What is the difference between a share split and a par value reduction?

Introduction

Swiss stock corporations have various options for optimizing their capital structure. Two common options are a share split and a par value reduction. In this blog post, we explain the differences between these measures, their impact on shareholders' voting rights and when they can be useful for companies.

Table of contents

1. Stock split: Definition and application
2. Nominal value reduction: purpose and advantages
3. Effects on voting rights
4. Legal requirements and implementation

Stock split: Definition and application

A share split is a capital measure in which the number of shares is increased. This reduces the nominal value per share in proportion to the share split, while the total nominal value of the company remains unchanged. For example, if a public limited company has issued 100,000 shares with a nominal value of CHF 1.00 and now carries out a share split at a ratio of 1:10, this results in 1,000,000 shares with a nominal value of CHF 0.10 each. The company's total nominal capital remains unchanged at CHF 100,000.00.

This measure can be useful for companies for various reasons:

• Improving tradability with a high share price
• Increasing the liquidity of the share
• Creating a psychological incentive for investors

For unlisted stock corporations in Switzerland, a share split can also be relevant if their shares are not publicly traded. Share splits can often be observed for shares with a high nominal value (e.g. CHF 100.00 or more) before a capital increase in order to realize a lower price per share or to give investors more shares for the same investment amount.

However, this is mainly a psychological effect, as the percentage participation of the investor does not change for the same investment amount.

A share split can also make sense before the introduction of voting shares, i.e. if the founders want to secure more voting rights for the same amount invested than investors who join the company at a later date. This is particularly the case if the existing shares, which will henceforth be managed as voting shares, already have a high nominal value. To ensure that the new ordinary shares do not have an even higher nominal value, the nominal value of the future voting shares should initially be reduced. When creating voting shares through a partial share split, special legal provisions must be observed, such as the limitation of the nominal value of the ordinary shares to ten times the nominal value of the voting shares.

And finally, a share split can make sense in preparation for an IPO in order to increase the tradability of the share.

Nominal value reduction: purpose and advantages

A par value reduction reduces the par value of each share without changing the number of shares. This measure offers the following advantages:

1. Possibility of tax-free capital repayment to shareholders: The repayment of par value capital is tax-free for shareholders and is not subject to income tax. In contrast to dividend payments, no withholding tax is payable.
2. Flexible instrument for optimizing the capital structure: A nominal value reduction enables a reduction in the company's taxable equity and can contribute to increasing the return on equity.
3. Signal effect for investors: A reduction in par value shows that the company is financially sound, as only such companies are generally in a position to make par value repayments.
4. Alternative to dividend payments: This measure offers a tax-advantageous option compared to traditional dividend payments and can therefore be an attractive way for companies to return capital to their shareholders.

A par value reduction can be particularly attractive for unlisted Swiss stock corporations in order to return excess capital to shareholders at favorable tax rates. This enables an efficient allocation of capital and can increase the attractiveness of the company for investors.

Effects on voting rights

The effects on the shareholders' voting rights differ depending on the measure selected:

For share split

• In the standard case, voting rights remain the same
• Possibility of creating voting shares, which can change the voting rights ratios

For nominal value reduction

• Voting rights generally remain unchanged
• No shift in the balance of power at the General Meeting

Legal requirements and implementation

Both a share split and a par value reduction require a notarized resolution by the Annual General Meeting and an amendment to the Articles of Association. Konsento offers comprehensive support for the smooth implementation of these measures:

• Agenda items for the proposal to the Annual General Meeting
• Simple and cost-effective notarization without having to appear in person at the notary's office
• Preparation of all necessary documents, including amendments to the articles of association and registration in the commercial register
• Possibility of holding uncomplicated proxy general meetings

Conclusion

Share splits and par value reductions are important instruments for shaping the capital structure of a Swiss AG. While a share split can improve tradability, a par value reduction enables a tax-optimized capital repayment. Both measures require a notarized AGM resolution and careful planning.

With Konsento, you can carry out these processes efficiently and cost-effectively. All the necessary documents are created and the notarization can take place without the need for a notary to be present in person. Konsento also offers the option of carrying out straightforward and streamlined proxy AGMs.

Would you like to find out more about how you can carry out a share split or par value reduction for your AG? Arrange a non-binding consultation with Konsento now and let our experts support you!

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