What is the fully diluted capitalization
Capital increase: you should know that as a shareholder
The capital increase in stock corporations involves increasing equity by issuing new shares, such as preferred shares. It is regulated in detail in Sections 182 to 206 of the Stock Corporation Act (AktG). There are different forms to choose from, which mostly depend on the intended purpose and require different requirements.
The capital increase is usually important for investors, as the increase has an impact on the voting shares as well as on the dividend and value of the shares.
GmbHs and companies with other legal forms can also carry out capital increases. You can read more about this further down in this guide.
Reasons for a capital increase
There are many reasons for a capital increase in the stock corporation:
- The company needs fresh capital because it is planning a takeover or needs money for investments, but the capital base is too low.
- The company has debts that it has to pay off.
- The company is committed to growth and aims to reach a wider investor base by issuing new shares.
Ordinary capital increase
In the event of an ordinary capital increase, the company issues new shares. The shareholders have a fixed subscription right. The new shares are issued in a fixed subscription ratio to the old shares.
With a subscription ratio of 1: 3, for example, the existing shareholders receive three new shares for one old share they hold. The existing shareholders are compensated through the subscription right so that they can retain their voting and dividend shares despite the issue of new shares.
Subscription rights do not have to be exercised
Shareholders are not obliged to exercise their subscription rights. However, after a capital increase you have to expect that your stake will decrease and the value of your shares will "dilute".
Authorized capital increase
In the case of an authorized capital increase, the main board of the stock corporation is authorized to increase the share capital of the AG over a maximum of five years to up to 50 percent of the current share capital. The authorization is granted at the general meeting. In the following five years, the main boards do not need any further approval in order to carry out the capital increase.
Such an increase may be necessary, for example, so that companies can react flexibly to changes in the capital market and issue new shares without having to call a general meeting.
Conditional capital increase
In the case of a conditional capital increase, the increase is made dependent on investors taking advantage of an offered exchange of shares. For example, the conditional capital increase can be carried out by exchanging convertible bonds.
In the case of the conditional capital increase, no subscription rights are generally provided for existing shareholders. You could thus suffer a decrease in the value of your shares, which depends on how many shares are created through the exchange of bonds.
Special features of a stock corporation
The Stock Corporation Act basically distinguishes between two different forms of capital increase in stock corporations, the effective capital increase and the nominal capital increase.
Effective capital increase
In the event of an effective capital increase, there is an inflow of funds from outside. The stock corporation consequently receives concrete fresh capital. An effective capital increase is, for example, an ordinary capital increase by issuing new shares.
The effective capital increase can in turn be divided into two different categories:
- Rights issues: In this case, new shares are issued and existing shareholders receive subscription rights. You can thus acquire new shares in a certain subscription ratio to the old shares.
- Capital increase excluding subscription rights: There is also the possibility that companies exclude subscription rights in the event of an effective capital increase.
Possible procedures for the effective capital increase
- Bookbuilding process: With this procedure, there is a subscription period within which the new shares are advertised. After the newly issued securities have been subscribed, they will be allocated thereafter.
- Block Trade: With this variant, the new shares are sold as a block to an investment bank. The latter then places the securities on the market at their own risk.
- Accelerated bookbuilding: This is a sub-form of the block trade. The shares are sold to investors within a few days.
Nominal capital increase
In the case of a nominal capital increase, the increase takes place with the funds of the company itself. These are internal financing and do not require external capital. For example, company reserves of the stock corporation can be used to increase capital. Only the reserves from the last annual financial statements are available here.
The nominal capital increase is usually implemented by issuing so-called "bonus shares". In this case, the shareholders receive more shares, but this does not increase the total value of the shares. The nominal capital increase is thus comparable to a stock split.
With the nominal capital increase, companies expect a lower market value of the shares and thus a higher attractiveness of the securities for investors.
Requirements for the nominal capital increase
- The balance sheet must be checked.
- The balance sheet must not be more than eight months old.
- Registration may only be made if it is certain that the financial situation has not deteriorated since the last balance sheet date.
- The capital increase must be registered.
Special features of a GmbH
In order for a capital increase to be carried out in a GmbH, a so-called “resolution to increase” must be available in accordance with Section 55 of the GmbH Act, with which the relevant articles of association may be changed.
