Considerations on Capital Reduction in Guatemala

Within the social and financial operation of a commercial company, it is common to see an increase or decrease in the capital contributed by its partners or shareholders, depending on the results that the business reflects at certain times in the life of the company.

While increasing capital is more familiar within the corporate sphere, being a frequently used mechanism, it is also worth acquiring an understanding of capital reduction as an effective and recommended mechanism for the corporate and financial health of any company, when its use is indeed appropriate.

In accordance with Article 210 of the Commercial Code of Guatemala, there are three ways to reduce capital in commercial companies:

    1. Decrease in the value of social contributions (personalist societies).
    2. By decreasing the value of shares (stock companies).
    3. By the redemption of some shares (stock companies).

The common understanding is that all three modalities require the modification of the Articles of Incorporation of the Company to reduce capital, however, this has its considerations.

For cases 1 and 2, it is indeed necessary to modify the bylaws for this to take effect legally and therefore before third parties.

For case 3, this modification may or may not be necessary. The differentiation of the route for this case will depend on how the company was constituted.

If the company, from its incorporation, regulated redeemable shares and the process for that redemption to take effect without the need to modify the bylaws, the reduction becomes very attractive and with a much simpler route, both in corporate and registry matters, representing a saving of costs and time. Practically, the reduction under this modality is done internally within the company, without necessarily following a registration process, which involves publications and legal deadlines.

This modality is often very useful for cases where corporate and business models are anticipated in which the passage of certain shareholders will be short in the life of the company, and especially when there are scenarios with purely investment views, without necessarily having an administrative or managerial role in certain companies.

Always within case number 3, it is key to understand and analyze Article 112 of the Commercial Code, which regulates the rules for the redemption of shares, providing the minimum parameters to be followed to achieve the effective redemption of shares, important to note that this same article regulates how to proceed in case the deed regulates or not the redemption and aspects of special relevance such as:

    • Determination of the book value of shares (which is not the same as their nominal value).
    • The still existing regulation on the draw before a Notary to determine which shares will be redeemed.
    • Cancellation of the share titles that are redeemed.
    • Rights of the shareholder who suffers redemption, contemplating a prescription period.

The scope of article 112 that we are mentioning also has a direct impact on those companies that do not contemplate within their Articles of Incorporation the procedure for capital reduction through redemption of shares, since what that norm regulates is the starting point of the registration process that must be carried out before the Mercantile Registry (which is regulated in articles 210 to 213 of the Commercial Code), before the reduction becoming effective within the company. This modality for reducing capital represents greater time and costs.

For those companies where the capital reduction process is not regulated in the Articles of Incorporation, there is always the option of modifying the bylaws to incorporate these redemption rules and thus facilitate the process when the company needs it.

Finally, it is important within the financial analysis of companies to take into account that the Commercial Code regulates cases where the reduction of capital represents the solution to certain situations that may arise in the history of a company, such as:

    • Loss of capital
    • Delinquent shareholders
    • As a result of the separation of partners.