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RE-DENOMINATION OF SHARE CAPITAL DENOMINATED IN LEGACY CURRENCIES

Document Overview

Background
Do we need anything?
Account for re-domination
Approach A
Approach B
Can I reduce or increase the par value of each share
Reporting un-rounded par value amounts on annual returns
Status of paper

Jersey incorporated companies with existing shares denominated in legacy currencies will need to be aware of the final changeover to the euro which took place on 1 January 2002.

Background
On 1 January 1999, the share capital of all Jersey companies issued in legacy currencies was converted to the euro by the operation of private international law. The prescribed accuracy (six significant figures) of the conversion rate and the way that it may be used are contained in Council Regulation 1103/97.

Such capital continued to be denominated in the relevant legacy currency (as a national currency unit of the euro) until 31 December 2001, unless a company had chosen to re-denominate into euro units under Article 38(1)(ea) of the Companies (Jersey) Law 1991, as amended.

On re-denomination, monetary amounts "to be paid or accounted for" (Article 5 of Council Regulation 1103/97) shall be rounded up or down to the nearest cent. If the amount is exactly half way then it shall be rounded up.

Do I need to do anything? Top
Since 1 January 2002, all references to legacy currencies will have read as references to the euro according to the fixed conversion rates. This re-denomination of share capital has occurred "automatically" by the operation of private international law.

Accounting for re-denomination Top
Regulation 974/98 leaves it to the national legislation of each participating Member State to determine what method should be used when re-denominating to euro the share capital of companies incorporated in that Member State. There is no Jersey legislation specifically on this question. As a result it is not entirely clear how legacy currency shares of Jersey companies will have been re-denominated and to what extent the rounding rules will apply. Two points, however, are quite clear.

The re-denomination of share capital from legacy currencies to the euro will invariably result in the par value of the shares being restated to several decimal places.

When a monetary amount is paid or accounted for after conversion from a legacy currency to the euro, the mandatory rounding rules in Council Regulation 1103/97 will be directly applicable. So for instance, if a dividend is paid or capital is returned to shareholders, then rounding will apply to the amount to be paid.

The total amount of issued share capital is an amount to be accounted for. It is less clear whether the par value of individual shares is also an amount to be accounted for. Accounting for the par value of individual shares has been the subject of much discussion, particularly as the conversion and rounding of individual shares and of total share capital is likely to result in the sum of the nominal value of individual shares differing from the value of total authorised and issued share capital.

It is the Registrar of Companies' view that one of the following two approaches will satisfactorily address the uncertainty arising from re-denomination of share capital. Both anticipate some difficulty in application, though Approach A less than B. Approach A is recommended by the Bank of England.

Approach A Top
The first approach (Approach A) assumes that the maximum share capital that a company can issue should never exceed the authorised share capital, converted and rounded to the nearest cent (a "top-down" approach). It is this total (issued) amount that should be accounted for on the company's balance sheet (rounded to the nearest cent), and the converted par value of individual shares is left un-rounded.

Use of an un-rounded nominal value per share under Approach A may be inconvenient. On and after 1 January 2002, shares should be issued, redeemed or bought back at the un-rounded nominal amount. This may cause a problem where shares are to be issued or redeemed without a premium, in which case the amount payable will need to be rounded to the nearest cent in respect of each shareholder. Where shares are issued, redeemed, or bought back at a premium then the amount to be rounded should be the total capital and premium issued, redeemed, or bought back.

This approach will not require any adjustment to total share capital.

Approach B Top
The second approach (Approach B) assumes that authorised capital is in fact the aggregate of the par value of all individual shares rounded to the nearest cent ("bottom-up"). For example, authorised share capital previously expressed as 10,000 shares of DM10 each, becomes 10,000 shares of €5.11 each (rounded to the nearest cent). On and after 1 January 2002, shares should be issued, redeemed or bought back at the rounded par value for each share.

Under Approach B, the aggregate of the rounded par value of all individual shares is recorded on the balance sheet, leaving a difference to be accounted for (since assets and liabilities will have been re-denominated "top-down"). Where the aggregate of the rounded par value of all individual shares is less than total authorised/issued share capital calculated under the "top-down" approach, then this difference should be treated as a non-distributable reserve. Where the aggregate of the rounded par value of all individual shares is more than total authorised/issued share capital (calculated "top-down"), then the difference should be treated as a capital loss. As an alternative (and recognising that amounts will not be material), differences may be accounted for through a company's revenue account.

Rounding differences are not expected to be material.

Using the example given above, authorised share capital would be 10,000 at €5.11 per share, i.e. €51,100. This differs to the amount calculated under the "top-down" approach, which produces authorised share capital of €51,124.74.

Can I reduce or increase the par value of each share to a whole par amount? Top
Although they are not specifically obliged to do so, companies may prefer to re-nominalise share capital to achieve a round euro par value (rather than continue with an un-rounded par value or one rounded to the nearest cent). To do so, a special resolution of the company's members will be required, whether the par value is increased or reduced.
If a company chooses to reduce the par value of its shares, then it may rely on Article 61(2A) of the Companies (Jersey) Law 1991, as amended, which states that a reduction in share capital shall not be subject to confirmation by the court if:

the reduction does not extinguish or reduce the liability on any share [issued] in respect of capital which is not paid up;

the reduction does not reduce the net assets of the company; and

the amount of the reduction is credited to a capital redemption reserve which may be applied only in paying up un-issued shares which are to be allotted to members as fully paid bonus shares.

If a company does not have any partly paid shares and can comply with the other requirements of Article 61(2A) then it can reduce its share capital by simply passing a special resolution. Otherwise, the company will be expected to obtain the approval of the court to the passing of such a special resolution before a reduction in share capital can be made.

If a company chooses to increase the par value of its shares, then it may do so through an issue of shares under Article 38(1)(a) and consolidation under 38(1)(b) of the Companies (Jersey) Law 1991, as amended. Such an issue might be funded by the capitalisation of reserves or through issue proceeds.

Where additional capital is raised, a company will also be required to obtain a revised permit under the Control of Borrowing (Jersey) Order 1958.

Reporting un-rounded par value amounts on annual returns Top
Where approach A is adopted, the converted par value of individual shares is left un-rounded.

For the purposes of completing an annual return, the Registrar of Companies will accept rounding of par value to the nearest cent, so long as it is clearly stated on the return that the par value disclosed is rounded only for the purposes of reporting to the Registrar.

Status of paper Top
The views expressed in this paper are those of the Registrar of Companies, based on references to current law. Each approach outlined in this Guidance Note can only be definitively interpreted by the Royal Court. Where in any doubt, companies are urged to obtain their own legal advice.
1 Belgian franc, German mark, Greek drachma, Spanish peseta, French franc, Irish punt, Italian lira, Luxembourg franc, Dutch guider, Austrian Schilling, Portuguese escudo, Finnish mark.

 
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  Last Updated: 18 August 2019