When companies strive for growth, it often makes sense to make additional investments. For various reasons, a bank loan is not always the best choice. An alternative for companies is the so-called capital increase. In this article, you can find out exactly what this is, what types there are and what advantages and disadvantages it offers.
What does capital increase mean?
The process of a capital increase is often used by stock corporations or limited liability companies. This is a measure with which companies can increase their Equity can be increased. Accordingly, an increase is a possibility in the area of self-financing.
Shareholders must give their consent at the Annual General Meeting for the transaction to be realized. If the company is a stock corporation, the increase must be approved in the Stock Corporation Act regulated. One option for a capital increase, for example, is the issue of additional shares, which generates additional funds. The companies can then use these independently to achieve their goals.
Capital increase example: Why do companies use a capital increase?
Increases in own capital can be used for various purposes. Such a capital injection measure is a solution, for example, when companies Pay off debts want.
Even if the aim is to create a Growth of the company promote, an increase may be appropriate. Investments, such as new machines, vehicles or software, can thereby be financed become. Planned takeovers are another option. Such measures can lead to rising share prices, which can make up for the actual increase in capital. Ultimately, the aim may be to Improving the balance sheet.
Potential disadvantages of a capital increase
The actual reason for the capital increase is central to the possible disadvantages. These can, for example, be Indication of liquidity problems be understood. The tendency is Debt capital more favorable than equity, which is why it tends to be preferred. However, this only applies to companies with a comparatively good credit rating.
One disadvantage relates to company shareholders. If new shares are issued in order to increase the company's own capital, there is a risk of a Dilution in the shares held by existing shareholders. If they do not decide to buy new shares in the same group, the value of their shares and their stake in the company itself is reduced.
What types of capital increase are there?
If a public limited company seeks to increase its capital, there are basically two different types: an effective and a nominal increase.
Effective capital increase
The effective increase can also be divided into subtypes: ordinary, conditional and authorized increase of capital.
In stock corporations, a so-called Ordinary increase of the capital. This involves a company issuing new shares. If the Annual General Meeting an approval of at least 75% can be achieved, an increase can be resolved. This is subject to the condition that the price of the new shares may not be below the nominal value of the existing shares.
- An optional possibility in the event of a capital increase is a so-called subscription right for existing shareholders, which ensures that the voting rights of existing shareholders are not worth less. An increase in the number of shares would result in lower voting rights for each individual share.
- If a shareholder wishes to prevent this, he can use his subscription right. This can be sold by the shareholder.
In addition to the ordinary increase, the alternative of a conditional capital increase ready. This basically involves the exchange of shares. Shareholders receive an offer from the company to exchange shares. For example, convertible bonds or Options be used. The lack of subscription rights may result in a lower value of the shares.
A third option are so-called Approved increases. The Annual General Meeting may decide to authorize a capital increase in the coming years. The authorized increase is subject to a maximum time limit of 5 years. In addition, the increase may amount to up to 50% of the current equity.
- The advantages of this type are increased flexibility and financial leeway. It is possible for companies to obtain large sums of equity capital. As the approval is valid for the next 5 years, the companies can react flexibly to changes in the market without having to obtain new approvals.
- It should also be mentioned that increased flexibility is accompanied by a certain degree of uncertainty for investors. They will only find out how a capital increase will affect the shares later on.
Nominal capital increase
In contrast to the effective increase, the nominal increase in the case of a public limited company takes place through a Internal financing. This means that financing is provided from the company's own funds. Reserves offer one option for this.
If a nominal increase is to be carried out some requirements be audited. This can only take place if the balance sheet has already been audited. This balance sheet must not be older than eight months.
The realization often takes place through Free shares to the shareholders. The procedure is associated with a Stock split comparable. Investors then own a higher number of shares, but the total value does not increase as a result. One possible disadvantage for investors is that Dividend payments reduced could be distributed. This can happen because the annual amount that can be used for distribution is reduced.
Conclusion: Why use a capital increase?
Capital increases are used by companies to increase equity. In order to implement this procedure, a certain level of approval is required at the Annual General Meeting.
There are many reasons for increasing the capital: companies can decide to increase the necessary Investments and thus Sales growth to strive for. Alternative options are the Repayment of debt or Planned acquisitions, which require a higher level of equity.
Depending on the cause that led to the decision to increase capital Possible risks should be considered. As debt is usually cheaper than equity, investors can also attribute the measure to potential liquidity problems. There is also a risk of share dilution for shareholders if no subscription rights are taken into account.
Effective capital increases can be divided into ordinary, conditional and authorized increases. An ordinary increase, for example, involves the issue of new shares. Subscription rights are used here to ensure that the shareholders' voting rights do not lose value. Conditional increases work through an offer for a share swap. Authorized increases are associated with greater flexibility for the Group, as once approval has been granted by the Annual General Meeting, it is valid for five years.
A nominal capital increase is realized through internal financing, which is often done by issuing bonus shares. The total value for the shareholders does not increase, even if the number of shares increases. This process can affect the amount of the next Dividend have an impact.