File : Share capital

Part 2

The different phases in constituting share capital

The different phases in constituting share capital

Making up the capital rests on the contributions made by the partners and shareholders: in cash or in kind.

Pooling certain assets, contributions

When the company is created, the founding partners or shareholders must each imperatively contribute or transfer to the company certain assets or securities and/or (where the legal form allows it) their professional knowledge. The notion of contributions therefore includes the necessary implementation and allocation of these elements for purposes of achieving the company object, and allows the partners or shareholders to share the profits or to benefit from the resulting savings. For this reason the lack of contributions results in the company being null and void.
The word "contributions" also corresponds to the generic term that designates three main classes of elements, each of which is governed by a specific legal regime.
– The first of these are contributions in cash, in other words sums of money immediately placed at the disposal of the company, or paid in several instalments.
-   Contributions of services, therefore, relate to expertise, specifically technical, professional, experiential, business, relationships and, more restrictively, of know-how (when not patentable). This class of contribution is therefore mainly in the form of services, but which do not fall under any kind of service or work contract. Because of the difficulty in assessing the non-enterable elements that make up this kind of contribution, such elements are not part of companies' capital.
Good to know:Such contributions are not allowed in limited companies, limited partnerships (unless they are made by general partners), and civil companies authorised to launch public calls for capital. By contrast, these contributions are allowed, namely in general partnership companies, SARL companies, simplified joint stock companies, and civil companies that are not authorised to launch public calls for capital. 
- Contributions in kind refer to movable or fixed assets as long as such goods possess pecuniary value and are transferable.
Such types of contribution are almost unlimited in their diversity, for example: buildings (in such a case the company's articles of association must be notarised); goodwill (in a complete form or only parts thereof); civil,professional or commercial leases; bills of exchange, receivables; member shares or company shares; industrial or intellectual property rights (patents, brands, designs, models etc). ; studies, works or procedures that carry genuine market value.
Contributions in kind may be made according to one or more of the main following modalities: in ownership, in usufruct (a division of the ownership rights that confers upon the titleholder the right to benefit from or to use an object and receive revenue from it, but without owning the object; the latter right belongs to the bare owner), or in simple usage (this is the right to use the object without owning or receiving income from it).

Remuneration of contributions in the form of member shares or shares

In principle a contribution only becomes a valid (with the exception of professional knowledge contributions) when in exchange for the contribution, each founding partner or shareholder receives from the company a certain number of units of share capital composed of said contributions.
The units of capital received by company founders are either shares or membership units depending upon the company's respective "joint stock company" category (such as public limited liability company, limited partnership, or limited joint stock company), or by a company established other than through stock.

The distinction between shares and members shares depends on the following main criteria:

  • For shares: first of all, a share is negotiable, in other words it can freely be transmitted by simple transfer from one account to another, from the transferor to the acquirer. When the company issuing the shares hands over the deed of transfer to the titleholder of the account or authorised intermediary, the transfer becomes effective. In addition, in principle, the legal form of the titleholders and any acquirers of shares is not taken into consideration, and therefore does not restrict deeding of shares in any way.
  • Concerning members shares: firstly, they are not negotiable, and transfer of shares presupposes that a deed is drawn up which in principle, declares to the issuing company (through a notary) the shares being transferred, or accepted by the company by means of an authenticated deed or under private signature. Additionally, also of shares takes into consideration the type of legal entity of the transferor and the acquirer, in other words theintuitu personae; which means that transfer of shares is granted by a given entity, towards a given entity, with the exclusion of all others. All of these conditions impose a certain number of restrictions on the free transfer of members shares.

Attribution of the members shares or shares to partners or shareholders becomes effective when the latter sign the company contract, in other words the articles of association and/or optionally, in the case of joint stock companies (such as public limited companies), the signing of corresponding share subscription forms and registration of the shares on the titleholder's account, maintained by the issuing company or an authorised broker.
The totality of the members shares or shares belonging to a partner or a shareholder in principle defines their share in the company's capital.
Attribution of the members shares or shares has the effect of conferring on the contributor the quality of partner or shareholder of the company with all obligations (obligation to release, in other words to perform all the contributions; obligation to be liable for company payables and to contribute to company losses etc), but also all of the rights (rights to profits and net assets; rights to liquidation boni; rights to repayment of capital; rights to be informed as to administration; the right to take part in assemblies; the right to transfer members shares or shares, or to allocate them as a guarantee) pertaining to them. This is why such members shares or shares are collectively designated by the generic term of: "commercial rights".

See our topical dossier on articles of association

Subscription and release of contributions

Capital is only validly constituted when the partners or shareholders have subscribed the company's entire capital, which does not necessarily mean that all the capital has been released.
Concretely, subscription becomes valid upon signing by the partners or shareholders, of the articles of association, or optionally, in the case of joint stock companies (a company whose capital is divided into shares: such as public limited companies, limited partnerships simplified joint stock companies), the signing of corresponding share subscription forms.
What is known as the "subscription" corresponds to the commitment of each partner or shareholder to release his or her contributions.
"Release" is the effective performance of the contributions, of whatever type. The release is immediate and complete; there are exceptions that justify the distinction between subscription and release.
However, in the case of contributions in cash, in other words sums of money, they may be made in instalments. This is because the law allows you to "release", in other words to pay the totality of the funds, either at the time of subscribing to the articles of association or when drawing up the subscription forms (for joint stock companies such as public limited companies), or in instalments, as follows:

  • For limited liability companies: a fifth of the amount at the time of subscription and the remainder, in one or several instalments, to be decided by the administration, within five years of registering the company on the Trade and Companies Register;
  • joint stock companies (such as public limited companies): half the amount at subscription and the remainder, in one or several instalments to be set by the decisional body (Board of Directors or Administrators for public limited companies), within a period of five years from the date of registration of the company on the Trade and Companies Register.

With respect to contributions in kind, such must be immediately fully available: property must provided as soon as the articles of association are drawn up.
For contributions of services, immediate provision is not required given their nature: such are generally considered as provisions of future and successive services even if, exceptionally, these types of contributions might be rendered as a sole provision of services.

Assessing the contributions

Attribution of member shares and shares as remuneration for contributions requires that they are first assessed.
The assessment, in the case of cash contributions, in other words contributions of sums of money, requires no other procedure than simply counting the sums contributed. It is only in the case of contributions in kind in favour of a limited liability company or a joint stock company (a company whose capital is divided into shares: a public limited company, limited partnership company, simplified joint stock company), which must be succeeded, under certain circumstances, by a verification of valuation of such contribution by a contributions auditor.
For contributions of services, although such are not part of capital (as opposed to other types of contributions), they are paid by allocation of the specific shares, known as "services share(s)" which, along with partnership interests and shares, confer upon their holders the status of partner or shareholder. The assessment of this type of contribution is difficult and does not fall under in the legal regulation. The law allows complete latitude to partners for shareholders in defining conditions for subscription and assessment in the articles of association.