There is therefore no automatic subscription right for shareholders in the GmbH as there is for shareholders when the capital is increased. Rather, shareholders can also suffer losses after a capital increase because the proportions of shares are redistributed in the framework of the shareholders' meeting.
Types of capital increase in the GmbH
- Adding new capital: With the ordinary capital increase, the shareholders inject new capital. The contribution can be made with cash or assets. In the latter case, the term “capital increase in kind” is also used.
- Conversion of reserves: A GmbH can convert reserves into equity and thus increase them. Since the reserves already belong to the shareholders, there is usually no new capital distribution with this type of increase.
- Capital increase by managing director: In the articles of association, it can be defined that the managing directors of a GmbH may increase the equity up to a certain limit on their own initiative. This capital increase may be necessary, for example, to hire new employees or to invest in new machines.
- Mixed forms: Depending on the objective pursued, mixed forms of capital increases are also permitted for GmbHs.
Special features of partnerships
In partnerships such as general partnerships (OHG) or limited partnerships (KG), a capital increase can take place in two different ways:
- Self-financing: In the case of self-financing, for example, parts of the profit are not distributed to the shareholders, but used to increase equity.
- Additional investments by previous or new shareholders: In this case, all shareholders agree and agree on capital grants. The respective voting and participation rights are also negotiated.
All shareholders must agree to any form of capital increase in a partnership. Exceptions can be defined in the partnership agreement or the company's articles of association.
Capital increase by silent partners
A company has the option of accepting silent partners. You do not share in the losses, only in the profits. This form of capital increase is therefore part of what is known as "passivation as debt capital".
This capital is not counted as equity. The legal form remains the same for investments by silent partners, as they form their own internal company within the company.
Significance for shareholders
In the event of a capital increase in accordance with Section 186 of the German Stock Corporation Act, shareholders generally enjoy a so-called subscription right. In this case, the existing shareholders may first buy the new and young shares.
They are then offered to them by the issuing companies in accordance with their voting shares. This is to prevent the share portfolio from losing value through a capital increase and voting rights being “diluted”.
The capital increase thus differs from the stock split. There the number of shares increases by dividing the existing ones. However, the equity remains the same. This means that the voting rights and profit expectations for shareholders remain the same, since only the number of shares increases or decreases, but not their value.
In practice, more and more companies are restricting subscription rights. The Stock Corporation Act provides numerous exceptions to this. Restricting subscription rights can, for example, help companies to quickly issue new securities and quickly attract new shareholders who have not yet invested in the company. At the same time, this reduces the dependency on the existing shareholders.
Typically, a capital increase results in a lower share price as the supply of available shares in the company increases. This price decline is usually compensated relatively quickly by increased demand for the new shares.
The capital reduction is the opposite of a capital increase. It can take place in both stock corporations and GmbHs. As part of a capital reduction, the equity of a corporation is reduced.
In this way, companies try to pay off a balance sheet loss, for example. The term “nominal capital reduction” is also used here. Because in fact only the share capital is reduced, but no liquid funds are issued.
By reducing equity, excess capital can also be distributed to shareholders. This procedure is also known as an effective capital reduction.
The legal basis for the capital reduction for stock corporations is provided by the Stock Corporation Act (AktG), for GmbHs by the GmbH Act (GmbHG). The capital reduction must be entered in the commercial register for both GmbHs and AGs.
Implementation of a capital reduction
- Simplified capital reduction: The simplified capital reduction is specified in paragraphs 229 to 236 of the AktG. Accordingly, it may only be used to compensate for impairments, to cover other losses and for the capital reserves. For these purposes, special requirements apply, which the legislator also prescribes. For example, the retained earnings must be completely released so that the simplified capital reduction can be carried out.
- Capital reduction through withdrawal of shares: Sections 237 to 249 of the AktG specify this form of capital reduction in more detail. Accordingly, it may be used to offset nominal losses or to return capital to investors. The shares are then either forcibly withdrawn by the shareholders or shares are bought back and withdrawn.
- Capital reduction in a GmbH: In the case of the GmbH, a capital reduction can take place if it is decided by a three-quarters majority at the shareholders' meeting. It is important here that the equity does not fall below the limit of 25,000 euros. It is the minimum for a GmbH.
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