In addition to the traditional financing instruments – i.e, the issuance of new shares (ordinary shares or preference shares), shareholder loans, and the issuance of bonds – quasi-capital contributions are an option provided for by law in Macau.
Quasi-capital contributions make it possible to establish an adjusted and considered balance between the future cash needs of a company, the personal interests of the shareholders, and any guarantee of the company creditors, and allow a circumvention of the legal limitations imposed in respect of capital contributions and the various means of debt financing.
The traditional instruments of debt financing, the contribution of which is counted as a liability, worsen the company’s financial situation by their very nature. Such financing instruments are neither desirable nor sustainable, given the limitations set out in Article 206 of Macau’s Commercial Code. This provision establishes that, at the end of each financial year, the company’s net worth must remain greater than half the value of the share capital, otherwise the capital shall be reduced or the company shall be wound up. Those are the typical – and legal – drawbacks of debt financing instruments; namely, of bond issuances and shareholder loans.
By the same token, Article 206 of the Commercial Code also imposes limitations on the use of typical equity financing instruments; i.e., share capital increases. While a share capital increase enables a company to raise new financial contributions from shareholders, this positive contribution to the company’s balance sheet means the condition set forth in Article 206 of the Commercial Code is more likely to be an issue.
Given these practical difficulties, there are benefits in establishing an option to make quasi-capital contributions through a provision in the articles of association, when the company is incorporated, or through an amendment to the articles of association.
This financing instrument is beneficial for the company, the shareholders, and the company's creditors.
From the company’s point of view:
Future cash needs are guaranteed up to the amount thus set;
Quasi-capital contributions do not form part of the share capital and do not bear interest;
The mere provision in the articles of association guarantees the future and eventual settlement of these contributions; and
Until the shareholders resolve for the repayment, the amounts of quasi-capital contributions are not accounted for as liabilities of the company but rather as equity.
From the point of view of the shareholders:
The contributions are only obligatory for the shareholders once they have passed a resolution to call up the payment, unlike capital contributions;
The shareholders have the right to decide when the quasi-capital contributions are called up; and
As requested by law, the quasi-capital contributions shall be paid by the shareholders on a pro rata basis according to their shareholding in the company but not on a voluntary basis, in a similar way to shareholders’ loans.
From the point of view of the company's creditors:
The forecasting and payment of quasi-equity contributions strengthens the company's net value assets to better guarantee the financial solvency of the credits granted to the company – a scenario that does not happen in any debt financing instruments.
Effective corporate governance can help to facilitate the future development of a company, while good company operation and sound financial and accounting planning safeguard the interests of the company, its shareholders, and the company’s creditors.
