GmbH Share Capital Increase

A share capital increase is an effective way for a limited liability company (GmbH) to raise new capital and thereby improve its financial position and expand operations. However, before considering a capital increase, company owners need to seek expert guidance to help them understand the intricacies involved, the different practical aspects, and the effects it may have. In this article, we provide a comprehensive breakdown of what a share capital increase entails for limited liability companies in Switzerland.

Overview of share capital of a GmbH

Before we explore the details of a share capital increase, let’s first examine what is meant by “share capital” in the context of a limited liability company (GmbH). The share capital of a GmbH represents the investment made by the company’s owners (i.e., shareholders). In Switzerland, a GmbH is legally required to have a minimum share capital of CHF 20,000, all of which must be paid up (i.e., proof of deposit in a registered bank account). A GmbH’s registered capital is divided into shares, which means that a shareholder’s ownership stake of the company is determined by the percentage of the total shares they hold.

GmbH vs AG share capital

In essence, the share capital of a GmbH functions similarly to that of a corporation (AG), except for the following notable difference:

• GmbH: GmbHs are typically closely held companies with a limited number of shareholders. Share transfers often require approval from existing shareholders or may be restricted by the company’s articles of association. The sale of shares takes place privately by an agreement, and if there are any changes to the share ownership structure, it must be entered into the commercial register. This structure provides greater control to the shareholders over who can become a co-owner, and results in fewer and slower changes in ownership structure.
• AG: In contrast to the GmbH, the personal element is less prominent in a AG. Corporations offer the possibility of anonymous ownership. The shares of a Corporation do not necessarily have to be traded on the stock exchange, but they are eligible for the capital market. I.e. they can be traded on a stock exchange, in contrast to the ordinary shares of the GmbH, which allows the unrestricted purchase and sale of their shares. This flexibility means that ownership of a corporation can change more quickly, often resulting in a broader base of shareholders. The ease of trading in company shares is a prominent feature.

What is a share capital increase for a GmbH?

There may come a time in a GmbH’s growth where it needs an additional capital investment over and above its initial registered capital. This is known as a share capital increase and it involves raising the total capital invested in the company by its shareholders. In other words, it is a decision by the owners of the company to invest additional funds into the business which can then be used for essential purposes such as expanding operations, investing in new projects, repaying debt, and strengthening the company’s financial position.

How does the share capital increase work in practice?

Article 781 of the Swiss Code of Obligations (CO) outlines the legal basis for an increase in share capital of a GmbH. Under these regulations, there are two stages to a share capital increase:

1. A decision to increase the share capital is made at the shareholders’ meeting. For such a resolution to be passed, it must have the support of at least two thirds of the votes represented at the meeting as well as the absolute majority of the entire voting share capital.
2. The resolution is then carried out by the management of the company. There are various rules and guidelines for how this is to be carried out, and we will be looking at the basic factors involved.

Let us now explore in more detail the different practical aspects of a share capital increase for a GmbH:

Types of share capital increases for a GmbH

There are three different ways in which an AG can increase its share capital; however, a GmbH only has one type: the ordinary capital increase. This involves a defined increase in share capital that is approved by the shareholders at a general meeting. The amount of the increase and by when it should be carried out is already determined, and it is a one-time decision. If a GmbH wants to further increase or decrease its share capital later, there should be a new resolution passed at a shareholder general meeting.

What are subscription rights?

Subscription rights protect existing shareholders from dilution of ownership due to the share capital increase. It gives existing shareholders the right to purchase the new shares in proportion to their current share ownership which allows them to maintain an equal stake of the GmbH.

As a GmbH share increase only happens by means of an ordinary capital increase, subscription rights are typically inherent. In fact, a restriction or withdrawal of these subscription rights can only occur through a specific resolution at the shareholders’ meeting for the capital increase, and such a decision can only be made if there is a valid cause. Important reasons include share increases due to mergers and acquisitions (i.e., the company acquires another company and takes over their assets as contributions in kind for an increase in share capital), employee participation in the share issue, and certain investments and partial takeovers.

