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Capital Increase: What do you need to know?


Integral service around a transaction
BY : adminMarch Tue, 2023

The operation of capital increase is opposed to the reduction of capital. It is an operation by which a company increases its share capital to:

  • Increase the nominal value of shares or ownership stakes;
  • Issue new shares or ownership stakes

Certain capital increases have marked Spanish corporate history, among the most recent in 2023 is the company Técnicas Reunidas, which launched a capital increase of 150 million euros. However, rest assured, there are much higher capital increases.

What is the purpose of a capital increase?

There are multiple reasons why partners decide to increase the company's share capital, including:

  • Integrating one or more new partners: for example, following the exercise of the option right attached to a subscription warrant for shares or BSPCE.
  • Develop a new line of business: instead of selling the business, its owner may want to join the company by contributing funds.
  • Improve the financial situation of the company in case of a business downturn: increasing the company's share capital will allow repayment to creditors and strengthen the financial stability of the company. When a company experiences significant losses, a capital increase becomes essential to prevent its disappearance; this is then called recapitalization.

Who makes the decision to carry out a capital increase?

The decision to carry out a capital increase lies with the shareholders or partners of the company, as this prerogative is reserved for those who own shares or stakes.

It is important to note that an individual partner or shareholder cannot unilaterally make the decision regarding the increase of the company's share capital. Therefore, the calling of an Extraordinary General Meeting (EGM) by the management is required, where shareholders and partners gather to vote in favor of or against the capital increase. 

It is relevant to take into account that, to convene an Extraordinary General Meeting, it is necessary to comply with a minimum legal notice period of 21 days. In the case of particular companies such as Sole Proprietorships (EURL), Single-Member Limited Liability Company (SRLU), or Single-Member Limited Company (SLU), the decision to increase the capital rests with the sole shareholder of the company.

What are the different forms of capital increase?

Wondering how to increase a business's capital? Keep in mind that there are different types of capital increase:

Capital Increase in Cash

In the context of a cash capital increase, the funds contributed do not belong to the company but to its partners or third parties interested in becoming part of the company as future partners. A cash capital increase implies that partners or potential future partners inject new liquidity into the company.

To carry out this operation, it is essential that the initial share capital is fully paid up; that is, all funds contributed during the creation of the company must have been completely released.

Types of Capital Increase

When you decide to carry out a capital increase, you can choose to keep your shareholding unchanged while increasing the nominal value of shares or ownership stakes. Alternatively, you can choose to attract new partners to the capital by issuing new shares.

  • Increase in Nominal Value of Shares: In this scenario, the number of shares or ownership stakes remains unchanged. This ensures that the participation of existing partners is not diluted, and no new partners are introduced.
  • Creation of New Shares: This option allows the entry of new partners into the company's capital, leading to a dilution of existing capital. In this case, existing partners must acquire new shares if they wish to maintain their original stake in the capital. This is known as a capital increase through the issuance of new shares.

Procedure to Follow

To carry out a cash capital increase, partners must hold two Extraordinary General Meetings:

  • First Extraordinary General Meeting: In this meeting, the capital increase is approved.
  • Second Extraordinary General Meeting: Its purpose is to document the execution of the capital increase.

In each decision of the General Meeting, the company must specify whether the capital increase is intended for employees or not. It can reserve a portion or the entirety of the capital increase for this purpose.

Finally, to complete the capital expansion process, the contributed funds must be deposited into a locked account. . This account will be closed once the capital is fully released.

1. Increase in capital through contribution in kind

Increasing capital through contributions in kind is another alternative to strengthen a company's equity. In this case, instead of simply contributing cash, partners or potential future partners contribute tangible assets or various types of rights. 

The possibilities for contributions in kind are diverse and range from transferring a business, assigning a property, or even granting rights over a commercial space, among other options. Unlike cash contributions, it is not an absolute requirement that the initial capital of the company be fully paid up in this type of operation. 

This approach to expansion is often used when company executives want to expand their operations into new business sectors. To carry out this process, partners or shareholders must unanimously agree on the appointment of a contributions commissioner, who will be responsible for evaluating and appraising the value of the assets being contributed. 

A report prepared by this commissioner, including the valuation method and the accuracy of the appraisal, must be submitted to the registry at least 8 days before the Extraordinary General Meeting is held. 

It is important to note that the appointment of the commissioner is not a mandatory requirement if two specific conditions are met: first, that the value of each contribution in kind is less than 30,000 euros, and second, that the total value of contributions in kind does not exceed half of the company's share capital

2. Capital Increase through Incorporation of Reserves

One way to carry out a capital increase is through the incorporation of reserves. In this case, the company itself contributes the funds needed to increase its share capital. Reserves are the profits that the company has accumulated during one or more years prior to the capital increase and have not been distributed among the partners. 

Instead of distributing dividends, the company chose to retain these profits to strengthen its financial position. It is important to note that, according to Spanish legislation, the legal reserve of the company must represent at least 10% of the share capital.

Therefore, when carrying out a capital increase, it is crucial to ensure that this operation does not reduce the legal reserve below the limit established by law.

