Find out what drives us and what defines our values
Meet the experts who manage your finances with passion.
Discover our current job offers or apply proactively!
Accounting
David Merz | Founding Partner
Zurich, October 27, 2023
A share capital increase is one of the most effective ways for corporations to raise new capital and thereby improve their financial position and expand their operations. However, before considering a capital increase, corporations need to seek expert guidance to help them understand the intricacies involved, the different ways to approach it, and the effects it may have. In this article, we cover all this and more, providing you a comprehensive breakdown of what a share capital increase entails for corporations in Switzerland and how to best approach it.
Book a free initial consultation with our experts.
A share capital increase is the process by which a corporation (AG) raises additional funds and increases its equity by issuing new shares to its shareholders. This, in turn, expands the company’s ownership base and allows more investors to participate in its growth. There are different types of share capital increases, namely, ordinary capital increase, approved capital band, and conditional capital increase. A share capital increase can have numerous effects, some may be favourable while others can negatively impact the company and shareholders. Corporations considering increasing their share capital will have to weigh up the expected benefits against the potential drawbacks.
There are various reasons why a corporation may opt to increase their share capital. Ultimately, they will only make such a move if they feel it will improve their financial stability and growth prospects while not negatively effecting shareholders in the process.
Some of the key reasons to increase share capital include:
There are three main forms that a share capital increase can take in Switzerland:
An ordinary share capital increase is a defined increase in share capital that is approved by the shareholders at a general meeting. The increase can either be by means of issuing new shares or increasing the nominal value of existing shares, however the latter does not result in an actual inflow of new capital; it only changes the balance sheet position of the company.
The key feature of an ordinary share increase is that the amount of the increase and the form it takes is decided at the outset, and the board of directors must immediately begin working to carry out the decided capital increase, usually within six months of the date that the resolution was passed.
The decision to increase the share capital must be publicly certified and so a notary must be present at the general meeting. Ordinary share increases often come with subscription rights for existing shareholders, which we will explain in more detail later.
An approved share capital increase or decrease provides more flexibility than an ordinary increase. It must also be decided through a general meeting, but instead of stipulating a fixed share increase, it authorises the board of directors to change the share capital within a predetermined range (capital band) without needing to seek further approval from the shareholders. The approved changes in capital must be exercised within a maximum period of five years from when the approval takes place. While the limits of the increase/decrease in share capital are decided at the general meeting, regulations stipulate that the maximum allowable increase or decrease is 50% of the current registered share capital.
For example, if a corporation currently has a registered share capital of CHF 1 million, the capital band for an approved change in share capital must lie between CHF 500,000 and CHF 1.5 million (i.e., an increase or decrease in share capital up to CHF 500,000). The shareholders can of course decide to make the band smaller than this maximum allowable limit (e.g., CHF 800,000 to CHF 1.2 million).
Approved capital changes give the corporation the freedom to raise more capital as and when it is needed, eliminating the need for a new shareholder meeting each time additional capital is required.
The capital band has been in place since 2023 and replaces the authorised capital increase.
A conditional capital increase is one whereby new shares are issued if certain conditions are met, such as convertible bonds being converted to equity, stock options being exercised, or employee share purchase plans. This means that it is the behaviour of third parties or external factors that determines whether new shares are issued and when. When the so-called trigger conditions are met, the company may issue new shares without additional shareholder approval. Due to the nature of conditional capital increases, they are usually without subscription rights for existing shareholders.
One potential difficulty with a new share issue is a reduction in ownership stake for existing shareholders due to the dilution of shares. To avoid this, most ordinary share issues take the form of a rights issue, where existing shareholders are given the first opportunity to purchase the additional shares in proportion to their current holdings. This is known as a subscription right, and it protects existing shareholders from an unwanted reduction in their proportional ownership of the company.
While in most instances existing shareholders are granted subscription rights, it is not always the case.
Ultimately, whether to give existing shareholders subscription rights over newly shared issued shares depends on the decision of the corporation board, as well as the specific type of share issue.
Subscription rights give shareholders the opportunity to purchase newly issued shares, but they are not obligated to exercise this right. In this case, the right is either:
A share increase can have various impacts on a corporation and its shareholders. Understanding these effects is essential for making informed decisions regarding a share capital increase:
The most common and immediate effect of a share capital increase is dilution of shares. This refers to the reduction in ownership stake of existing shareholders when new shares are issued.
Let’s look at a simplified example to illustrate this:
Of course, the above loss of ownership stake may be averted if the new share issue comes with subscription rights for existing shareholders, whereby Mr. Schmidt would be given the opportunity to purchase 15 of the newly issued shares and therefore maintain his 3% ownership stake in Corporation X.
Dilution of shares due to a new share issue can also have an impact on the market value of a corporation’s shares. Existing shareholders may be concerned about a decrease in value of the existing shares they own due to the additional supply, especially if the total value of the corporation remains unchanged. However, if the capital raised is used effectively by the company to create value, the actual value of an individual’s shares might not decrease and could even increase.
A natural result of a new share issue is a corresponding increase in liquidity for the corporation due to the inflow of capital. This is often the very purpose of increasing share capital, as the company can then utilise the liquidity for various aims, including investment in growth initiatives, debt reduction, or working capital needs.
Corporations often use the proceeds from a share capital increase to pay off some of their existing debt, which results in a decrease in the debt-to-equity ratio. This is usually viewed favourably by investors and creditors as it is an indicator of lower financial risk.
Depending on the level of share dilution and participation of existing shareholders in the new share issue, a share capital increase can lead to a change in control of the corporation. The ownership stakes of some major shareholders could be reduced while new entrants or other existing shareholders could gain more of the ownership share. This may potentially alter the balance of power and control among shareholders and the board of directors.
Subscription rights can dampen this effect, yet the balance may still shift if the rights are not exercised.
A share capital increase requires careful planning and decision-making, not to mention complex compliance requirements and legal processes. If you are looking to expand your corporation, strengthen your balance sheet, and explore growth and investment opportunities through a share capital increase, without all the time and stress involved, then partnering with a trusted fiduciary like Nexova AG can make all the difference.
Nexova has deep expertise and knowledge in corporate finance and regulatory compliance, and provides comprehensive support to corporations in Switzerland who are looking to initiate a share capital increase in the most efficient way possible. We take care of everything for you, from offering guidance on the type of capital increase that best suits your goals and circumstances, to assisting with shareholder communications and providing expert legal and financial advice and representation.
We charge a transparent and affordable fixed rate of CHF 1950 for our comprehensive share capital increase service, so you know what to expect from the beginning; no hidden costs or surprises along the way.
Contact us today for a free consultation and find out more about how we can help your corporation ensure a successful share capital increase.
Your email address will not be published. Required fields are marked *
Comment *
Name *
Email *
Website
Submit Comment