase is vulnerable: shareholders can appeal a refusal to annul an increase they voted by written consultation, and an increase carried out irregularly - a defective set-off, an over-valued contribution, a majority not reached - can be challenged and can expose those behind it. The message is that the route may be simple, but the steps are cumulative: miss the full-payment precondition, the deposit, the majority, the valuation or the articles amendment, and the increase is exposed.

The three methods compared

Before choosing a route, it helps to see the three methods side by side, because the majority, the money and the formalities differ sharply.

Raising the nominal value of existing shares - available on a cash or a reserves increase - is worth a special note: a cash increase by raising the par value needs unanimity, because it deepens every shareholder's commitment, whereas a reserves increase by raising the par value keeps the half-of-shares majority, since no one is asked for new money.

The costs and accounting of an increase

A capital increase has its own set-up costs, and the law gives a choice on how to treat them. The costs can be written off (amortised) at the latest by the end of the fifth financial year following the one in which they were incurred, or charged against the issue premiums attached to the increase. On the tax side, how the costs are deducted follows how they are booked in the accounts: they can be deducted in full in the year they are incurred where the general conditions for deducting charges are met, or spread over a maximum of five years on a straight-line plan that cannot then be changed.

There is a distribution restriction to keep in mind. As long as the set-up-costs account (which includes the costs of a capital increase) has not been cleared, the SARL cannot make a distribution - unless it has free reserves at least equal to the costs still to be written off. So a company that expenses a large increase against future years should be aware the choice can constrain its ability to pay dividends until the costs are amortised, and factor that into the timing of the operation.

Set-off of a current account: the detail that protects the operation

Paying up a cash increase by set-off against a current account deserves a closer look, because it is common and because it is where increases most often go wrong. The law is silent for the SARL (unlike joint-stock companies, where set-off against liquid and payable claims is expressly allowed), but it is settled that set-off works in a SARL too: there is no objection to paying for the new shares by set-off against the subscriber's claim, since nothing would stop the company, on a cash payment, from immediately using those funds to pay the debt it owed the subscriber.

Two cautions come from the case law. First, set-off must be a real, liquid and payable claim, not a device to dress up a failing company: an increase paid by capitalising a current account in a company with heavy losses, presented so as to make third parties believe the business was recovering, was struck down - the manager had "created an appearance" of recovery. Where a company has losses close to or above its capital, capitalising current accounts needs particular care, and having the accounts certified is prudent. Second, set-off is excluded where the shareholders' decision expressly stipulates that the increase will be paid in cash only - so the resolution's wording has to leave room for set-off if that is the intention.

One reassurance sits alongside the cautions. A cash increase paid by set-off is a cash increase, not an in-kind contribution, so it does not require a contribution auditor - the auditor requirement attaches to in-kind contributions, not to the set-off of a claim. And even for a genuine in-kind contribution, the absence of an auditor is not sanctioned by nullity of the operation but by the liability of the managers and contributors for the value attributed to the contribution. Understanding which rules bite - and which do not - is what lets a current-account capitalisation go through cleanly.

Frequently asked questions about increasing a SARL's capital

This article states general principles of French law as at its date of publication and is provided for information only. It does not constitute legal or tax advice and creates no lawyer-client relationship. Figures, rates and thresholds evolve; verify them against the texts in force before acting, and take advice on your specific situation.