What Is a Capital Increase?
In many ways, a capital increase is similar to the first payment of share capital, which takes place in connection with the formation of a private limited company or public limited company. Therefore, the rules for the capital increase are largely the same as for the incorporation. This article provides an overview of what a capital increase is, what it means to make a capital increase, why it may be necessary, and how such an increase should be carried out.
On Capital Increases
A capital increase means that new funds are added to the company capital. The capital increase can be done by subscribing for new shares, by transferring part of the saved capital to the share capital, and/or by issuing convertible debt instruments or warrants, as specified in section 153 of the Companies Act.
A capital increase may be necessary in a number of cases. This applies, for example, when the equity has been greatly reduced so that there is a capital loss. It must be established that the company’s equity is less than half of the subscribed share capital. Six months must elapse from this determination, during which time the general meeting must be convened. At the general meeting, the management is obliged to account for the company’s financial position and find solutions to the capital loss. This duty is based on the management’s obligation to ensure that the company’s equity is sufficient to withstand a temporary decline in earnings.
However, a capital increase does not have to be linked to an actual capital loss. Such an increase can also be about signaling the company’s profitability, which can be important to customers, suppliers, and potential lenders. A strong signal of a healthy company is appealing to new business partners as well as new investors, and therefore companies can have a strong interest in signaling signs of health.
The Capital Increase Process
The capital increase itself must be made through a formal procedure. The decision on the capital increase must be made in accordance with the same rules that apply to amendments to the articles of association. That is, at a general meeting with a general majority of amendments to the articles of association, where a 2/3 majority makes a decision. It therefore requires an amendment to the articles of association to make a capital increase, as the share capital must be stated in the articles of association. When the share capital is increased, it will be necessary to enter the new amount in the articles of association. Once the capital has been paid up, the payment must then be reported to the Danish Business Authority.
In the case of a capital increase, it is necessary to know what the market price of the shares is. Otherwise, it is not possible to ensure that the capital increase is decided correctly. The general meeting sets the subscription price in connection with the capital increase, but it is the management itself that must propose the price.
Subscription of New Shares
Subscription of new shares can either be done by cash contribution or contribution in kind. A contribution in kind is a contribution of assets that requires a valuation report to determine the fair value of the asset in question. It is often the owners themselves who subscribe for new shares, but creditors can also subscribe for new shares through debt conversion. This type of contribution is particularly interesting as it can be a good idea to offer creditors a debt conversion if the company cannot pay its debts.
A creditor who has a receivable from the company can pay in the share capital they have subscribed to. This is done by converting their claim into shares. This is the only time when it is theoretically possible to subscribe for share capital at a discount—which is otherwise strictly prohibited. The creditors’ alternative to recovering their money is to sell the claim to another party. However, the market value of the receivable is not equal to the debt, which is why the receivable is worth less than it actually is. This is why it is referred to as a penny-for-penny conversion of the receivable when it is converted into equity. This procedure has many similarities with set-off.
Promissory Note
Issuing convertible debentures or warrants is similar to debt conversion, where the lender lends money to the company in exchange for the creation of a debenture. After the end of the debt relationship, which will be stipulated in the debt instrument, the lender can convert its debt into new shares or demand payment of the debt.
Thus, there are several ways to inject new capital into the company. Although the rules apply to both public and private limited companies, it should be noted that there is a limitation: private limited companies cannot offer their shares to the public. Only public limited companies (A/S) have this option.
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Do you have questions about capital increases? Or if you have other commercial legal issues, you are more than welcome to contact us.
