“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.

Share
X.com LinkedIn Email Save as PDF
More Publications
Appleby-Website-Structured-Finance-1905px-x-1400px
26 Sep 2025

Structured lending for hyperscale data center providers: offshore spvs powering securitisation driven capital solutions

The exponential growth of hyperscale data centers, driven by surging demand for cloud computing, art...

Appleby-Website-Banking-and-Asset-Finance-1905px-x-1400px
25 Sep 2025

Typical Collateral Package in Cayman Fund Financing

The recovery of the Asian fund finance market over the past couple of years has reinforced the domin...

Appleby-Website-Dispute-Resolution-Practice
4 Sep 2025

Send in the Troops? Proportionality, notice and the appointment of joint provisional liquidators in the Cayman Islands

A recent Judgment of the Grand Court of the Cayman Islands offers a valuable reminder to aggrieved s...

Appleby-Website-Residential-Property-Caribbean
1 Sep 2025

A Guide to Transferring Shares in a Local Company

The Cayman Islands has a well-established legal framework for companies carrying on local business.�...

Appleby-Website-Dispute-Resolution-Practice
21 Aug 2025

Hong Kong and Australian courts recognise principles of segregation in Cayman SPCs

In two recent judgments, Tjin Joen Joe, Andy Tsjoe Kong and another v Oakwise Value Fund SPC [2025] ...

Appleby-Website-Private-Client-and-Trusts-Practice
12 Aug 2025

Tempering the wind to the shorn lamb (Case Note): Stevens v Hotel Portfolio II UK Limited [2025] UKSC 28

Marcus Staff  verifies that trusts imposed by law aren’t wagging the voluntary trust dog  by cro...

Appleby-Website-Fund-Finance
12 Aug 2025

Cayman Ultimate General Partners in Subscription Facilities: Do They Ultimately Matter?

In subscription finance transactions where the borrower or another pledgor entity (such as a feeder ...

Appleby-Website-Dispute-Resolution-Practice
7 Aug 2025

A Cayman Candle on the Mareva Injunction 50th Birthday Cake

Two recent judgments in the Grand Court of the Cayman Islands show how freezing injunctions are stil...