Share Capital Increase for Corporations

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.

What is a share capital increase?

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.

Reasons to increase share capital

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:

• Opportunities for expansion and investment: Increasing share capital is the simplest way to generate new capital, and therefore provide a company with the financial resources needed to pursue expansion or investment opportunities.
• Debt repayment: A corporation may plan to use the proceeds from a share capital increase to pay off some of their existing debt. This can be a good way to reduce interest expenses and lower the financial risk of having high liabilities.
• Strengthening the balance sheet: Increased share capital leads to a more favourable balance sheet arising out of the increase in equity and potential reduction in liabilities. A strong balance sheet is important for several reasons. It can attract more investors and increase a corporation’s share price, as well as improve credit ratings and borrowing capacity, which may also lead to more favourable financing terms.
• Compliance: In some situations, a corporation may legally be required to increase their share capital to meet minimum capital adequacy requirements. This is especially the case for companies operating in the banking and finance sector, where regulatory capital requirements are strict.
• Wider investor base: Issuing new shares can allow the corporation to reach a wider investor base by giving new shareholders the opportunity to enter at large. A larger share capital can also further help attract more investors in the future, leading to sustained growth and investor confidence in the corporation.

Different types of share capital increases

There are three main forms that a share capital increase can take in Switzerland:

1. Ordinary capital increase

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.

2. Approved capital band increase or decrease

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.

3. Conditional 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.

What are subscription rights?

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.

Do existing shareholders always have subscription rights?

While in most instances existing shareholders are granted subscription rights, it is not always the case.

• In the case of a conditional capital increase which is linked to specific conditions being met, existing shareholders don’t necessarily have rights over the newly issued shares.
• There may also be other circumstances which give rise to a new share issue, such as a merger or acquisition, whereby the newly issued shares are not automatically offered to existing shareholders.
• Approved capital increases within the pre-authorised limits may also not have subscription rights attached to them.

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.

What happens if shareholders choose to not exercise their right?

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:

• Simply not exercised and the remaining unclaimed shares are issued to the general public, or
• The subscription right itself is sold on the open market to other investors who can then exercise it and participate in the rights issue. The market value of a subscription right is determined by what the market views as the difference between the fair market value of the new shares and the issue price (nominal value).

Effects of a capital increase

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:

Dilution of shares

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:

• Suppose Mr. Schmidt owns 30 shares in Corporation X, which currently has a total of 1000 ordinary shares in issue. Mr. Schmidt therefore owns a 3% ownership stake in Corporation X.
• At the general meeting, the voting shareholders decide to increase Corporation X’s share capital by means of an ordinary capital increase whereby 500 new shares are issued.
• This means that, after the new issue, Corporation X has 1500 shares in issue. Provided Mr. Schmidt’s share ownership remains at 30 shares, his ownership stake in Corporation X has now been reduced to 2% because of the dilution.

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.

Increased liquidity

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.

Reduced debt-to-equity ratio

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.

Change in control

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.