Flexible equity capital: How the capital band works
Combination of authorised capital increase and authorised capital reduction
The stock corporation law that came into force on 1 January 2023 offers public limited companies more flexibility in the design of their equity financing and a needs-based adjustment of their capital structure. With this newly created form of financing, the public limited company and in particular its board of directors are given the opportunity to react quickly to a change in capital requirements.
The capital band is a range approved by the General Assembly and documented in the articles of association within which the board of directors can increase and decrease the share capital. It combines the previous authorised capital increase with a new type of "authorised capital reduction". The capital band enables companies in particular to raise equity capital by issuing new shares (capital increase) and a simplified elimination of excess equity capital (capital reduction).
Strengths of the capital band
With the previous authorised capital increase, the capital authorised by the General Assembly was reduced by the respective amount with each increase of the capital and issue of shares and was ultimately completely exhausted. In order to raise further capital, the Board of Directors therefore had to obtain a new authorisation for the increase of the capital from the General Assembly.
In contrast, the capital band has the advantage that the capital framework approved by the general meeting is not necessarily used up in the event of capital changes, but can be renewed by a capital change in the opposite direction. If the joint-stock company has increased the share capital in the past within the framework of the capital band, it can reduce it in times of surplus capital and thereby create renewed scope for future capital increases.
The capital band can be either unilateral or bilateral. Unilaterally, it restricts the board of directors to only increase or only reduce the share capital. Two-sided means that the board of directors can increase the share capital and reduce it at a later date. Of course, the reverse order is also possible in the case of a two-sided arrangement.
With the introduction of the capital band, the authorised capital increase under existing law has been replaced. Capital increases authorised by General Assemblies expire at the end of December 2024 at the latest and must thereafter be replaced by the introduction of a capital band - or other forms of financing.
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Formal requirements
By approving the capital band, the General Assembly grants the board of directors the authority to increase or decrease the share capital within a period defined by it (max. five years) and within a defined range (max. ± 50% of the existing nominal capital including participation capital).
The introduction of the capital band requires a qualified resolution of the General Assembly (cumulatively at least two thirds of the represented share votes and the majority of the represented nominal share value). Since the capital band will be included in the Articles of Association like the previous authorised capital increase, the resolution of the General Assembly requires public certification and an entry in the Commercial Register. During the term of the capital band, the General Assembly has the option to amend or cancel it.
During the term of the capital band, the General Assembly has the option to amend or cancel it.
After the authorisation by the General Assembly, the board of directors can increase or decrease the share capital within the term by means of a board resolution. In a further step, the board of directors must amend the articles of association to reflect the current capital. The latter must again be publicly certified and notified to the commercial register.
Next steps in the Board of Directors
For boards of directors of public limited companies whose authorised capital expires this year, it is advisable to examine the possibility of the capital band and consider introducing it. The introduction requires an amendment of the articles of association as well as an approval by the general meeting. But even without expiring authorised capital, it is worthwhile to examine the introduction of the capital band, as it offers the company more flexibility in financing. With the capital band, companies can react quickly to changes in their financing situation and reduce or increase their share capital as needed.
Technical support for the introduction of the capital band
In the meeting module of Konsento, agenda templates are available for general meeting resolutions on the introduction of the capital band, for capital increase and determination resolutions as well as the resolution for the amendments to the articles of association. In addition, a notary can be appointed in the meeting module to certify the resolutions online that require notarisation. If an auditor is necessary in the context of the withdrawal of the subscription right of the existing shareholders, he can also be appointed via the meeting module of Konsento so that he can carry out his audit online right there. Furthermore, Konsento's company administration software supports its customers in the subscription, issue and allocation of new shares.
This enables the board of directors of stock corporations to manage equity in a time- and cost-efficient manner, with all necessary resolutions, processes and forms available in one place.
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