Do you have millions of pounds sitting unused in your share premium account? Perhaps you have capital redemption reserve from a previous share buyback, or merger reserve created when you issued shares as consideration for an acquisition many years ago.
With approval from shareholders and confirmation from the court, these and other undistributable reserves can be transformed into distributable reserves in a process known as a Reduction of Capital.
Once created, undistributable reserves have extremely limited uses and can sit unused for decades. The amounts companies hold in undistributable reserves can be very significant: in some cases, they run to the billions.
By undertaking a Reduction of Capital, companies effectively unlock these amounts as they transform from undistributable reserves into realised profits. After deduction of any realised losses, the amounts are then available to facilitate future dividends or share buybacks. This can be useful if you know that the company may otherwise have insufficient distributable reserves to fulfil its published capital allocation policy, but can also be done to maximise future flexibility without any particular short-term need for more reserves.
Several listed companies have undertaken this process in 2025 alone, with amounts ranging from approximately £120m to more than £12bn.
The exact process is slightly different depending on the types of reserves you have available, and typically takes 10 to 12 weeks. For a public company, a Reduction of Capital requires shareholder approval and court confirmation.
Private companies can follow a much simpler process, whereby no court approval is needed and, instead, all directors sign a solvency statement to the effect that there are no grounds on which the company could be found unable to pay its debts in the coming 12 months. Note that, typically, share capital itself is only reduced where it represents unlisted and redundant shares, such as deferred shares left over from a prior restructuring, or perhaps preference shares that were issued to founders when the company was first incorporated. Various other factors need to be considered if the company was to reduce share capital representing listed ordinary shares.
Any creditor of the company who can show that there is a real likelihood that the Reduction of Capital would result in the company being unable to discharge its debt or claim when it falls due may attend the final hearing and object to the Reduction of Capital.
Before the directions hearing, the company will need to prepare a witness statement (usually signed by the CFO) that gives the court the information it needs to assess the impact of the proposed Reduction of Capital on creditors. That witness statement should detail all the creditors of the company (not the group, just the individual entity). This also sets out details of the company’s financial position and why creditors are unlikely to be prejudiced by the Reduction of Capital. As this analysis is prepared upfront, in practice it is highly unlikely that a creditor would be able to show up at the final hearing and successfully object to the Reduction.
If there are any concerns about the impact on creditors, various creditor protection options are available (such as seeking their consent or putting funds in blocked accounts). However, in the vast majority of cases no such protections are needed.
Where the reserve (see box below) available is a ‘statutory’ reserve, the above Reduction of Capital process needs to be followed. Where the reserve you want to unlock is not a statutory reserve, before completing the Reduction of Capital you first need to convert that reserve into share capital in an intermediate step.
This is done by using the reserve in question (eg, merger reserve) to pay up new shares as a bonus issue. Those new shares are typically a class of deferred shares with very limited rights, and are not listed.
Once the bonus shares are issued, the amount previously in the relevant reserve becomes share capital. The bonus shares can then be cancelled, which has the effect of converting that same amount into realised profit.
The process is run in parallel, so that the bonus issue is approved at the same shareholder meeting and the bonus shares are issued, typically, the evening before the final court hearing. This means that they only exist for a very short period and are simply a means to an end – they have no meaningful value and no action or involvement is required from individual shareholders.
Lucy Reeve is a partner at Linklaters LLP
This article first appeared in The Treasurer Issue 4, 2025
