Capital increase

Capital increase (GmbH) / Kapitalerhöhung

August 20, 2024

The capital increase is the increase in the amount of share capital stated in the articles of association. This amount corresponds to the sum of the contributions to be made by the shareholders in a German limited liability company (GmbH). The raising and maintenance of this share capital is compensation for the limited liability of the GmbH. It is therefore subject to special rules that attempt to prevent this liability stock of share capital from being subsequently withdrawn from the company's creditors (capital maintenance).
The share capital is a necessary component of the articles of association, § 3 I No. 3 of the German Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung - GmbHG), so that the change and thus the increase of this amount always constitutes an amendment to the articles of association. The law distinguishes between different types of capital increase.

Effective capital increase, § 55 GmbHG

An effective capital increase is a capital increase with an increase in equity. It is the most common type of capital increase in practice and the basic case, § 55 GmbHG. An effective capital increase is primarily carried out in order to increase the company's assets and thus make it more operational. However, the focus can also be on the admission of special new shareholders in order to establish or underpin co-operation relationships. It is organised as a uniform procedure.

Capital increase resolution

A shareholder resolution is required first. The rules on amendments to the articles of association apply to this. The main content of this capital increase resolution is to increase the share capital by a certain amount. A maximum amount may also be specified. However, simply stating a minimum amount is not sufficient due to the unboundedness. The issue price of the shareholder shares must be at least equal to the nominal value. However, an extra pay (Agio) is often stipulated. The capital increase resolution can be cancelled and amended until it is registered.

Exception: Exclusion of subscription rights

The existing shareholders* are entitled to a statutory subscription right. In the absence of a provision in the GmbHG, the legal basis is either constructed by analogy with stock corporation law (for the stock corporation, the subscription right is regulated in Section 186 of the German Stock Corporation Act (AktG)) or is seen in the duty of loyalty.
The individual shareholder has a claim against the company for the allocation of a share of the increase amount corresponding to his previous shareholding by virtue of the capital increase resolution. This subscription right is exercised by acquiring the new shareholder shares. The reason for the subscription right is to protect the shareholder against dilution of his shareholding. The issue of new shareholder shares logically reduces the share of a previous shareholder. The aim is to enable him to maintain the status quo by acquiring new shares. In terms of value, the subscription right is to be understood as an essentially identical minus to the share, which is why the rules on the transferability of the share apply accordingly. If subscription rights are not exercised within a reasonable subscription period of approximately two weeks, the unexercised subscription rights accrue to the other shareholders on a pro rata basis (subsequent subscription right).

The subscription right can be excluded. As this involves a considerable infringement of shareholder rights, this is subject to strict criteria. Such an exclusion of subscription rights is often regulated within the capital increase resolution. For this resolution, it is disputed whether the strict formal requirements of Sections 186 III, IV AktG also apply analogously to the GmbH. Accordingly, it requires a three-quarter majority of the share capital, not just the votes cast, and a written justification. Within the shareholders' meeting, these requirements can be waived with the consent of all shareholders. However, to be on the safe side, these requirements should be met.

Three material requirements must be met: The exclusion must fulfil a purpose that is in the interests of the company. It must not be possible to fulfil this purpose in any other, more sparing way. In addition, the disadvantage to the shareholders associated with the exclusion of subscription rights must not be disproportionate to the advantage sought by the company. The principle of equal treatment and the duty of loyalty must be observed here. A breach of fiduciary duty also exists if the capital increase is linked to high requirements and thus makes it difficult for individual shareholders to exercise their subscription rights in breach of trust (de facto exclusion of subscription rights).

The following in particular are permissible reasons for a permissible exclusion of subscription rights: a required contribution in kind, an urgent interest in cooperating with a specific investor, special financial consideration in the event of an existing need for restructuring and an urgent need for financing.

Implementation of the capital increase

The implementation of the capital increase is a three-act procedure and requires the acquisition of the shareholder shares, the payment of the contribution and the entry in the commercial register.
The takeover of the shareholder shares takes place through the takeover agreement. This agreement stipulates that the transferee becomes a member of the company after the capital increase is completed or that his or her membership is extended, and that the transferee is obliged to make the contribution. The declaration of the transferee (subscription) requires notarisation, § 55 I GmbHG. It must specify the company, the amount of the capital contribution taken over including the agreed premium and the capital increase measure.

The capital increase may only be entered in the commercial register once the contribution has been paid up to the amount of the increase (nominal amount without premium). In the case of cash increases, at least one quarter of the amount of the increase must be paid in, §§ 56a, 7 II 1 GmbHG. The payment must finally be at the free disposal of the managing directors. Payments prior to the capital increase resolution, where the contribution is no longer unequivocally available in the shareholder assets at the time of the takeover, are only permitted under strict conditions in reorganisation cases and should therefore be avoided. In order for the capital increase to be effective, it must be entered in the commercial register, § 57 I GmbHG. The managing directors must ensure that the contributions have been made in accordance with § 7 II 1 GmbHG and that they are finally at the free disposal of the managing directors, § 57 II 1 GmbHG. Defects in the takeover agreement are completely cured by the registration.

