Cayman Islands exempted companies are valued for their flexibility and ease of operation. A key component of their appeal lies in the nuanced treatment of share capital and, particularly, the strategic uses of the share premium account.
“Share capital” refers to the nominal (or par) value of a company’s issued shares. If a company issues shares which do not have a nominal value, then “share capital” refers to the total consideration received by the company for those shares.
If a company issues shares for a premium, the “share premium” is the amount by which the consideration received by the company exceeds the nominal value of the shares. This premium is credited to the “share premium account”. Notably, if shares are issued without a nominal value, the entire consideration received constitutes paid-up share capital and is not treated as share premium.
Share premium is not simply an accounting entry – it is a practical tool deployed by companies. Subject to the company’s memorandum and articles of association, the share premium account may be used to:
- pay distributions or dividends;
- pay up unissued shares as fully paid bonus shares to existing shareholders;
- repurchase or redeem shares;
- write off preliminary expenses of the company; or
- write off expenses, discounts, or commissions on any issue of shares or debentures.
The Companies Act (as revised) (the Act) grants exempted companies discretion regarding the creation of a share premium account in certain “arrangements” (such as mergers, consolidations, acquisitions, and reconstructions) where the allotting company gains control over a company whose shares it acquires or cancels. This discretion, if exercised, allows a company to disregard the share premium when valuing the issued shares on its balance sheet – providing greater flexibility in how they present their financial position following the transaction.
A defining advantage of an exempted company is the permissive framework for making distributions from the share premium account. Unlike some jurisdictions with stricter “profits-only” distribution rules, the Act expressly allows distributions (or dividends) to be made from the share premium account, provided the so-called “statutory solvency test” is adhered to. Under this test, no distribution or dividend may be paid out of the share premium account unless the company, immediately after payment, can pay its debts as they fall due in the ordinary course of business. This test acts as a critical safeguard, ensuring that distributions from the share premium account do not prejudice the company’s ability to meet its obligations to creditors. Knowingly or wilfully authorising or permitting a distribution or dividend in contravention of the statutory solvency test is an offence, carrying the risk of a fine or imprisonment for the company/directors in question.
The share premium account also provides a flexible funding source for repurchasing or redeeming shares. The principal amount and any premium payable on a repurchase or redemption may be funded from the share premium account with or without a combination of other funding sources, such as profits. When shares are redeemed or repurchased using the share premium account (or profits), those shares will be cancelled and their nominal value must be transferred to a “capital redemption reserve”, with a corresponding reduction in the share premium account (or profits). This process ensures the maintenance of the company’s stated capital and provides a degree of protection for creditors by preventing the erosion of the capital base.
Overall, the share premium account offers Cayman Islands exempted companies a strategic advantage. Its flexibility in distributions, redemption and restructuring provides powerful tools for optimising a company’s capital structure and maximising shareholder value within the robust legal framework created by the Act.
For further information, please contact:
Simon Raftopoulos, Partner, Appleby
sraftopoulos@applebyglobal.com
