Form of corporate finance involving an increase in a company's capital stock
Stock corporations typically effect a capital increase through the issue of new shares. A resolution authorising the capital increase must be approved by the annual general meeting.
As provided for in the German Stock Corporation Act, stock corporations can undertake a capital increase in one of four ways (section 182):
- Ordinary capital increase (capital increase through contributions): the company expands its capital stock by issuing new shares. Existing shareholders are entitled to subscription rights that will enable them to buy new shares before they are offered to the public so that they can maintain a proportionate share of ownership in the company.
- Authorised 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 maximise the volume of funding or earn the highest possible premium on its shares.
- 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 per cent of the existing capital stock as of the date when the increase was approved. Existing shareholders are not entitled to subscription rights.
- Capital increase out of retained earnings: open reserves that are created from retained profits are transformed into capital stock; i. e., there is no direct provision of equity capital from outside sources. This type of capital increase is similar in form to capital in exchange for contributions; however, the subscription price of the new shares is equivalent to zero. Existing shareholders receive so-called bonus shares.
The company's capital reserves can be converted into capital stock if, together with the statutory reserves, they account for more than 10 per cent of the capital stock (or a higher percentage that is stipulated in the company's charter).
