Capital reduction: decisions to secure before the vote

Capital reduction, what are we really talking about?

Two operations under the same name

Company law distinguishes between two types of capital reduction. They bear the same name, but their effects have almost nothing in common.

A reduction due to losses serves to clear a deficit. Capital decreases by the amount of the losses incurred. No money leaves the company. The partners receive nothing; they simply record their contribution to the losses in their accounts.

A reduction not motivated by losses reduces the value of the shares. The company either reimburses part of the capital contributions or buys back shares to cancel them. The creditors' security is effectively diminished. This is why the law grants them the right to object.

The three reduction techniques

The company can first reduce the nominal value of each share. The number of shares remains the same. Each shareholder retains the same percentage of the capital.

It can also reduce the number of shares by cancelling a portion of them proportionally. The economic result is the same, but the operation is more complex to implement when the shares are not easily divided.

Finally, in a reduction not motivated by losses, the company can repurchase certain shares for cancellation. This is the technique used to organize the exit of a partner. It follows specific rules, which we detail below.

What the capital reduction does not do

A reduction motivated by losses does not generate any cash flow. It does not solve a financing problem. It brings the reported capital into line with the reality of the shareholders' equity.

This is often the first misunderstanding. A manager who lacks liquidity doesn't need a capital reduction. They need financing, an investment, or negotiations with their creditors. A capital reduction can complement these solutions, but never replace them.

When does a capital reduction become mandatory?

The threshold of half of the share capital

Losses can reduce equity below half of the share capital. For a limited liability company (SARL), ArticleL223-42 of the French Commercial Code then requires the partners to decide on early dissolution. They must do so within four months of the approval of the financial statements showing the loss.

For public limited companies, the rule is set out inArticle L225-248, in almost identical terms. It is the board of directors or the management board that must convene the extraordinary general meeting.

In the vast majority of cases, the partners refuse the dissolution. But this refusal starts a countdown.

Two exercises to regulate

If dissolution is not ordered, the company must rectify its situation. The deadline is the end of the second fiscal year following the recording of the losses. It has two options.

• Rebuild its equity capital so that it reaches at least half of the share capital.
• Reduce its capital by the amount necessary so that equity reaches at least half of this reduced capital.

Since Law No. 2023-171 of March 9, 2023, the text specifies that the reduction can be limited to the necessary amount. It is no longer necessary to allocate all losses not absorbed by reserves.

The 1% threshold of the total balance sheet

The same law added a third step, which addresses a specific case. If, at the deadline, the equity is still not restored and the capital exceeds a threshold set by decree, the company must reduce its capital to an amount less than or equal to this threshold. It has two additional fiscal years to do so.

For limited liability companies (SARLs) and joint-stock companies without a minimum legal capital requirement, this threshold is 1% of the total balance sheet. It is calculated based on the last financial year-end. For public limited companies (SAs), it corresponds to the higher of this amount and the minimum capital required for their legal form. These thresholds are set out in Articles R223-37 and R225-166-1 of the French Commercial Code, in force since July 27, 2023.

This approach is particularly suitable for a company that has returned to profitability but whose equity remains low. There is a drawback, however. If the company subsequently increases its capital without having rebuilt its equity, it must again comply with the requirements in two subsequent financial years.

What happens if nothing is done

The partners may fail to reach a decision, or the meeting may not validly deliberate. Any interested party may then petition the court for the dissolution of the company. A creditor, a minority shareholder, or a competitor may therefore bring the matter before the court.

The court can grant a maximum of six months to rectify the situation. It cannot order dissolution if the situation has been rectified by the time it rules on the merits of the case. The risk is therefore mitigated, but it weakens the company throughout the proceedings.

The limitation of the device

These rules do not apply to companies under safeguard or receivership proceedings, nor to those implementing a plan. The last paragraph of Article L223-42 expressly provides for this. In such cases, insolvency law governs the fate of the capital, as we will see later.

Who decides on the capital reduction and by what majority?

