Capital Increase in Stock Corporations
Entrepreneurial activities are usually financed through equity and/or debt capital. In the context of stock corporations, equity capital is of particular importance and is composed of various elements, including share capital and participation capital. However, in the course of the life cycle of a stock corporation, equity capital can be adjusted, either by increasing or decreasing it.
There are various reasons why a capital increase may be necessary. The most common motives are to raise fresh capital to finance the growth of the company or for other investments. However, a capital increase, often in combination with a capital reduction, may also be necessary to restructure a company's balance sheet.
In a capital increase, new share capital is created by issuing new shares. These can be subscribed by existing and/or new shareholders.
There are three forms of capital increases in current stock corporate law, which are explained in more detail below:
Ordinary capital increase
In the case of an ordinary capital increase, the increase of the capital is decided by the general meeting with a simple majority. This resolution must be publicly certified by a notary public. The capital increase must be completed within six months of the general meeting's resolution and filed with the Commercial Register Office for registration. This type of capital increase is particularly suitable if the financing requirement is already known and financing commitments from investors are available.
Contributions to share capital are called paying-up and must be made in one of the following forms:
- The cash payment is made by paying the issue price of the shares into a capital contribution account at a bank. The bank releases the amount only after the capital increase has been entered in the commercial register
- In the case of offsetting with a claim a creditor receives shares in the company instead of money in exchange for the repayment of the debt.
- In the case of a contribution in kind, the shares are not paid up in cash but by contributing other assets.
- The share capital can also be increased by converting freely usable equity capital. This leads to the issue of so-called "bonus shares".
If a capital increase is carried out with paying-up by offsetting, paying-up by contribution in kind or by conversion of freely available equity capital as a qualified fact, the capital increase must be audited by a licensed auditor before notarisation.
In order for the capital increase to be duly registered with the commercial register, the company's board of directors must amend the articles of association and formally establish the capital increase. Both must be publicly certified by a notary public.
The capital band
Since the beginning of 2023, the articles of association of a stock corporation can provide for a so-called capital band with a range of up to plus 50% or minus 50% of the previous share capital. This authorizes the board of directors to increase and decrease the share capital as needed during five years. The capital band thus not only give the company more flexibility in terms of timing than other forms of capital increase, but also allows for a staggered raising of capital in several steps.
The introduction of a capital band requires a qualified resolution of the general meeting, which must be passed cumulatively by at least two-thirds of the share votes represented and the majority of the nominal share value represented. In contrast to the ordinary capital increase, the introduction of a capital band thus requires a broader support of the shareholders. This resolution, together with the amended articles of association, must be publicly certified and entered in the commercial register.
This form of capital increase is particularly suitable for companies that do not yet know their exact financing needs at the time of the general meeting and therefore do not yet have concrete financing commitments. Another advantage is that the capital framework approved by the general meeting does not necessarily have to be used up in the case of capital changes, but can be renewed by a capital change in the opposite direction. This means that in times of surplus capital, a stock corporation can reduce it and thus create new scope for future capital increases.
Contingent capital increase
With this type of capital increase, the general meeting makes the basic decision on a possible increase of the share capital, but only the maximum amount of the capital increase is determined. This resolution also requires a qualified majority, the amendment of the articles of association, public certification and entry in the commercial register.
In contrast to the authorized capital increase, it is not the board of directors that receives the decision-making power on the specific capital increase, but rather holders of conversion and option rights or employees with subscription rights.
Holders of conversion rights are creditors of convertible loans which have a fixed term, bear interest and can be converted into shares at the end of the term, with the shareholder's repayment claim being offset against his payment obligation.
Option rights also confer the right to acquire shares under certain conditions, but here the shares are purchased. Option rights are usually granted to employees within the framework of employee stock ownership programmes (ESOP).
A characteristic of the contingent capital increase is that the equity capital is increased to the extent that the holders of conversion and option rights make use of them. In this case, the entry in the commercial register merely serves as documentation.
Conclusion
The different forms of capital increases, namely the ordinary capital increase, the capital band and the contingent capital increase, differ in terms of required resolution quorums, implementation periods, flexibility and the appropriate financial instruments and forms of financing.
The ordinary capital increase is suitable if the financing needs are already known and concrete financing commitments are available. The capital band offers the greatest flexibility in the implementation of the capital increase, especially in terms of timing and staggering in several steps. The contingent capital increase is particularly suitable for companies that wish to receive investor funds immediately through convertible loans or where the formal capital increase is to take place at a later date. It is particularly interesting for companies that want to make their employees co-owners within the framework of participation programmes such as ESOP and therefore issue options first.
Time and cost savings and fewer errors thanks to automation
Konsento is a LegalTech platform that supports stock corporations in all aspects of a capital increase. This includes namely:
- online tools for organizing, conducting and following up on general meetings and board meetings, including the necessary templates for items on the agenda and motions (agenda items), electronic voting and vote tabulation, as well as automatically generated meeting minutes,
- online notarisation by a notary public,
- the automatic creation, filling and, if necessary, sending of all documents required for the capital increase, and
- the allotment of shares and maintenance of the share register.
These features reduce the errors, time and cost of raising capital so that more of the capital raised remains with the company in the end.
Book a free demo and let us show you how we can support your next capital increase!
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