1. What is Shareholders’ Equity?
The shareholders’ equity is the difference between a company’s assets and its liabilities. Shareholders’ equity is therefore a constantly changing variable.
On the balance sheet, shareholders’ equity is composed of the following items according to the Swiss Code of Obligations (cf. Art. 959a CO):
- Fixed share capital ( = sum of the nominal value of the issued shares) [e.g. the share capital and the participation capital].
- Reserves, consisting of statutory capital reserves and the statutory and voluntaryretained earnings. The statutory retained earnings consist of the statutory retained earnings according to Art. 672 CO, the revaluation reserve according to Art. 725c CO and the reserve for treasury shares according to Art. 659b para. 2 CO.
Furthermore, shareholders’ equity includes the profit or loss carried forward from previous years as well as the current annual profit or loss. Any treasury shares held are also part of shareholders’ equity. Like a loss carried forward or a loss for the year, these are carried as a minus item.
In order to have freely available equity capital, the company must have positive shareholders’ equity. If the shareholders’ equity is negative, i.e., if the amount of debt is greater than the assets, the company is over-indebted. The rules according to Art. 725b CO apply.
If the shareholders’ equity is less than 50% of the protected equity capital, there is a capital loss. In this case, the rules according to Art. 725a CO apply.
2. What is the protected part of equity?
The protected equity is the part of the total shareholders’ equity which may not be distributed. It consists of (i) the nominal share capital and any participation capital, (ii) the statutory capital reserves (Art. 671 para. 1 CO) and the statutory retained earnings in accordance to Art. 672 para. 1 CO in a combined amount of a maximum of 50% (20% in the case of holding companies) of the share and participation capital entered in the Commercial Register, (iii) plus the statutory reserves for treasury shares in a group (Art. 659b para. 2 CO) and revaluation (Art. 725c para. 1 CO).
The rules about the protected part of the equity can be summarised as follows:
150% of the share and participation capital entered in the Commercial Register plus any statutory reserves for own capital shares in the Group (Art. 659b para. 2 CO) and from revaluations (Art. 725c para. 1 CO)
120% of the share and participation capital entered in the Commercial Register plus any statutory reserves for own capital shares in the Group (Art. 659b para. 2 CO) and from revaluations (Art. 725c para. 1 CO)
Holding companies are companies whose assets consist mainly of investments and other financial assets or companies that fulfill their holding function not mainly by holding investments but additionally by granting loans.
If the shareholders' equity and the protected part of the shareholders' equity are known, the freely available part of the shareholders’ equity can be calculated.
3. How do you calculate the freely available part of the shareholders’ equity?
If a company has positive shareholders’ equity that exceeds the protected capital, the excess amount is generally considered to be freely available equity. However, it should be noted that intercompany upstream and cross-stream loans that do not correspond to the third-party comparison may still reduce the freely available equity.
Here are three examples for the calculation of freely usable equity:
4. Why do we care about the freely available capital?
The freely available equity capital is of particular importance in the following cases:
- Conversion of a GmbH into an AG: When a GmbH is converted into an AG, the GmbH must increase its share capital prior to the actual conversion. This increase can, among other things, take place either through an additional contribution by the shareholders or through the conversion of freely available equity capital (through the issue of free shares) (Art. 781 para. 5 no. 3 in conjunction with Art. 650 para. 1 no. 6 in conjunction with Art. 652d CO).
- Issue of free shares: If free shares are issued in the context of a capital increase, this is only possible at the expense of freely available equity capital (Art. 650 para. 1 no. 6 in conjunction with Art. 652d CO).
- Subsequent payment of partly paid-up shares: If existing (partly paid-up) shares are subsequently paid-up, the existing shareholders must pay-in the nominal value or the additional capital must be converted from freely available equity (Art. 634b para. 2 CO).
- Acquisition of treasury shares: The acquisition of treasury shares against payment is only permitted if freely available equity capital exists (Art. 659 CO).
- Restructuring mergers: In the case of a restructuring merger, the acquiring company must have freely available equity capital in the amount of the shortfall. Only then, a corresponding merger is permissible (Art. 6 FusG).