To develop the concept of share premium, it is first important to define what a capital increase is and the types of capital increases that exist in Honduras. 

A capital increase in a company is a process by which a company increases its capital stock, that is, the total value of contributions made by shareholders to finance the operations of the company. Honduran legislation regulates four different types of capital increases, namely: 1) increases through new contributions in cash or in kind; 2) through debt compensation; 3) through capitalization of reserves or profits; 4) through revaluation of assets.

In this context, a capital increase with share premium is a specific modality of these types of capital increases, and it differs from other types of increases in the way the value of the new shares issued is determined.

Concept of Share Premium

A capital increase with share premium involves issuing new shares at a price higher than their par value. The difference between the issue price (often the market price) and the par value constitutes the share premium. This mechanism allows companies to strengthen their capital stock without significantly diluting the value of existing shares.

Example 1: In 2022, the company Industrias Cervena, S.A., decided to carry out a capital increase with share premium to finance an expansion project. They issued 1,000,000 new shares at a price of L 200 per share, with a par value of L 100. The share premium was L 100 per share (price of issuance – par value), raising a total of L 200,000,000.00, of which L 100,000,000.00 corresponded to the share premium.

Purpose of the Share Premium

The share premium is a legal and financial figure with several purposes, one of the most notable being the raising of capital without incurring debt. However, in my opinion, the main objective of the share premium is to protect existing shareholders by avoiding the dilution of the intrinsic value of the subscribed shares of the company.

Dilution refers to the reduction in the proportional value of a shareholder's shares in a company as a result of the issuance of new shares without the shareholder subscribing to shares in proportion to their ownership in the capital stock. This phenomenon occurs when a company issues additional shares, increasing the total number of shares outstanding and thus decreasing the ownership percentage of the current shareholders. Dilution can affect both the control of the company and the value of the shares, as the intrinsic value and earnings per share may decrease.

In Honduras, it is common for companies with many years of operation and profit generation to carry out capital increases at the par value of the shares. This significantly harms the other shareholders, as it presumes that the value of the company's shares (and therefore the value of the company) remains at the par value. Although there is a preemptive right to subscribe to shares proportionally, if not exercised, other shareholders see their participation considerably diluted. This occurs not only by not participating in the capital increase but also because the shareholder who does participate acquires the new shares at par value and not at market price. This increases their participation in the company's capital stock, which ultimately determines each shareholder's ownership percentage.

By incorporating a share premium, the company can minimize this dilution, as not all the contribution is allocated to capital stock. The value corresponding to the share premium is allocated to a separate account in equity called "Share Premium," which is not considered part of the capital stock. This way, existing shareholders are protected, and a fairer and more realistic value of the company is reflected.

Accounting Treatment of the Share Premium

From an accounting perspective, the value of the share premium is recorded in a reserve account within equity, differentiating it from capital stock. This account is usually called "Share Premium."This accounting treatment is based on the International Financial Reporting Standards (IFRS) and Honduran accounting practices.

The Share Premium in Acquisitions

The acquisition of companies typically takes four (4) forms: (a) Transfer of assets and liabilities; (2) Merger; (3) Purchase of shares; (4) Issuance of new shares in favor of the Acquirer. It is common for acquisitions not to be total, meaning that the buyer does not intend to acquire 100% control of the company, but rather seeks to acquire enough participation to take control of the company, depending on statutory regulations, usually 51% or 75%. 

When the acquisition occurs through the issuance of new shares in favor of the acquirer, the concept of share premium is very important, as it defines the capital structure of the company.

This can be better explained with the following illustrative example:

Example 2: The company Inmobiliaria Cervena, S.A. has a fully subscribed and paid-in capital stock of L 1,000,000.00. The capital stock is distributed in shares with a par value of L 100.00.

The current capital structure is as follows:

• Comercializadora Araz, S.A. – owns 50% of the capital stock, equivalent to 5,000 shares.
• Agroindustrias Stiglitz, S.A. – owns 50% of the capital stock, equivalent to 5,000 shares.

The shareholders of this company do not wish to sell their shares; however, they are open to a new investor entering and having a controlling participation in the company. 

The company Galate, S.A. has offered to contribute L 20,000,000.00 to Inmobiliaria Cervena, S.A. in exchange for 75% of the capital stock of the company, which is acceptable to the shareholders of Inmobiliaria Cervena, S.A.

In this scenario, it would be a mistake for the shareholders of Inmobiliaria Cervena, S.A. to agree to a capital increase and for the L 20,000,000.00 to be recorded in the capital stock, as in that case Galate, S.A. would own 95.23% of the capital stock. To "accommodate" the capital structure as negotiated by the parties in the acquisition process, a share premium must be used. 

For Galate, S.A. to own 75% of the capital stock, 30,000 new shares equivalent to L 3,000,000.00 should be issued in its favor. This way, the capital stock will be L 4,000,000.00 and Galate, S.A. will own 75% of said capital stock. The rest of Galate, S.A.'s contribution, i.e., L 17,000,000.00, is the share premium and will be recorded in the equity account named "Share Premium."

To calculate the price at which the investor acquires each share, the total contribution (L 20,000,000.00) is divided by the total number of shares issued for that contribution (30,000), resulting in a price of L 666.67 per share. This indicates that Galate, S.A. paid L 666.67 per share of Inmobiliaria Cervena, thus avoiding the dilution of the participation of other shareholders (beyond what was already contemplated by the entry of a new shareholder). If the capital had been increased at the par value, for L 666.67, Galate, S.A. would have acquired approximately 6 shares and a fraction.

Conclusion

The increase in capital with share premium in Honduras is an effective tool to prevent the dilution of existing shareholders. It allows for the raising of additional capital by reflecting a fairer market value, thus protecting the current shareholders' participation. In acquisition contexts, it facilitates the equitable structuring of capital, thereby strengthening the sustainable growth of companies.

SOURCES:

Gutiérrez Falla, L. F. (1988). Derecho Mercantil: Contrato Societario y Derechos Individuales de los Accionistas. Editorial Astrea de Alfredo y Ricardo Depalma.