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Potential Application of Capital Increase within German Stock Corporations

Seminar Paper 2015 9 Pages

Business economics - Investment and Finance

Excerpt

Contents

1 Introduction

2 Definition of a Capital Increase

3 Capital Increases within a Stock Corporation
3.1 Ordinary Capital Increase
3.2 Contingent Capital Increase
3.3 Authorized Capital Increase
3.4 Capital Increase out of Retained Earnings

4 Reasons and Motives for a Capital Increase

5 Impact of a Capital Increase for the Shareholder

6 Capital Increase within German Stock Corporations

7 Conclusion

References

1 Introduction

The changing economic conditions, especially as a result of the globalization of the economy, require higher and higher demands at companies to position and maintain on an international and global market environment.

This affects not only those companies that open up new markets but also these ones on home markets who are facing new competition by international competitors.

One of the keys to the entrepreneurial success is the funding of the company, which guarantees the short-term securing liquidity and also the long-term business development.

One of the essential funding opportunities of Stock Corporations is to increase the equity by Capital Increases towards insoles.

A Capital Increase is the essential alternative for the financing by way of credit for a corporation. It increases the share capital and gives the company the opportunity to work with new capital. Though for the investors this often means a dilution of their own rights.

The following paper will have a definition of a Capital Increase and its different applications in Stock Corporations.

Afterwards there will be a closer look at the reasons and motives for a Capital Increase and its consequences for the Shareholders plus some insights in Capital Increases of German Stock Corporations like Deutsche Bank.

The conclusion will give a summary of the results and a personal view about options of Capital Increase in Stock Corporations.

2 Definition of a Capital Increase

The concept of a Capital Increase is firstly understood as the increase in share capital. Usually the term is used in a broad sense but also for the increase of equity within the external financing. In the wider sense the term of a Capital Increase can be used for any expansion of the capital base.1 So the respective company receives from outside of the company capital, either in form of liquid assets, means cash, or as physical capital (investment in kind). This happens in Stock Corporations via the issue of new shares. The nominal value of these shares increases the share capital of the company. If these so called new shares are issued to a higher price than their nominal value (“agio”, premium), the resulting additional funds incorporate as capital reserves of the company.2

Capital Increases can display in four different types:

1. Ordinary Capital Increase
2. Contingent Capital Increase
3. Authorized Capital Increase
4. Capital Increase out of Retained Earnings

The first one is the most common in Stock Corporation. Anyway this paper will explain each possible application of Capital Increases in detail.

3 Capital Increases within a Stock Corporation

3.1 Ordinary Capital Increase

An Ordinary Capital Increase has to be decided by the Stockholders’ Meeting with a 3/4-majority or another, firmly ascribed majority. The “old” shareholders receive a subscription right for the new shares, this can be eliminated with, again, at least a 3/4-majority. The Capital Increase can only be carried out by issuing new shares.3

This subscription right is an entitled right where the shareholder relates a part of new shares corresponding to his previous capital.4 For example: If the share capital increases from 3 to 4 Million Euro, the shareholders get the offer of 1 new share compared to 3 old shares. The subscription rate is 3:1. This right will help and protect the existing shareholders against capital dilution.5

3.2 Contingent Capital Increase

The new shares issued as part of a contingent capital increase can only be used for certain purposes for example, so that holders of convertible and warrant-linked bonds can acquire the shares to which they are entitled. They can also lay the groundwork for a merger, or be issued as employee shares. The amount of the capital increase is usually based on the number of shares to be converted or purchased through subscription rights; however, it may under no circumstances exceed 50 percent of the existing capital stock as of the date when the increase was approved. Existing shareholders are not entitled to subscription rights.6 Like the Ordinary Capital Increase the Contingent Capital Increase has to be decided by the Stockholders’ Meeting with a 3/4-majority, as well.

3.3 Authorized Capital Increase

The annual general meeting can authorize the executive board to increase the capital stock by a certain amount within five years through the issue of shares or through contributions in kind. The executive board can decide to undertake the capital increase on any date within this period, enabling it to respond quickly to a sudden need for capital, or take advantage of a favorable situation in the capital markets so as to maximize the volume of funding or earn the highest possible premium on its shares.

3.4 Capital Increase out of Retained Earnings

The Capital Increase out of Retained Earnings affects the so called liability capital, or registered capital, of a company. This conversion of reserves is known as a Nominal Capital Increase, as well.7 It is used to delimit the Capital Increase out from Insoles. Doing this the company receives additional external resources.

[...]


1 Cf. Wöhe, G. and Bilstein, J., 1998, p. 67

2 Cf. Rollwage, N., 2002, p. 18

3 Cf. AktG, §§ 182-191

4 Cf. AktG, §§ 186

5 Cf. Gabler, 2015

6 Cf. AktG, §§ 192-201

7 Cf. Winter ,W., 1993, p. 153

Details

Pages
9
Year
2015
ISBN (eBook)
9783668208674
ISBN (Book)
9783668208681
File size
388 KB
Language
English
Catalog Number
v320806
Institution / College
University of Applied Sciences Essen
Grade
Tags
potential application capital increase german stock corporations
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Title: Potential Application of Capital Increase within German Stock Corporations