Procedures for Reducing the Capital

Procedures for Reducing the Capital

The general procedures for reducing the capital is as follow.

When the method of public notice is via “official gazette”

1. Passing a resolution of a Board of Directors / Determining by Directors: Determination of the content of the agenda and a resolution to convene the shareholders’ meeting.
2. Making an application for public notice in the Official Gazette
3. Dispatching of convocation notice of a shareholders’ meeting
4. Commencement of publication in the Official Gazette and dispatch of notice to known creditors (Beginning of the period for creditor protection procedures)
5. Passing a resolution of the shareholders’ meeting
6. Expiration of the period for creditor protection procedures
7. Effective date of the capital reduction
8. Application for registration

When the method of public notice is via a “Website”

1. Passing a resolution of a Board of Directors / Determining by Directors: Determination of the content of the agenda and a resolution to convene the shareholders’ meeting.
2. Making an application for public notice in the Official Gazette. Also, making an application to an e-public notice research company
3. Dispatching of convocation notice of a shareholders’ meeting
4. Commencement of publication in the Official Gazette and publishing the public notice on the website.
5. Passing a resolution of the shareholders’ meeting
6. Expiration of the period for creditor protection procedures
7. Effective date of the capital reduction
8. Application for registration

*The date of the resolution of the shareholders’ meeting can be the same day as an effective date. Most important part of the procedures is that the period for creditor protection procedures (at least one month) must have expired by the effective date.

Resolutions of the Shareholders’ Meeting

The content of the matters to be pass by the special resolution* at a general meeting of shareholders pertaining to a reduction of capital are as follows.

A. The amount by which the stated capital is reduced
B. If all or part of the amount by which the stated capital is reduced is to be appropriated to Reserves, a statement to such effect and the amount to be appropriated to Reserves
C. The day on which the reduction in the amount of stated capital takes effect.

* If the above resolution is passed at the ordinary general meeting of shareholders and the amount of capital reduction is within the amount of deficit as of the date of the meeting, the resolution can be passed by an ordinary resolution.

The range of Capital that can be Reduced

The amount of capital can be reduced only up to the amount of capital as of the effective date as stipulated in 3 above. Meaning, the capital cannot be reduced to a negative figure.

If a capital increase is planned after the date of the resolution, the amount of the capital increase can also be taken into account when considering the reduction of the amount of capital.

Creditor Protection Procedures

The creditor protection procedure is the most important part in the capital reduction process.
It is important to note that without proper creditor protection procedures, the capital reduction cannot take effect.

Public notice in the Official Gazette and individual notice to known creditors

The following information must be notified to all known creditors and published in the Official Gazette, at least one month prior to the effective date.

Also, please be aware that it takes 5 to 10 business days from the time of application to the time of actual publication in the Official Gazette. Therefore, it is necessary to make this application as early as possible.

i. The details of such reduction in the amount of Capitals, Etc.
ii. Financial statements (balance sheet (and profit and loss statement for a Large Company)) approved at the most recent ordinary shareholders’ meeting
iii. A statement to the effect that creditors may state their objections within a certain period of time (at least 1 month).

Public notice of financial statements

All Kabushiki-Kaisha are required to publicly announce the balance sheet (and profit and loss statement for a Large Company) that has been approved at the ordinary shareholders’ meeting.

If a company has not completed this procedure, it is necessary to apply for a public notice of financial statements in addition to the said public notice in the Official Gazette. When you apply for both, the two public notices will be published together in the Official Gazette.

* Please note that it will take longer than usual from the date of application to the date of publication in the Official Gazette if you apply for the both notice at the same time.

If a company has completed publishment of financial statements, the following statement shall be included in the Official Gazette.

For companies that use the “Website” method of public notice, it is sufficient to make a public notice of the settlement of accounts on the same day. In that case, the URL of the financial statements shall be published in the Official Gazette.

Omission of Individual Notification to Known Creditors

Corporations that use the “Official Gazette” method of public notice must give individual notice to creditors.

On the other hand, it is possible to omit individual creditor notification when the method of public notice is via “Website”. Such companies can post a public notice of the settlement of accounts and capital reduction at a URL that is stated on the corporate registry.

However, in this case, it is necessary to request an investigation by a third-party organs of an e-public notice research company to prove that the relevant Webpage has been publicly posted at all times for the one month period (i.e., They constantly visit the website during the period to see whether the server has not been down for a long period of time). The cost of this investigation will be higher than the cost of a public notice in the Official Gazette, so it is necessary to consider which method to be used.

For your information: Even if the method of public notice is stipulated as “Website,” a public notice of capital reduction may not be posted on the website, and it is possible to send an individual notice to creditors instead by its own discretion. Even in this case, the publication of a financial statement needs to be posted on the website; however, the investigation for this publication is not necessary.

Objection by Creditors

If a creditor objects to a capital reduction, the company must take one of the following actions against the creditor.

(a) Pay the creditor
(b) Provide collateral
(c) Place a substantial amount of assets in trust with a trust company, etc.

However, if there is no risk of harming creditors even if the reduction of capital is carried on to take effect, these actions are not required. (e.g., If the creditor forgets that the amount has already been repaid or the security has been provided, etc.)

Effect date

The capital is reduced on the determined effective date. Since the amount of capital is a matter of public record in the commercial register, an application for registration must be filed within two weeks of the effective date, in principle.

The capital reduction will not take effect if the above-mentioned creditor protection procedures have not been completed. Therefore, if you are considering the procedures for capital reduction, it is advised to start the procedures at least one and a half to two months prior to the effective date.

MK@ 07/31/2022