What is the difference between a stock split and a nominal value reduction?

Introduction

There are various options available for Swiss stock corporations to optimize their capital structure. Two common options are the stock split and the nominal 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. Denomination reduction: purpose and benefits
3. Effects on voting rights
4. Legal requirements and implementation

Stock split: definition and application

A stock split is a capital measure that increases the number of shares. As a result, the nominal value per share is reduced 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 has now carried out a stock split at a ratio of 1:10, this results in 1,000,000 shares with a nominal value of CHF 0.10 each. The total nominal capital of the company 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 share liquidity
• Creating a psychological incentive for investors

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

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

In addition, a stock split can 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 joining later on. This is particularly the case when the existing shares, henceforth listed as voting rights shares, already have a high nominal value. To prevent the new common shares from having an even higher nominal value, the nominal value of future voting shares should be reduced first. When creating voting shares through a partial share split, special legal provisions must be observed, such as limiting the nominal value of common shares to ten times the nominal value of the voting shares.

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

Denomination reduction: purpose and benefits

A par value reduction decreases the nominal value of each share without changing the number of shares. This measure provides the following benefits:

1. Option for tax-free capital repayment to shareholders: The repayment of nominal value capital is tax-free for shareholders and is not subject to income tax. In contrast to dividend payments, there is no withholding tax.
2. Flexible instrument for optimising the capital structure: A nominal value reduction makes it possible to reduce the company's taxable equity and can contribute to increasing the return on equity.
3. Signal effect for investors: A nominal value reduction shows that the company is financially healthy, as only such companies are usually able to make nominal value repayments.
4. Alternative to dividend payment: This measure offers a tax-advantageous option compared to traditional dividend payments and can therefore represent an attractive opportunity for companies to return capital to their shareholders.

For unlisted Swiss stock companies, a nominal value reduction can be particularly attractive in order to return excess capital to shareholders in a tax-friendly manner. This enables an efficient allocation of capital and can increase the attractiveness of the company for investors.

Contact us now for a free and non-binding consultation

Effects on voting rights

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

In case of stock split

• In standard cases, voting rights remain the same
• Possibility to create voting shares, which can change voting rights

When nominal value is reduced

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

Legal requirements and implementation

Both a share split and a nominal value reduction require a notarized resolution of the General Assembly and an amendment to the Articles of Association. Konsento provides comprehensive support for the smooth implementation of these measures:

• Draft agenda for the proposal to the General Assembly
• Simple and cost-effective notarization without a personal appearance at the notary
• Preparation of all necessary documents, including the amendment to the articles of association and commercial register registration
• Possibility to hold uncomplicated proxy general meetings

Contact us now for a free and non-binding consultation

Conclusion

Stock split and nominal value reduction are important instruments for shaping the capital structure of a Swiss AG. While a stock split can improve tradability, a nominal value reduction enables tax-optimized capital repatriation. Both measures require a GV resolution that requires notarization and careful planning.

With Konsento, you can carry out these processes efficiently and cost-effectively. All necessary documents are prepared and the notarization can be carried out without a personal presence at the notary. Konsento also offers the option of carrying out uncomplicated and streamlined proxy GVs.

Would you like to find out more about how you can carry out a stock split or a nominal value reduction for your AG? Arrange a non-binding consultation with Konsento now to the rest of the process and let our experts help you!

Sign up for our newsletterto stay up to date on business administration.

Or follow us on social media:

• Linkedin
• facebook
• youtube
• twitter