140 5 Equity and Shareholders’ Capital
5.3 The Legal Capital Regime
There is a connection between the concepts of “equity”, shares and “legal capital”.
The adoption of a legal capital regime in the EU for public limited-liability
companies is an important way to create equity capital for those companies and to
protect it.
What does a legal capital regime mean? A legal capital regime can serve many
purposes and mean many things. Traditionally, the amount of capital that must be
contributed to and maintained by a company is called the legal capital of the
company.^24 Generally, a legal capital regime consists of staggered constraints on
the distribution or use of certain asset classes in the balance sheet.
First, a legal capital regime requires the existence of legal capital. A legal capi-
tal regime means that certain asset classes (that is, the legal capital) in the balance
sheet are subject to particular company law rules which make it more difficult to
use those assets or distribute them to holders of certain instruments (such as
shareholders). The constraints can be more staggered if the legal capital regime
contains many asset classes. The assets covered by the legal capital regime typi-
cally include the book value of certain equity investments in the company (such as
share capital and funds paid to the company for other equity instruments than
shares) and even other assets (such as cumulated profits, reserves, or increase in
the book value of the firm’s assets).
For example, German company law prohibits the repayment of share capital.^25 This prohi-
bition is interpreted broadly. It applies not only to payments but to all kinds of benefits with
a financial or commercial value. The test is based on the balance sheet. In a GmbH, any
payment or other financial advantage to shareholders is regarded as a breach of § 30(1)
GmbHG where the equity as recorded in the balance sheet of the company falls short of the
amount of the stated share capital (and the GmbH is in the status of an underbalance,
“Unterbilanz”).
Second, there are restrictions on the distribution or use of such asset classes. A le-
gal capital regime typically contains company law rules that allocate power in the
company, and the constraints on the use or distribution of legal capital include par-
ticular rules on decision-making. Typically, there will be increased separation of
monitoring and management meaning that the general meeting, the court, or a
creditors’ body will have veto rights. There is thus a connection between a legal
capital regime and corporate governance. In addition, the restrictions are typically
staggered.
For example, Finnish company law provides that “own capital”^26 consists of “free own
capital”^27 and “bound own capital”.^28 The general meeting of shareholders has a veto right
(^24) Booth RA, Capital Requirements in United States Corporation Law. In: Lutter M (ed),
Das Kapital der Aktiengesellschaft in Europa, ZGR, Sonderheft 17. De Gruyter Recht,
Berlin (2006) p 717, citing Manning B, Hanks, JJ Jr, Legal Capital (1990).
(^25) § 30(1) GmbHG and § 57(1) AktG.
(^26) In Finnish: oma pääoma. In Swedish: eget capital.