A Guide for Growing Companies
In the lifecycle of a business, there comes a time when financial needs exceed current capacities. Whether it’s to fund new projects, support growth, or strengthen the financial structure, a capital increase is often a key option. However, this process requires careful planning and an understanding of its legal and strategic implications.
Below, we explain the fundamental aspects to determine when, how, and why a capital increase should be carried out.
What is a Capital Increase?
A capital increase is a process by which a company raises its equity. This can be done through the issuance of new shares, the contribution of assets or rights, or the conversion of existing loans. This increase enables the company to secure new financial resources or reinforce its solvency.
When Should a Capital Increase Be Considered?
There are several situations in which a capital increase may be the appropriate solution:
Business Expansion: When the company needs additional funds to finance new projects, open new business lines, or expand into new markets.
Financial Restructuring: To reduce debt and improve the financial structure.
Taking Advantage of Investment Opportunities: When opportunities arise that require significant initial investment.
Attracting New Investors: Bringing in new partners who contribute capital and strategic value.
Compliance with Legal or Regulatory Requirements: In regulated industries, a capital increase may be necessary to meet specific financial criteria.
How to Carry Out a Capital Increase
The process must comply with the applicable corporate law requirements. Although specific details may vary depending on the company type, the general steps are as follows:
Calling a Shareholders' or Partners' Meeting: The capital increase must be approved during this meeting, including the amount, terms, and method.
Amending the Company’s Bylaws: The increased capital must be reflected in the company’s statutes.
Registration in the Commercial Register: The capital increase must be officially recorded.
Methods of Execution:
Issuance of new shares or ownership interests.
Contributions in cash or in kind.
Conversion of existing loans.
Advantages and Disadvantages of a Capital Increase
Advantages:
Strengthened Financial Position: Increases equity and reduces reliance on debt.
New Investor Acquisition: Can bring in not only capital but also expertise and strategic contacts.
Growth Promotion: Enables financing of ambitious projects without relying solely on loans.
Disadvantages:
Dilution of Ownership: Existing shareholders may see their stake reduced if they do not exercise their preemptive rights.
Administrative Burden: The process takes time and requires strict legal compliance.
Potential Loss of Control: New shareholders may influence decision-making processes.
Key Considerations
Before proceeding with a capital increase, it is essential to:
Define the Purpose: Clearly establish how the new capital will be used.
Conduct a Proper Company Valuation: To determine the price of new shares or ownership interests.
Communicate Transparently: Clearly inform shareholders and potential investors about the reasons and terms of the capital increase.
A capital increase is a powerful tool for companies looking to grow or strengthen their financial position. However, it should be approached thoughtfully to ensure regulatory compliance and carefully weigh both opportunities and risks.
At Dr. Frühbeck Abogados, we have an experienced team in commercial law that advises companies throughout all phases of this process. From strategic planning to legal execution, we are here to help you make informed and secure decisions.