In a limited liability company

ArticleL223-34 of the French Commercial Code entrusts the decision to the shareholders, who must act under the conditions required for amending the articles of association. For limited liability companies (SARLs) formed after the law of August 2, 2005, ArticleL223-30 sets the majority at two-thirds. This threshold is calculated based on the shares of the shareholders present or represented.

A quorum applies. Partners present or represented must hold at least one-quarter of the shares at the first meeting, and one-fifth at the second meeting. Older limited liability companies (SARLs) remain subject to a three-quarters majority of the shares, unless they unanimously decide to adopt the 2005 regulations.

These thresholds are not merely a reference point. Since the law of July 19, 2019, any interested party can request the annulment of a decision taken in violation of article L223-30.

In a public limited company

According to ArticleL225-204, the reduction is authorized or decided by the extraordinary general meeting. The latter may delegate to the board of directors or the management board all powers to implement it.

If there are auditors, they prepare a report on the reasons for and conditions of the transaction. When the board carries out the transaction under delegation, it draws up minutes which are published in the commercial register and amends the articles of association.

The company must also maintain its minimum share capital of €37,000. A reduction below this amount is only possible subject to the condition precedent of an increase that restores it to at least this level.

In a SAS

The SAS (simplified joint-stock company) generally follows the rules of the SA (public limited company), subject to any modifications permitted by its articles of association. These articles of association designate the competent body and the required majority. Therefore, they should be reviewed before any meeting is convened.

There is no minimum legal capital requirement for a simplified joint-stock company (SAS). This flexibility has a practical limit. Very low capital sends a negative signal to banks and suppliers, who check it before granting credit.

The principle of equality of partners

In all types of companies, a reduction of capital may not, under any circumstances, infringe upon the equality of the shareholders. Articles L223-34 and L225-204 state this in identical terms.

In practical terms, each shareholder must be treated in proportion to their shareholding. A reduction that targets only the shares of a minority shareholder, without their consent, is questionable. Targeted buybacks of a departing shareholder's shares remain possible, but only within the framework established by law and with the shareholder's consent.

How does a capital reduction not motivated by losses proceed?

Prepare the project

It all begins with a plan finalized by the company director. This plan specifies the amount of the reduction, the chosen method, and the intended use of the funds. If there is an auditor, the plan must be submitted to them. In a limited liability company (SARL), this period is at least 45 days before the shareholders' meeting (Article R223-33 of the French Commercial Code).

This timeframe needs to be managed in advance. A meeting convened too quickly can force everyone to start all over again.

Filing with the court registry triggers the objection period

Once the decision has been voted on, the minutes are filed with the clerk of the court. This filing starts the period for creditors to object. This period is 20 days in public limited companies (SA) and simplified joint-stock companies (SAS) (article R225-152) and 1 month in private limited companies (SARL) (article R223-35).

Only creditors whose claims predate the filing may file an objection. The representative of the bondholders has the same right in a corporation.

During this period, the reduction operations cannot begin. In the event of an objection, they cannot begin until the court has ruled at first instance. This is stipulated inArticle L225-205 for public limited companies and Article L223-34 for private limited companies.

What the creditor can obtain

The objection is brought before the court. The judge has three options. He may reject the objection, order the repayment of the debt, or order the provision of security if the company offers it and if it is deemed sufficient.

For a supplier or a bank, this right is a real bargaining chip. A creditor who sees their debtor's equity draining away can obtain payment of their debt before the funds are released. Therefore, management has a vested interest in identifying their key creditors even before the vote.

Buying back shares to force out a partner

A limited liability company (SARL) cannot, in principle, buy its own shares. Article L223-34 provides an exception. The shareholders' meeting that decides on a capital reduction not justified by losses may authorize the manager to buy a specific number of shares for cancellation. The buyback must take place within three months of the expiry of the objection period (Article R223-34).

In a public limited company (SA), Article L225-207 follows the same logic. The shareholders' meeting may authorize the board of directors or the management board to purchase a specific number of shares for cancellation. The repurchase remains subject to the principle of equal treatment of shareholders.

The purchase price is negotiable. It must be financed without putting the company in financial difficulty. A purchase that depletes cash reserves at a time when a creditor is awaiting payment exposes the manager to serious criticism.

