The max is how many can get in. It goes up and own based on arena numbers.
The currently-logged in will stay at whatever it was.
Say it's maxed out 400/400. There are 400 on, 400 slots. The slots are reduced, BUT, nobody is kicked. Too rude. Dumping hundreds at a time isn't a good business decision.
So the limit drops to 400/350. Still 400 on, but the 350 is a promise that nobody is going to get in past that point.
The 400 then drops over time as players disco or log off. Then the number goes down, back to 350/350. As soon as it's 349/350 people can log in.
The cap is basically a "wait til this number" type of countdown.