Cash deposits and contributions in kind

Unlike a corporation’s share issue, in the case of a GmbH, the statutes do not allow the company to make a public offer to subscribe to the ordinary shares. This is in accordance with the more private and closed nature of a GmbH, and the fact that the ordinary shares are not to be publicly traded on the capital market.

That said, the GmbH is allowed to search for individual additional shareholders if required, which may include the use of specialist journals or newspapers. In most cases, however, the majority of the new share capital is bought by existing shareholders, and they may be entitled to make either cash deposits for the shares or contributions in kind if the company allows it:

• If the shares are purchased through a cash payment, the funds should be deposited by the purchaser in a blocked bank account designated for the new share issue.
• If the shares are acquired through a contribution in kind, the shareholder makes their contribution to the share capital increase by contributing assets (property, equipment, intellectual property, etc.) that is equivalent in value to the newly acquired shares. In the event of a contribution in kind, a clear record must be kept of the subject matter of the contribution in kind, its accepted value, the identity of the shareholder making the contribution and the quantity of ordinary shares issued to them in return.

It is also important to note that the purchase of shares by means of a contribution in kind is common in the case of a takeover (also referred to as a ‘takeover in kind’). This occurs when the GmbH takes over the ownership of another company. The assets of the newly acquired company are transferred to the GmbH and registered as a share capital increase by way of a contribution in kind, with the amount of the newly issued share capital equal to the value of the assets acquired.

Converting debt to equity

One other option for paying for newly issued share capital is to offset it against existing debt. In other words, instead of repaying a loan with cash, the company may come to an agreement with the lender to convert the existing debt into newly issued share capital, thereby reducing the company’s liability and increasing its equity. This is only possible if there is no legal or contractual ban on debt offsetting.

Documentation

The decision to increase a GmbH’s share capital must be publicly recorded and notarised for it to remain valid and binding. The public document must contain at least the following information:

• The nominal amount (or maximum nominal amount) of the share capital increase,
• The number of (or maximum number of) ordinary shares to be issued along with their nominal value,
• Information about dividend entitlement and when it starts,
• The type of deposits to be made for the share capital (e.g., cash deposit and/or contribution in kind),
• The applicable records regarding contributions in kind and/or acquisitions of property (mentioned in the previous sections),
• Voting rights applicable to shares,
• Privileges associated with preferred ordinary shares if applicable,
• The subscription rights allocation that has not been exercised, or the restriction/withdrawal of subscription rights if applicable.

Registration with the commercial register

All share capital alterations of a GmbH must be entered into the commercial register within three months of the decision of the shareholders’ meeting for it to remain valid. The identities of the shareholders along with their ownership stake must be provided and kept up-to-date in the commercial register. This contrasts with an AG, whereby the share ownership changes hands rapidly and need not be updated in the commercial register.

Effects of a capital increase

A share capital increase can have various effects on a GmbH and its owners. Understanding these effects can help to make informed decisions about increasing the share capital and the best way to approach it:

1. Dilution of ownership

Dilution of ownership is typically less of a factor when it comes to increasing the share capital of a GmbH. By default, the ordinary capital increase comes with subscription rights which are only restricted in special circumstances. This gives existing owners the opportunity to maintain their ownership share if they so choose. Due to the more closed, personal nature of a GmbH, rapid changes in ownership structure and controlling power is limited.

2. Increased liquidity

An increase in share capital generally results in an inflow of capital in the form of cash or other liquid assets. With this increase in liquidity, the company has more flexibility to pursue growth and investment activities.

3. Reduced debt-to-equity ratio

An increase in share capital causes an increase in equity and/or reduction in debt, which has the effect of lowering the company’s debt-to-equity ratio. This is usually viewed favourably by potential investors and creditors as it is an indicator of lower financial risk. This can also make it easier to secure financing on more favourable terms.

4. Attractiveness to investors

Increased capital makes a GmbH more appealing to potential investors, as a higher share capital suggests a stronger financial position and commitment from shareholders to grow the company.

5. Asset protection

A larger share capital can provide an additional layer of protection for the company’s assets, which can prove invaluable in the event of financial difficulties.