Capital increase with an in-kind land contribution and minority preemption challenge
Sepahan Polymer JSC has paid-in capital of 200,000 million rials divided into 200 million shares of 1,000 rials. Alpha Holding owns 55%, Beta owns 30%, and minority shareholders own 15%. In Tir 1402 the board proposes increasing capital to 300,000 million by issuing 100 million new shares: 70 million for cash at 1,000 rials and 30 million to Alpha in exchange for a land parcel. The board's appointee values the land at 45,000 million rials; the company's auditor values it at 28,000 million. The EGM is held with 85% of shares represented, and 92% of votes cast approve the increase; Beta opposes. Alpha votes in favor. The notice stated only 'capital increase' without mentioning the in-kind contribution or the valuation report. Beta did not receive the auditor's report before the meeting. After registration, Beta sues, claiming the resolution is invalid and that its preemption right was diluted.
1. Assess the validity of the EGM resolution with respect to the notice, the in-kind contribution, and the conflicting valuations.
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The resolution is exposed to challenge. A capital increase by an in-kind contribution is not an ordinary item; shareholders must be told that land is being contributed, who is contributing it, and how it was valued. The notice stating only 'capital increase' is inadequate because it withheld material terms. The board's own appointee valued the land at 45,000 while the auditor valued it at 28,000; that conflict required independent scrutiny and full disclosure before the vote. The 92% approval among those present does not cure the lack of notice if Beta did not have the information needed to vote informedly.
The Commercial Code requires an extraordinary general meeting and proper valuation of in-kind contributions before capital is increased. The auditor's lower valuation is particularly serious: 30 million shares at 1,000 rials require at least 30,000 million of contributed value, but the auditor's valuation is only 28,000. On that evidence, the capital increase cannot be registered as fully paid unless Alpha contributes an additional 2,000 million in cash or the number of shares is reduced. Beta can seek annulment of the resolution and, depending on the registration stage, correction of the capital entry.
2. Analyze Beta's preemption right and dilution. What share of the cash tranche could Beta subscribe, and what happens to the land tranche?
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Beta's 30% holding gives it a prima facie right to 30% of the cash tranche: 30% × 70 million = 21 million shares, requiring 21,000 million rials. If Beta subscribes, its post-increase holding is 60 million existing + 21 million new = 81 million of 300 million, or 27%. Alpha would hold 110 million existing + 30 million in-kind + 38.5 million cash (55% of the cash tranche) = 178.5 million, or 59.5%. Minority holders would hold 30 million + 10.5 million = 40.5 million, or 13.5%. If Beta does not subscribe, it falls to 20%, Alpha rises to 70%, and minority holders fall to 10%.
The land tranche is different because it is an in-kind contribution, not cash. Preemption rights can be excluded for a properly approved in-kind contribution, but only if the EGM specifically approves the contributor and the valuation after full disclosure. Here the notice defect and the conflicting valuations undermine that approval. Beta can argue that the land tranche should have been offered pro rata or that the resolution is invalid. At minimum, Beta is entitled to subscribe to the cash tranche before Alpha or outsiders take it up.
3. If the land is overvalued by 17,000 million rials, who bears liability, and what are the accounting and legal consequences?
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If the land is recorded at 45,000 but is worth 28,000, the company's assets and capital are overstated by 17,000 million. The directors who proposed and approved the valuation, and the appraiser who signed it, can be liable to the company and to creditors for the fictitious capital. Under company law, directors must ensure that in-kind contributions are real and properly valued; a valuation that supports shares not actually paid for can lead to personal liability and to cancellation of the capital increase.
Accounting-wise, the land should be recorded at its fair value at contribution date, not at the board's unsupported figure. If 30 million shares were issued for land worth only 28,000, the contributors have not paid the full nominal capital. The company should require a 2,000 million cash contribution or cancel the shortfall. The auditor should qualify or modify the capital verification report, and Beta can sue for annulment and damages. The company should also assess whether the overstatement misled creditors or the registration authority.