3. Capital Increase through Debt Settlement

What definition?

Capital increase through debt settlement allows partners to contribute an outstanding debt they have with the company, facilitating the increase in capital without the need to inject new financial resources.

This type of capital increase enables the reduction of the company's debts, allowing it to enrich itself indirectly as the outstanding debt is converted into share capital. This operation is beneficial in several aspects:

  • For the company, it represents a strengthening of its equity.
  • For the creditor partner, the operation allows them to acquire shares in the company.

To carry out a capital increase through debt settlement, the following conditions must be met:

  • Being a Creditor of the Company: This implies that the person has an outstanding payment right from the company.
  • Having a Liquid and Overdue Debt: A debt is considered liquid when its value can be precisely determined in monetary terms. Additionally, it must be an overdue debt, meaning the creditor has the right to demand payment at that time.
  • Fully Paid-Up Capital: This means that partners or shareholders have contributed to the company all funds corresponding to their initial capital subscription.

4. Increase in capital through incorporation of current account 

Increasing capital through the incorporation of the current account of partners or shareholders allows transforming a debt that a partner has recorded in their current account into an additional stake in the company's share capital. For this reason, it is also known as a capital increase through debt settlement.

It is important to note that to carry out this type of capital increase, certain conditions must be met, and the same restrictions apply.

To conclude this section, if you wish to delve deeper, in Spain, operations related to capital increase and the incorporation of reserves are regulated by the Companies Act (Law 1/2010, of July 2). The Companies Act establishes the procedures and legal requirements for carrying out these operations in Spanish companies.

capital increase service

Transform Your Company: Contact us for a Successful Capital Increase.

At Baker Tilly GDA, we specialize in advising and managing capital increase processes, ensuring compliance with all current regulations and legal requirements. If you are considering a capital increase or the incorporation of reserves in your company, our team of experts is ready to provide the necessary support. Contact us today for personalized advice and to carry out these operations efficiently and in accordance with regulations.

What are the essential steps to increase capital in the Spanish market?

Capital increase is an essential business strategy to finance the growth and expansion of a company in the Spanish market. To carry out this operation effectively, it is crucial to follow a set of essential steps that comply with the regulations and norms established in Spain.

Capital Increase

1. Extraordinary General Meeting (EGM) Convocation:

To increase the capital in a Spanish company, the first step is to convene an Extraordinary General Meeting of shareholders. This meeting must be announced in advance and conducted in accordance with the provisions of the company's bylaws and applicable Spanish legislation.

2. Review of the Bylaws:

Before proceeding, it is crucial to carefully review the company's bylaws to determine how the capital increase process should be carried out. The bylaws may contain provisions regarding the issuance of new shares or participations, preferential subscription rights, and voting procedures.

3. Preemptive Subscription Rights:

In Spain, it is common, before proceeding with a capital increase, to consider the preemptive subscription rights of existing shareholders. These rights grant them priority to subscribe to new shares or participations in proportion to their current stake in the company. This means that existing shareholders have the opportunity to acquire a portion of the new shares before they are offered to third parties.

It is important to note that the bylaws can modify or eliminate these preemptive subscription rights, but such modifications must follow the proper procedure and receive approval from the Extraordinary General Meeting (EGM).

4. Approval at the Extraordinary General Meeting (EGM):

During the AGM, the company's partners will vote on the capital increase proposal. The way in which this voting is conducted will depend on the legal structure of the company.

  • Public Limited Companies (Sociedades Anónimas - S.A.): The decision is made by a majority vote of the shareholders present or represented at the EGM.
  • Limited Liability Companies (Sociedades de Responsabilidad Limitada - S.L.): The decision is also made by a majority vote of the partners present or represented.

It's important to note that, in some cases, the bylaws may establish specific voting requirements, so it is crucial to review them thoroughly.

5. Amendment of the Bylaws

If the proposal for a capital increase receives approval from the shareholders at the EGM, the company's bylaws must be amended to reflect the new share capital and, if necessary, the nominal value of the shares or participations.

6. Deposit the Funds:

Once the capital increase is approved, the corresponding funds must be deposited into the company's account within a specified period, typically 8 days from their reception. You may choose to make this deposit in a bank or before a notary.

7. Compliance with Legal Procedures:

From the date of fund deposition, there is a period of 6 months to fulfill the necessary legal procedures for the capital increase. This includes submitting the required documentation to the relevant authorities.

Completing these essential steps ensures that the capital increase is conducted in accordance with Spanish regulations and provides the company with the necessary resources for its growth and development objectives in the Spanish market. It is crucial to have proper legal and financial guidance during this process to ensure compliance with all relevant regulations and obligations.

Do you need expert advice for your capital increase in Spain?

In Baker Tilly GDA, we specialize in providing advisory and management services for capital expansion processes that comply with all regulations and legal requirements in the Spanish market. Our team of experts is ready to provide you with the necessary support at every stage of this important process.

Visit our website here for more information about our services and how we can assist you in achieving your business growth goals. Feel free to contact us today for a personalized and efficient consultation!

At Baker Tilly GDA, we are here to help you achieve success in your capital expansion projects.

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