Characteristics of the increase in kind, § 56 GmbHG

In addition to the cash increase, the effective capital increase can also take the form of a non-cash increase. § Section 56 GmbHG standardises special regulations for this qualified case of an effective capital increase. Contributions in kind are all contributions that are not entirely in cash. The special provisions for an increase in kind primarily serve to protect creditors. Of particular note here is the legal concept of the hidden contribution in kind, which occurs particularly easily in the case of capital increases and is also applicable to them via Section 56 II GmbHG. This is the case if the capital increase resolution provides for a cash increase but, from an economic point of view, a non-cash contribution is later made, § 19 IV GmbHG. This is always the case if the cash contribution paid by a shareholder in connection with a capital increase is used promptly to purchase assets from the same shareholder. In the case of a hidden contribution in kind, the shareholder is not released from his contribution in accordance with § 19 IV 1 GmbHG, but the value of the contribution in kind is offset against the contribution debt, § 19 IV 2 GmbHG.
In the case of a contribution in kind, the object of the contribution in kind and the nominal amount of the share to which the contribution in kind relates must be specified in the capital increase resolution, § 56 I 1 GmbHG. If this is not done, the capital increase may not be entered in the commercial register. If it is entered in the commercial register despite an incorrect determination, it is generally effective as a cash increase. This determination must also be included in the takeover declaration, § 56 I 2 GmbHG. An entry in the commercial register may only be made if the contribution in kind was made entirely at the free disposal of the managing directors, §§ 56a, 7 III GmbHG. A non-cash contribution report is not required, unlike in the case of non-cash formation.

Authorised capital increase, § 55a GmbHG

According to § 55a GmbHG, the managing directors can be authorised in the articles of association to effectively increase the company's share capital by issuing new shares.
This can be included in the articles of association or inserted by amending the articles of association. A three-quarters majority and notarisation are required for the amendment to the articles of association, § 53 II GmbHG.

The authorisation must contain two details, § 55a I 1 GmbHG. Firstly, the nominal amount up to which the increase can take place (authorised capital). This amount may not exceed half of the share capital existing at the time of the authorisation, § 55a I 2 GmbHG. Secondly, a maximum period of five years from registration of the company or amendment to the articles of association must be set within which the increase must be implemented. Authorisation to make a contribution in kind is also permissible, but must be expressly regulated in the articles of association. In contrast to a public limited company, an exclusion of subscription rights can also be regulated in the articles of association of a GmbH, which is why an authorised capital increase with an exclusion of subscription rights is also possible.

The managing directors decide on the timing and scope of the capital increase at their own discretion within the scope of the authorisation granted. This decision by the managing directors (decision if there is only one managing director) does not have to be entered in the commercial register. However, for reasons of proof, it is advisable to document the decision together with the considerations of the managing directors. The implementation is based on the provisions of the effective capital increase, so that the acquisition of the shares, the payment of the contribution and the entry in the commercial register are also required here.
The capital increase from authorised capital accelerates and simplifies the capital increase procedure and also reduces transaction costs.

Nominal capital increase, Section 57c GmbHG

In contrast to an effective capital increase, a nominal capital increase is purely internal financing. Existing capital reserves or retained earnings are converted into share capital. Capital reserves are based on payments and contributions in kind by the company. These result in particular from the payment of an agio upon formation or a capital increase, from other additional payments by shareholders, additional contributions or from the reduction of the share capital by simplified means. Retained earnings, on the other hand, are the undistributed, taxed profits of the financial year or previous financial years.

In accordance with § 57h GmbHG, a distinction is made between two types of implementation. The formation of new shares and the increase of old shares, whereby both forms can also be combined. When new shares are created, each shareholder receives a number of new and independently realisable shares corresponding to the number of shares previously held. These correspond to the nominal value of the old shares.

When old shares are increased, the nominal amounts of the shares are increased proportionally. In the case of partly paid-up shares, the increase is the only permissible method. This indirectly serves to raise capital because, in contrast to the new shares, the increased shares can be cancelled (compulsory exclusion of shareholders). The increase is particularly recommended if the uniformity of the shares and thus the personalised character of the company is to be maintained.
A necessary prerequisite for the resolution is the prior adoption of the annual resolution and the resolution on the appropriation of profits for the last financial year prior to the capital increase resolution. These can be adopted together with the capital increase resolution at the same shareholders' meeting.

The content of this capital increase resolution must state that the capital increase is being carried out by way of a conversion of reserves. If several reserves exist, it must also be stated which reserve is to be converted and in what amount. The type of implementation and the fixed amount of the increase must also be stated. This resolution must be based on a balance sheet. This is to ensure that the reserves to be converted actually cover the amount of the increase. The annual balance sheet can also be used as the basis for this. However, care must be taken to ensure that the balance sheet is not older than eight months, so that an interim balance sheet must be used if necessary. The resolution must then be registered with the commercial register by the managing director.

A nominal capital increase merely causes a transfer within equity in the balance sheet. It therefore does not effectively lead to more capital and does not initially lead to a direct improvement in the position of creditors. However, a higher nominal value means greater security for future potential creditors, as the free reserves have now been incorporated into the capital maintenance system. There are no acquisition costs for the shareholders, nor does the capital increase affect their taxable income. The nominal capital increase is also and especially intended for the entrepreneurial company, as it is obliged to make contributions, § 5a III GmbHG.


*If we use the generic feminine or the generic masculine in the future for better readability, this expressly includes all genders.