A capital increase is a central instrument of corporate financing. It strengthens equity and creates funds for growth, acquisitions, or balance sheet improvement.
Fundamentals
What Is a Capital Increase?
A capital increase is the increase of subscribed capital (share capital for GmbH, share capital for AG) through the issuance of new shares.
Reasons for Capital Increases
| Reason | Example |
|---|---|
| Growth financing | Expansion, new markets |
| Acquisition | Finance purchase price |
| Debt reduction | Improve equity ratio |
| Restructuring | Cover losses |
| New shareholders | Admit investor |
| Employee participation | Service stock options |
Equity Structure
Equity
+-- Subscribed Capital (capital increase affects this)
| +-- Nominal value
| +-- Premium --> Capital reserve
+-- Capital Reserve
+-- Revenue Reserves
+-- Retained Earnings/Accumulated Deficit
Types of Capital Increase
Overview
| Type | Characteristic | Cash Inflow |
|---|---|---|
| Ordinary (cash) capital increase | Against cash contribution | Yes |
| Capital increase in kind | Against contribution in kind | No (asset value) |
| Capital increase from company funds | Conversion of reserves | No |
| Authorized capital | Pre-approved authorization | Yes (later) |
| Conditional capital | Subject to condition | Variable |
Ordinary Capital Increase
Process for GmbH:
- Shareholder resolution (3/4 majority)
- Subscription declaration by contributors
- Payment (at least 25% immediately)
- Notarial certification
- Commercial register filing
- Registration (constitutive)
Process for AG:
- General meeting resolution (3/4 majority)
- Subscription offer to shareholders
- Subscription period (at least 2 weeks)
- Subscription
- Payment (at least 25%)
- Registration in commercial register
Capital Increase in Kind
Eligible contributions in kind: - Real estate - Machinery, equipment - Company shares - IP rights - Receivables
Particularities: - Formation report required - Value verification - Full contribution immediately
Capital Increase from Company Funds
Conversion of: - Capital reserve - Revenue reserves - Retained earnings
Characteristics: - No new money flows in - Only reallocation within equity - Increases subscribed capital - For AG: Bonus shares
Authorized Capital (AG)
Concept: - General meeting authorizes board - Increase capital up to certain limit - Max. 50% of share capital - Max. 5 years valid
Advantage: - Quick response to opportunities - No new general meeting needed
Conditional Capital
Purposes: - Convertible bonds - Stock options - Exchange rights
Characteristics: - Only upon occurrence of condition - No subscription right for existing shareholders - Securing rights of beneficiaries
Subscription Rights
Definition
Existing shareholders have the right to subscribe to new shares in proportion to their existing stake.
Calculation (AG)
Subscription ratio = Old shares : New shares
Example:
Old: 10 million shares
New: 2 million shares
Ratio: 5:1 (for 5 old ones you receive 1 new)
Value of Subscription Right
Subscription right value = (Old price - Issue price) / (Subscription ratio + 1)
Example:
Old price: 100 EUR
Issue price: 80 EUR
Ratio: 5:1
Subscription right value = (100 - 80) / (5 + 1) = 3.33 EUR
Subscription Right Exclusion
When permissible (AG): - Substantive justification - 3/4 majority of general meeting - Board report
Typical reasons: - Placement with institutional investors - Capital increase in kind - Employee participation - Small increase (<10%)
Pricing
Issue Price
| Size | Meaning |
|---|---|
| Nominal value | Minimum price (below par prohibited) |
| Issue amount | Actual price |
| Premium | Difference -> Capital reserve |
Valuation for GmbH
Without stock exchange: - Company valuation - Negotiation - Expert opinion
Methods: - DCF - Multiples - Asset value
Pricing for AG
| Method | Application |
|---|---|
| Bookbuilding | Price range, determine demand |
| Fixed price | Issue price fixed |
| Accelerated bookbuilding | Fast, overnight |
Implications
On the Balance Sheet
Before capital increase:
Share capital: 1,000,000 EUR
Capital reserve: 500,000 EUR
Capital increase: 500,000 EUR (nominal) + 200,000 EUR (premium)
After capital increase:
Share capital: 1,500,000 EUR (+500,000)
Capital reserve: 700,000 EUR (+200,000)
Bank: +700,000 EUR
On Ownership Stakes
Before:
Shareholder A: 60% (600,000 EUR)
Shareholder B: 40% (400,000 EUR)
Capital increase: 500,000 EUR, only A participates
After:
Shareholder A: 73.3% (1,100,000/1,500,000)
Shareholder B: 26.7% (400,000/1,500,000)
Dilution: Those who don't participate lose relatively.
On Key Figures
| Metric | Impact |
|---|---|
| Equity ratio | Increases |
| Debt ratio | Decreases |
| EPS (Earnings per share) | Decreases (more shares) |
| Book value per share | Changes |
Practical Aspects
Time Required
| Step | Duration |
|---|---|
| Preparation, valuation | 2-4 weeks |
| Shareholder resolution | 1 day - 2 weeks |
| Subscription period (AG) | At least 2 weeks |
| Registration | 2-4 weeks |
Costs
| Item | Magnitude |
|---|---|
| Notary | 0.5-1% of increase amount |
| Commercial register | Low |
| Advisor (if needed) | Variable |
| Underwriting bank (AG) | 2-5% for IPO/capital increase |
Documentation
Required: - Shareholder resolution/General meeting minutes - Subscription declaration - Payment confirmation - Notarial certification - Commercial register filing
Special Cases
Capital Reduction with Increase (Capital Cut)
Restructuring situation: 1. Reduce capital (cover losses) 2. Simultaneously increase (new money)
Example:
Share capital: 500,000 EUR, Loss: 400,000 EUR
1. Reduction to 100,000 EUR (loss covered)
2. Increase by 400,000 EUR (new money)
Result: Share capital 500,000 EUR, no accumulated deficit
Debt-to-Equity Swap
Conversion of debt to equity: - Contribution in kind = Receivable - Creditor becomes shareholder - Debt decreases, equity increases
Mixed Forms
- Cash and contribution in kind combined
- Partial subscription rights
- Conditional capital increase with cash
Shareholder Agreements
Relevant Provisions
| Clause | Content |
|---|---|
| Anti-dilution | Protection against dilution |
| Pro-rata right | Right to participate |
| Pay-to-play | Obligation to participate |
| Down-round protection | Protection at lower valuation |
Shareholder Disputes
Risks: - Blockade at 3/4 majority requirement - Dilution as pressure tool - Valuation dispute
Prevention: - Clear provisions in shareholder agreement - Arbitration clause - Establish valuation mechanism
Recognition Value for Outsiders
Commercial Register Publication
Visible: - New amount of share capital - Date of increase - Type of capital measure
Not visible: - Issue price/Premium - Dilution of existing shareholders
Analysis for Due Diligence
| Question | Relevance |
|---|---|
| When was the last increase? | Financing history |
| Who paid in? | Shareholder structure |
| At what valuation? | Implied valuation |
| Where did the money go? | Use of proceeds |
Conclusion
Capital increases are versatile and have far-reaching implications:
- Choose type: Cash, in kind, from funds - depending on purpose
- Consider subscription rights: Dilution and conflicts
- Clarify valuation: Especially for GmbH
- Observe formalities: Notarial certification, register
- Documentation: Update shareholder agreements
A capital increase is a powerful instrument - but one that fundamentally changes the shareholder structure and therefore must be carefully planned.
Analyze capital measures: Firmium shows share capital development and historical capital measures from the commercial register.