Advertising and final formalities

Once the objection period has expired, or after the court's decision, the reduction is implemented. The company director acknowledges the completion, updates the articles of association, and publishes a notice in a legal gazette. The amendment is then registered with the commercial register via the online business formalities portal.

According to the officialEntreprendre Service Public, the reduction of share capital is exempt from registration with the business tax service.

Capital reduction due to losses and reverse stock split

Clear the losses without cash outflow

The reduction due to losses does not result in any cash outflow. Therefore, creditors do not have the right to object. The operation is decided in a single meeting, subject to the majority requirements for amending the articles of association.

It is most often used to rectify a situation where equity is less than half of the share capital. It can also prepare for the arrival of an investor who would refuse to take a stake based on a balance sheet showing past losses.

The accordion stroke

When losses exceed capital, the company can reduce it to zero and then immediately increase it. This is known as the "accordion" maneuver. Its validity in principle has been recognized since a ruling by the Court of Cassation on May 17, 1994 (Cass. com., no. 91-21.364, known as Usinor).

The two operations are inseparable. The Court of Cassation reiterated this on January 4, 2023 (Cass. com., No. 21-10.609). In a public limited company, a reduction to zero is only lawful subject to the suspensive condition of an actual capital increase. This increase must bring the capital up to at least the legal or statutory minimum.

Until the capital increase is implemented, the shareholders concerned remain shareholders. A minority shareholder therefore does not lose their status simply by voting for the reduction.

The risk of abuse of majority

The accordion effect does not require unanimous agreement. Partners who cannot participate in the increase see their stake dwindle, sometimes disappearing altogether. This is the main source of disputes.

A minority shareholder can invoke abuse of majority power. They must demonstrate that a decision was contrary to the company's best interests, made solely to favor the majority at their own expense. Judges will notably examine whether the transaction was necessary for the company's survival.

The most recent decision is a warning. On November 26, 2025, the Court of Cassation upheld the conviction of a majority shareholder (Cass. com., No. 24-15.730). The reverse stock split had, however, been foreseen in a ratified conciliation agreement. The agreement was based on a misrepresentation of the financial situation. The minority shareholder, whose stake fell from approximately 18% to 0.01% of the capital, received compensation.

Court approval does not, therefore, shield a capital restructuring from challenge. The accuracy of the financial statements justifying the transaction remains the primary point of review.

How the lawyer chooses between reconstituting and reducing

Faced with deteriorating equity, two paths are possible. The first is to rebuild equity through a capital contribution, the incorporation of current account balances, or a return to profits. The second is to reduce capital.

The choice depends first on the profitability horizon. If the next few years are expected to be profitable, natural recovery may suffice. It also depends on the capital distribution. A reduction followed by a reserved increase alters the balance between shareholders and requires greater caution.

Ultimately, it depends on the image presented to partners. Capital reduced to the 1% threshold of the balance sheet resolves the legal issues. However, it doesn't necessarily reassure a banker who is assessing their client's financial standing.

What changes with a safeguard procedure or a judicial reorganization?

The half-capital regime put on hold

Articles L223-42 and L225-248 do not apply to companies undergoing safeguard or receivership. They also do not apply during the execution of a plan. The fate of the capital is then governed by Book VI of the French Commercial Code.

Capital, a tool of the plan

When the draft plan includes a change in share capital, Article L626-3 of the French Commercial Code governs the shareholders' decision. This exceptional provision prioritizes the objective of rescuing the company. It notably allows for limiting the obstruction of a shareholder, according to procedures that vary depending on the specific legal process and the presence of different classes of affected parties.

Since the 2021 reform, capital holders can form a class of affected parties and vote on the plan. Their position is therefore negotiated in the same way as that of creditors.

The partner threatened with dilution can take action

A partner is not without recourse against a plan that imposes dilution on them. The Court of Cassation recognized their right to file a third-party objection against the judgment approving a restructuring plan that affected them in this way (Cass. com., February 8, 2023, No. 21-14.189).

