Protection against dilution through subscription rights
When a stock corporation (AG) increases its capital, every shareholder has the right to purchase a share of the new shares that corresponds to their previous share. This subscription right protects shareholders from having their share in the company and their voting rights diluted when new shares are issued. As a result, dividend income and the voting power of shareholders are retained. However, shareholders must invest additional money to take advantage of this protection.
This subscription right is particularly important for small and medium-sized companies, especially for startups. It plays a lesser role for large listed companies, as shareholders there can simply trade their shares on the open market.
Subscription rights for new shares and participation certificates
When an AG creates new participation capital, shareholders also have subscription rights to it, similar to issuing new shares. If participation capital has already been created earlier, the company statutes may specify that if there is a simultaneous increase in share and participation capital, shareholders can only obtain shares and participants can only receive participation certificates. In the event of uneven increases, subscription rights must be distributed in such a way that the participation of shareholders and participants in the total capital remains unchanged.
Restriction or abolition of subscription rights
Subscription rights may only be restricted or abolished for important reasons. Examples of such reasons include the purchase of companies or investments, the involvement of employees, initial public offerings, mergers, or the conversion of borrowed capital into equity to restructure the company. Strategic partnerships or takeover situations can also be important reasons.
In doing so, the principle of equal treatment of shareholders must be respected. In addition, restrictions or abolitions of subscription rights must always be necessary and proportionate (principle of careful exercise of rights).
Competence of the General Assembly
Only the general meeting of shareholders can restrict or cancel subscription rights, as part of a capital increase resolution. This resolution must achieve at least two thirds of the votes represented and the majority of the share figures represented (double quorum). The decision must also regulate to whom and in which proceedings subscription rights withdrawn or not exercised are allocated.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 unexercised subscription rights
If shareholders do not exercise their subscription rights or only partially exercise them, the capital increase resolution must specify what happens with the unexercised subscription rights. It is common to say that the Board of Directors uses the remaining shares in the interest of the company or can allocate them to other shareholders or third parties.
Notarization, capital increase report and audit certificate
The resolution of the general meeting on the capital increase must be publicly notarized, which also includes the regulation of subscription rights. The Board of Directors's capital increase report must document compliance with this resolution, in particular with regard to the restriction or abolition of subscription rights. If subscription rights are restricted or canceled, an approved auditor must review and confirm the report. In order to dispense with an audit certificate, in practice, companies with few shareholders require existing shareholders to waive their subscription rights beforehand. At the same time, the Board of Directors is empowered to decide on the use of unexercised subscription rights in the interest of the company.
Consequences of violations
Violations of statutory or statutory subscription rights may result in a challenge to the resolution of the general meeting and to liability actions against the Board of Directors.
Conclusion
The correct and both administratively and cost-efficient handling of shareholders' subscription rights 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, not to restrict or cancel the subscription rights of previous 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 additional capital from existing shareholders anyway. In this case, there is no need for a statutory restriction of subscription rights anyway.
Simplification through digitization
Konsento digitizes corporate action such as General Assembly and board resolutions as well as capital increases. The innovative platform simplifies the preparation of company resolutions with numerous draft treatises, including capital increase resolutions. These include suggestions for dealing with subscription rights. As part of capital increases creates the Konsento solution including all required documents from available data. In addition to subscription slips, the capital increase report from the Board of Directors or registration with the commercial register, this also includes waivers issued by existing shareholders.
Book one today free initial consultationto plan how to handle subscription rights held by your previous shareholders.
Sign up for our newsletterto stay up to date on business administration.
Or follow us on social media: