Entrepreneurial activities are usually financed through equity and/or external capital. In the context of joint stock companies (AGs), equity is of particular importance and consists of various elements, including share capital and participation capital. However, over the course of the life cycle of an AG, equity can be adjusted, whether by increasing or decreasing.
There are various reasons why a capital increase may be necessary. The most common motives are to raise fresh capital to finance company growth or for other investments. However, a capital increase, often in conjunction with a capital reduction, may also be necessary to restructure a company's balance sheet.
A capital increase creates new share capital by issuing new shares. These can be signed by existing and/or new shareholders.
In current stock corporation law, there are three types of capital increases, which are explained in more detail below:
Ordinary capital increase
In the case of an ordinary capital increase, the increase in capital is decided by the general meeting with a simple majority. This decision must be publicly certified by a notary. The capital increase must be completed within six months of the resolution of the general meeting and registered with the commercial register office. This type of capital increase is particularly suitable if the financing requirements are already known and financing commitments have been made by investors.
The contributions to share capital are known as liberation, which must be made in one of the following forms:
- Cash settlement is carried out by depositing the issue price of the shares into a capital payment account with a bank. The bank only releases the amount once the capital increase has been entered in the commercial register
- When clearing off the debt, a creditor receives shares of the company instead of money.
- In the case of contributions in kind, shares are not liberated in money, but by bringing in other assets.
- Share capital can also be increased by converting freely usable equity. This results in the issuance of so-called “bonus shares”.
If a capital increase is carried out with settlement liberation, payment in kind or by conversion of freely available equity as a qualifying offence, the capital increase must be reviewed by a licensed auditor before notarization.
In order for the capital increase to be properly registered with the commercial register, the company's board of directors must adjust the articles of association and formally approve the capital increase. Both must be publicly certified by a notary.
The capital band
Since the beginning of 2023, the articles of association of an AG may include a so-called Capital band with a range of up to plus 50% or minus 50% of the previous share capital. This empowers the Board of Directors to increase and reduce share capital as required over a period of five years. The capital band therefore not only gives the company more flexibility in terms of time than other forms of capital increase, but also allows staggered capital raising 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 represented share votes and the majority of the share figures represented. In contrast to an ordinary capital increase, the introduction of a capital band therefore requires wider support from shareholders. Together with the amended articles of association, this resolution must be publicly notarized and entered in the commercial register.
This form of capital increase is particularly suitable for companies that do not yet know their exact financing requirements at the time of the general meeting and therefore do not yet have any concrete financing commitments. Another advantage is that the capital framework approved by the General Assembly does not necessarily have to be used up in the event of capital changes, but can be renewed by a capital change in the opposite direction. This means that, in times of excess capital, an AG can reduce it and thus create new scope for future capital increases.
Conditional capital increase
In this type of capital increase, the general meeting makes a basic decision on a possible increase in share capital, but only the maximum amount of the capital increase is determined. This resolution also requires a qualified majority, the adjustment of the articles of association, public certification and registration in the commercial register.
In contrast to the approved capital increase, it is not the Board of Directors that has the power to decide on the specific capital increase, but holders of exchange and option rights or beneficiary employees.
Holders of conversion rights are creditors of convertible loans that have a fixed term, bear interest and can be converted into shares at the end of the period, offsetting the shareholder's repayment claim against his liberation obligation.
Options also grant the right to purchase shares under certain conditions, but this is where the shares are bought. Option rights are generally awarded to employees as part of employee participation programs (ESOP).
It is characteristic of the conditional capital increase that equity is increased to the extent that holders of conversion and option rights make use of. In this case, entry in the commercial register is only for documentation.
conclusion
The various forms of capital increases, namely the ordinary capital increase, the capital band and the conditional capital increase, differ in terms of required decisions, implementation deadlines, flexibility and the appropriate financial instruments and forms of financing.
The ordinary capital increase is suitable if the financing requirements are already known and concrete financing commitments have been made. The capital band offers the greatest flexibility when carrying out the capital increase, in particular in terms of time and in terms of staggering in several steps. The conditional capital increase is particularly suitable for companies that would like to receive investor funds immediately through convertible loans or for which 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 as part owners as part of participation programs such as ESOP and therefore issue options first.
Time and cost savings and fewer errors thanks to automation
Konsento is a LegalTech platform that provides public companies with all aspects of a capital increase supports. In particular, this includes:
- online tools for the organization, implementation and post-processing of General meetings and Board meetings including the necessary templates for negotiation items and motions (agenda items), electronic voting and vote evaluation as well as automatically created meeting minutes,
- online notarizations by a notary,
- the automatic preparation, filling and, if necessary, sending of all documents required for the capital increase, and
- the allocation of shares and maintenance of the share register.
These features reduce the errors, time, and costs of raising capital, so that in the end, more of the raised capital remains with the company.
Book a free demo and let us show you how we can help you with your next capital increase!
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