Share Capital

The legal framework governing Maltese companies is mainly laid out in the Companies Act (Chapter 386 of the Laws of Malta). This legislation amongst others outlines the responsibilities, powers, and constraints of companies, directors, and shareholders, including the rules relating to share capital. While share capital represents the shareholders’ equity in the company, the Act offers flexibility in how companies may utilise funds invested as share capital, provided that specific principles and legal provisions are adhered to.

The term “share capital” is not explicitly defined in the Companies Act as a standalone definition. However, various references thereto are provided in various provisions, including on company formation, issuance of shares, and capital maintenance requirements.

Generally, share capital is understood to refer to the total amount of capital that a company raises through the issuance of shares to its shareholders and represents the portion of a company's equity that has been funded by investors in exchange for ownership stakes.

These funds serve as the financial backbone of the company, enabling it to commence and sustain operations (together with any other form of financing such as shareholder loans).

The Companies Act stipulates that a private company must have a minimum authorised share capital of EUR 1,164.69, with at least 20% of the nominal value of each issued share paid up on subscription. This is applicable as the general rule. Sector specific legislation, such as in say gaming, banking or financial services, may have their own sector specific rules on share capital requirements.

The primary purpose of share capital is to support the company’s objectives, as detailed in its Memorandum of Association and to represent ownership splits in a company. Directors are entrusted with ensuring that the funds invested as share capital are used in a manner consistent with these stated objectives.

The Companies Act does not impose rigid restrictions on how funds invested as share capital can be used. Directors are granted a degree of discretion, provided that their actions align with the company’s objectives and comply with overarching fiduciary duties. Common allowed uses of share capital include:

1. Operational Expenses: Funds invested for share capital may be used to cover operational/business costs such as office rent, utilities, employee salaries, and other operational requirements essential to running the business.
2. Asset Acquisition: Companies may invest in tangible or intangible assets necessary for their operations, including equipment, technology, or intellectual property.
3. Research and Development: Funds can be allocated to innovative projects or product development to enhance the company’s competitiveness.
4. Expansion Activities: Such funds can be used to facilitate business growth, such as entering new markets, launching new products, or establishing additional branches.
5. Debt Settlement: In certain cases, the funds may also be used to settle liabilities, provided this is done carefully and does not compromise the company’s solvency.

While there is significant flexibility, the Companies Act imposes the following specific restrictions to safeguard the interests of the company and its creditors:

1. Prohibition on unauthorized Distributions: Companies cannot distribute assets, including share capital, to shareholders except from profits available for distribution. This means that dividends or other forms of shareholder payouts must originate from retained earnings, not from the core share capital.
2. Fiduciary Duties of Directors: Directors are legally bound to act in the best interests of the company. Misusing share capital for personal gain or activities outside the company’s objectives could lead to legal consequences, including personal liability for directors and breach of their fiduciary duties towards shareholders.
3. Adherence to Memorandum of Association: All the company’s activities including its financial activities and thusthe use of funds invested as share capital, must align with the scope of the company’s operations defined in the Memorandum of Association.
4. Solvency Requirements: The improper use of share capital that endangers the company’s financial stability or ability to meet its obligations is prohibited. Directors must ensure that sufficient funds are retained to maintain operational solvency and the business as a going concern.

The directors of any company play a critical role in managing the use of funds invested in a company as share capital. Under Maltese law, directors have a fiduciary duty to act in good faith and in the best interests of the company, exercise care, diligence, and skill in decision-making and avoid conflicts of interest that could compromise their impartiality. Failure to adhere to these responsibilities may result in personal liability, including being held accountable for damages suffered by the company or its shareholders.

In Malta, companies generally enjoy a level of autonomy in the utilisation of share capital, provided that such usage is prudent, aligned with the company’s objectives, and compliant with the Companies Act. Directors must exercise this flexibility carefully while making sure that the money is distributed wisely to promote the expansion and sustainability of the business and defending the interest of shareholders.

For information or assistance, please contact us at info@gtg.com.mt

Author: Sarah M. Vella