It is widely accepted that one of the main purposes of a business is to create value for its shareholders, who contribute significant capital into entities, hoping that value will be returned to them.

While there are a large number of international companies in Bermuda whose shareholders routinely extract value through the methods discussed below, these methods are also very relevant for shareholders of local Bermuda companies, in which there is often significant value.

With more than 3,000 local companies on island, their shareholders are equally entitled to use these methods to recoup value.

Under the Bermuda Companies Act 1981 there are a few ways in which a shareholder of a Bermuda company may extract capital from the entity.

The most common ways are:

• Declaration and payment of dividend

• Distribution of contributed surplus

• Reduction of capital

• Company’s purchase of its own shares

• Share redemption

A company may declare and pay a dividend, provided the company is, or would after the payment, be able to pay its liabilities as they become due, or the realisable value of the company’s assets would not be less than its liabilities.

Importantly, dividends are payable out of available profits or other distributable reserves and not from share premium. The by-laws of the company should be consulted to determine any restrictions on the payment of dividends.

Subject to the by-laws, the required documents for effecting the dividend include board resolutions approving the dividend and confirmation of satisfaction of solvency, provided by the chief financial officer or other officer of the company with sufficient awareness of the company’s financial affairs.

The process for a distribution of contributed surplus is similar to that for the declaration of a dividend. Contributed surplus generally includes proceeds from donated shares, credits resulting from the redemption or conversion of shares at less than the amount set up as nominal capital and donations of cash/assets to the company.

A similar solvency confirmation as above, also applies here. Subject to the by-laws, the corporate steps for making a distribution from contributed surplus are the same as with dividends.

Under the Companies Act, a company is permitted to reduce its share capital in any way provided that the reduction is not prohibited by its memorandum or by-laws and that on the date the reduction is to be effected, there are no reasonable grounds for believing that the company is, or after the reduction would be, unable to pay its liabilities as they become due (solvency test).

Once the relevant share capital is reduced, distributable reserves would be created that can be distributed to the shareholders. The process to effect the share reduction includes board and shareholder resolutions approving the reduction, a confirmation of solvency and the filing with the Registrar of Companies of a memorandum of reduction.

Pursuant to the Companies Act, a company limited by shares, if authorised to do so by its memorandum or by-laws, may purchase its own shares from shareholders to whom they were issued to be cancelled or held as treasury shares.

On such purchase, any amount due to the shareholder may be paid in cash or be satisfied by the transfer of any part of the undertaking or property of the company having the same value; or a mixture of both.

The company must ensure that on the date that the repurchase is to be effected, there are no reasonable grounds for believing that the company is or after the purchase would be, unable to pay its liabilities as they become due.

The process for effecting the purchase includes a board resolution approving the repurchase, a repurchase agreement setting out the terms of the purchase and confirmation of satisfaction of solvency.

A company that has issued redeemable preference shares may redeem such at the option of the company or at the option of the holder of such shares. The solvency test would also apply here.

On redemption of the shares, any amount due to a shareholder may be paid to the shareholder in cash or otherwise. The process to effect the redemption would include board resolutions and a solvency confirmation.

While not an exhaustive list, the options presented here demonstrate that Bermuda law offers great flexibility in terms of how funds may be returned to a company’s shareholders.

• George McCallum is a senior associate in Appleby’s corporate practice in Bermuda. A copy of this column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult a lawyer