Amicable procedures follow a different logic. In ad hoc mandates or conciliation proceedings, no legal text compels shareholders to restructure their capital. This is negotiated, and the ruling of November 26, 2025, demonstrates that it remains open to challenge.

What are the tax implications of a capital reduction for the partners?

Reduction motivated by losses

A reduction due to losses does not result in any distribution to the partners. Therefore, it does not trigger taxation for them. However, it may have implications for certain tax deferral schemes, which must be verified on a case-by-case basis.

Repayment of contributions by reduction of the nominal value

In a reduction not motivated by losses and without a buyback, the sums paid to the partners may constitute a reimbursement of contributions. Article 112, 1° of the French General Tax Code does not then treat them as distributed income.

One condition is particularly important. A distribution is only considered a reimbursement of contributions if all profits and reserves other than the legal reserve have been previously distributed. Otherwise, the tax authorities may reclassify all or part of the sums as distributed income.

Share buybacks and capital gains tax treatment

When a company repurchases shares for cancellation, Article 112, 6° of the French General Tax Code subjects the shareholder's gain to the capital gains tax regime. The Council of State confirmed this on October 15, 2025 (CE, No. 495120). Neither the reason for the repurchase nor its financing from reserves alters this tax treatment.

The limit of abuse of rights

This favorable tax regime has attracted the attention of the tax authorities. They sometimes challenge, on the grounds of abuse of law, buyout arrangements preceded by capital transactions. The solutions remain a subject of debate. An administrative court of appeal upheld a tax adjustment on February 12, 2026 (CAA Toulouse, No. 24TL00941), and an appeal has been filed.

The tax implications of the transaction must therefore be reviewed with an accountant or tax lawyer before the vote. They often determine the choice of technique.

Common situations and mistakes to avoid

Four typical situations

The departing partner. A minority partner in a limited liability company (SARL) wants to recoup their investment, but no buyer has come forward. The other partners lack the funds to buy out their shares. A capital reduction through a buyout becomes the only option, provided the company has sufficient cash flow.

Deteriorating equity. A small or medium-sized enterprise (SME) has just completed two loss-making years. Its equity represents less than half of its capital. The accountant alerts the manager at the time of closing the accounts. The question is whether to replenish, reduce, or combine both.

The indebted holding company. A takeover holding company can no longer service its acquisition debt. The lenders agree to restructure the debt in exchange for recapitalization by a new investor. The reverse stock split is on the table, and minority shareholders are worried.

The vigilant creditor. A supplier reads the legal notice of a capital reduction not due to losses at one of its clients. Its invoice remains unpaid. It has a few weeks to file an objection and obtain payment or security.

Three common mistakes made by leaders

• Confusing a capital reduction with a cash flow solution is misleading. A reduction motivated by losses does not bring in any money.
• Pay the departing partner before the end of the objection period. Transactions cannot begin during this period.
• Allow four months to pass after the accounts are approved. Failure to act will give any interested party the right to bring a dissolution action.

Three reflexes to adopt

• Review the articles of association and shareholders' agreement before any meeting is convened. They may stipulate majorities or specific rights.
• List all outstanding creditors and their payment due dates. A sensitive creditor should be dealt with before the vote, not after the opposition.
• The tax reduction technique must be validated. The same amount paid is not taxed in the same way depending on the method chosen.

In a capital reduction, the timing is rarely determined on the day of the vote. It is determined when the accounts are finalized and the creditors are identified. It is at this stage that the intervention of a lawyer is most valuable.

Reducing one's capital: a decision to prepare before voting on it

Capital reduction may seem technical, but it involves three balances at once: cash flow, creditor relations, and the relationship between partners.

The rules are known. The deadlines too. What makes the difference is the order in which the issues are addressed. Accounts, statutes, creditors, taxation, and only then the vote.

Arst Avocats supports directors and partners at every stage, from drafting resolutions to completing formalities. Our corporate law and mergers & acquisitions handles capital transactions. When a capital reduction occurs during a crisis, it works with our insolvency and restructuring. Romain Picard, partner, specializes in corporate law.