The subscription right explained simply
Protection against dilution through subscription rights
When a stock corporation increases its capital, each shareholder has the right to acquire a proportion of the new shares that corresponds to their previous shareholding. This subscription right protects shareholders from having their stake in the company and their voting rights diluted when new shares are issued. This preserves the dividend yield and the voting power of the shareholders. However, the shareholder must invest additional money in order to utilise this protection.
This subscription right is particularly important for small and medium-sized companies, especially start-ups. It plays a lesser role for large listed companies, as shareholders can simply trade their shares on the open market.
Subscription rights for new shares and participation certificates
If a stock corporation creates new participation capital, the shareholders also have a subscription right, similar to the issue of new shares. If participation capital has already been created in the past, the company's articles of association may stipulate that in the event of a simultaneous increase in share and participation capital, shareholders may only subscribe to shares and participants only to participation certificates. In the case of uneven increases, the subscription rights must be distributed in such a way that the participation of shareholders and holders of participation certificates in the total capital remains unchanged.
Restriction or cancellation of the subscription right
The subscription right may only be restricted or cancelled for important reasons. Examples of such reasons include the purchase of companies or shareholdings, employee participation, IPOs, mergers or the conversion of borrowed capital into equity to reorganise the company. Strategic partnerships or takeover situations can also be important reasons.
The principle of equal treatment of shareholders must be observed. In addition, restrictions or cancellations of subscription rights must always be necessary and proportionate (principle of careful exercise of rights).
Power of the General Meeting
Only the General Meeting of Shareholders can restrict or cancel the subscription right as part of a capital increase resolution. This resolution must achieve at least two thirds of the votes represented and the majority of the par value of the shares represented (double quorum). The resolution must also regulate to whom and in what procedure subscription rights that are withdrawn or not exercised are allocated. If this is still unclear at the time of the Annual General Meeting, the decision can be delegated to the Board of Directors.
Regulation for subscription rights not exercised
If shareholders do not or only partially exercise their subscription rights, the capital increase resolution must stipulate what happens to the subscription rights that are not exercised. The usual wording is that the Board of Directors may use the remaining shares in the interests of the company or allocate them to other shareholders or third parties.
Notarisation, capital increase report and audit confirmation
The resolution of the Annual General Meeting on the capital increase must be publicly notarised, which also includes the regulation of subscription rights. The Board of Directors' report on the capital increase must document compliance with this resolution, in particular with regard to the restriction or cancellation of subscription rights. If subscription rights are restricted or cancelled, a licensed auditor must review and confirm the report. In order to dispense with an audit confirmation, in practice companies with few shareholders obtain a prior waiver of the exercise of subscription rights from the existing shareholders. At the same time, the Board of Directors is authorised to decide on the use of unexercised subscription rights in the interests of the company.
Consequences of violations
Violations of legal or statutory subscription rights can lead to the General Meeting's resolution being contested and to liability claims against the Board of Directors.
Conclusion
Correct and efficient handling of shareholders' subscription rights in terms of both administration and costs requires forward-looking planning by the Board of Directors. If fresh capital is to be raised from new shareholders as part of a capital increase, it is advisable for cost reasons to neither restrict nor cancel the subscription rights of existing shareholders, but to obtain a written waiver from them. If the new capital does not come from a strategic investor, the Board of Directors should not be averse to raising further capital from existing shareholders anyway. In this case, there is no need for a statutory restriction on subscription rights anyway.
Simplification through digitalisation
Konsento digitises corporate actions such as resolutions of the general meeting and board of directors as well as capital increases. The innovative platform simplifies the preparation of company resolutions with numerous agenda items, including for capital increase resolutions. These include proposals for dealing with subscription rights. In the context of capital increases, the Konsento solution also creates all the necessary documents from available data. In addition to subscription forms, the Board of Directors' capital increase report and the application to the commercial register, this also includes waiver declarations from existing shareholders.
Book a free initial consultationtoday to plan how to deal with your existing shareholders' subscription rights.
Sign up for our newsletterto stay up to date with company management.
Or follow us on social media: