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.

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 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.

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.