Share premium: do you have it?

Many do not consider or appreciate that they could also, inadvertently, be creating share premium.

Any amount paid to a company — in cash or in a consideration other than cash — in exchange for shares that results in the payment of an excess amount over the par value of the shares, is considered share premium, and that additional value must be recorded in a separate account known as the “share premium account”.

SHARE PREMIUM EXAMPLE

To put this into a real-life scenario, let’s consider this example: Company X issues 500 shares to you. The shares have an assigned par value of $10 each. However, you pay Company X the subscription price of $15 per share. On account of you paying more than the par or nominal value of the shares, Company X has received $5 per share in share premium. The aggregate share premium of $2,500 will be credited to the share premium account of Company X.

On a balance sheet, share premium is akin to share capital in that it too is listed as an entry in the share capital and liabilities portion of the company’s balance sheet.

There are other ways in which share premium is akin to share capital. For example, a company is restricted from paying dividends out of its share capital or share premium account as this could be deemed an unlawful reduction of capital/premium.

Share premium in Bermuda

Bermuda law has certain capital maintenance rules that a company must observe to reduce its capital/premium, including a statutory requirement to publish a notice in the local gazette notifying any creditors of the company’s intention to reduce its capital/premium account, a written solvency confirmation, shareholder consent, and the regulatory filings to the Bermuda Registrar of Companies as set out in section 46 of the Companies Act 1981.

Notwithstanding the foregoing, a company can use its share premium account to:

• pay up unissued shares of the company to be issued to members of the company as fully paid bonus shares; or
• write off expenses of the company (preliminary or expenses or commission paid or discount allowed on any issue of shares or debentures); or
• provide for the premiums payable on redemption of any shares or any debentures of the company.

When a company has received share premium, the company must be mindful of its effect on the company’s assessable capital, which is calculated by adding the company’s share capital and its share premium.

The company’s assessable capital is used to determine the annual government fee (AGF) payable to the Registrar. The relevant AGF payable by the company, based on its assessable capital as at August 31of the prior year, is set out in the current table of fees located in the fifth schedule of the Companies Act.

The AGF increases in bands based on a company’s assessable capital, with the fee ranging from $2,095 to $32,676 in the case of a Bermuda exempted company.

Thus, it is pertinent to be aware that the amount of share premium on account could impact the AGF payable by the company. Payment of the wrong AGF or filing of an incorrect declaration to the Registrar can result in penalty fines.

This insight on share capital is part one of two, with the article ‘Contributed surplus: It’s not capital!’ taking it one step further and discussing the topic of contributed surplus and the potential ramifications if a company’s contributed surplus is not properly recorded.

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

First published in The Royal Gazette, Legally Speaking, July 2021