Capital increase on IPO

A capital increase is typically completed in the course of an IPO, as issuing new shares against inflow of additional financial means is evaluated by investors as indicative of a convincing equity story, and in particular of future growth. A stronger equity capital position can additionally lead to improved financing conditions in the future, developing a positive effect on the (future) share price; it can entail benefits in terms of company law (e.g. higher approved capital, higher post-formation threshold) or optimise balance sheet ratios. The capital increase takes the form of cash contributions, either as an orderly capital increase based on a decision of the annual meeting of stockholders or a capital increase from authorised capital.

To protect existing shareholders against dilution of their shareholding quota and to comply with the principle of equal treatment, stock corporation law envisages the new shares always first being offered to existing shareholders for purchase – in an amount proportionate to their shareholding. If a third party is to receive new shares from a capital increase, the subscription right of the shareholders must either be ruled out by a capital increase decision, or approved by a waiver on the part of the shareholders. Because the company typically has a small, closed group of shareholders prior to initial listing, all of whom support the IPO, it is typical to waive subscription rights on going public. In addition to this, the IPO can possibly constitute an objective justification for excluding subscription rights if joining the capital market is in the best interests of the company.

Contributions must always be placed at the free disposal of the management board. Since they are part of the capital stock available to creditors as the potential liability mass, they must not be repaid directly or indirectly to the shareholders (principle of capital maintenance). Since the banks accompanying the IPO temporarily become shareholders due to the technicalities of execution, special precautions must be taken on repaying loans from these banks from the proceeds.

BDO has the qualifications and experience that you need to be sure of competent advice in all legal questions regarding capital increases in the course of the IPO.