Question
GER would like to know how to concretely calculate whether an undertaking is to be regarded as being in difficulties in the meaning of point 20(a) of the Guidelines. GER points to the fact that said provision clarifies in ftn 26 that "share capital" should include, where relevant, any share premium. However, GER is uncertain whether the term "reserves" is to include only retained earnings (Gewinnrücklagen) or retained earnings + capital reserves (Gwinnrücklagen + Kapitalrücklagen(=Agios)).
GER explains the question by using an example. A limited liability company (a GmbH) has a share capital of EUR 100 000, capital reserves of EUR 9.9 million and retained earnings of EUR 2 million. The company, therefore, has own funds of EUR 12 million and out of these reserves of EUR 11.9 million. From that moment on the company makes losses, which are carried forward until all of the own funds of the company have disappeared. Under the new Guidelines it is not relevant anymore within which time-frame the losses occur. GER would like to know from when the undertaking is to be regarded as being in difficulty.
According to GER "share capital" is defined as including all "share premiums" (Agios), which should in the present example mean that this would be EUR 100 000 plus the capital reserve of EUR 9.9 million = EUR 10 million. GER understands the term reserves as retained earnings plus capital reserves (i.e. EUR 11.9 million). This would mean that the undertaking is only to be regarded as being in difficulties if the accumulated losses are higher than EUR 16.9 million. Only an amount higher than EUR 16.9 million leads to a negative cumulative amount that exceeds half of the subscribed share capital (which is EUR 5 million).
GER would like to know if we agree with this understanding.
Answer
We consider this method of calculating whether an undertaking is in difficulty in the meaning of point 20(a) of the Guidelines to be flawed. As also pointed out by GER in the question, ftn 26 to said point defines the "share capital" as including, where relevant, any "share premium". However, the GER understanding of equating "share premium" to "capital reserves" appears flawed, as the latter can also include other items than the share premium (e.g. revaluation reserve). Thus, it is necessary, when determining whether an undertaking is in difficulty, to distinguish the share premium from other capital reserves and calculate the loss of capital in relation to the "subscribed share capital" as laid down in the Guidelines, which means "share capital" + "share premium". This also means that the term "reserves" in the meaning of the R&R Guidelines is to be understood as including retained earnings + capital reserves without share premium. In other words, the share premium is not to be included in the reserves, as it forms part of the share capital.
Applied to the example provided by GER this would mean the following. It would be necessary to establish what part of the "capital reserve" of EUR 9.9 million actually corresponds to the share premium. We can, for our example, work with the assumption that the share premium is EUR 900 000 (the remaining EUR 9 million being other "capital reserves" of the undertaking). This would mean that the total subscribed share capital, half of which must disappear, is EUR 1 million (EUR 100 000 of share capital + EUR 900 000 of share premium). The total reserves would, thus, be EUR 11 million (9 million "capital reserve" + 2 million retained earnings). It follows that the accumulated losses would have to amount to more than EUR 11.5 million in order to lead to a negative cumulative amount exceeding half of the subscribed share capital (which amounts to 500 000).