Capital increase is a significant corporate action aimed at strengthening a company’s financial structure, funding growth, or improving liquidity. One common method for achieving this is the issuance of securities, which may include shares, bonds, convertible instruments, or other capital market products.

This article explains the legal framework, procedural requirements, and strategic considerations for conducting a capital increase through securities issuance, with references to corporate law, capital markets regulations, and best practices.

Legal Basis for Capital Increase Through Securities

The legal foundation for capital increases typically derives from a country’s commercial code and capital markets legislation. For example:

• Commercial Code Provisions – Regulating shareholder approval, amendment of articles of association, and pre-emptive rights.
• Capital Markets Law – Governing public offerings, private placements, disclosure obligations, and investor protection rules.
• Securities Regulations – Setting out registration, prospectus, and reporting requirements.

In many jurisdictions, public companies must also comply with the stock exchange’s listing rules, while private companies face fewer disclosure obligations but must still respect corporate governance principles.

Forms of Securities Used in Capital Increase

When increasing capital, a company may issue various instruments:

• Ordinary Shares – Grant voting rights and dividends.
• Preferred Shares – Offer priority in dividends and liquidation but may limit voting rights.
• Convertible Bonds – Debt instruments convertible into equity at a later date.
• Warrants & Options – Rights to acquire shares at a future date and predetermined price.

The choice depends on financing needs, shareholder structure, and investor demand.

Procedural Steps for Capital Increase by Securities Issuance

Step 1 – Board Resolution

The board of directors must adopt a formal resolution outlining:

• Type of securities to be issued.
• Amount of increase.
• Issue price and payment terms.
• Pre-emptive rights procedures.

Step 2 – Shareholders’ General Assembly Approval

In most jurisdictions, the general assembly’s approval is required, with a qualified majority vote. Exceptions exist where the board has authorized capital powers under the articles of association.

Step 3 – Regulatory Filings

Depending on the nature of the offering:

• Prospectus Preparation – For public offerings.
• Notification to Capital Markets Authority.
• Stock Exchange Application – For listed companies.

Step 4 – Subscription Process

Investors subscribe to the new securities, usually through:

• Rights Issues – Offering existing shareholders first option.
• Private Placements – Targeted to select investors.
• Public Offerings – Available to all investors.

Step 5 – Registration & Capital Injection

• Payment of capital into a blocked bank account.
• Registration of new capital with the commercial registry.
• Update of articles of association.

Pre-Emptive Rights and Their Waiver

Shareholders generally have pre-emptive rights to maintain their percentage ownership.

• Waiver or restriction of these rights must be explicitly stated and justified.
• In many jurisdictions, such waivers require strong business reasons and may be subject to judicial review.

Compliance and Disclosure Requirements

Capital increases through securities must meet:

• Fair valuation principles.
• Transparency obligations to protect minority shareholders.
• Anti-dilution protections in certain investment agreements.

For public companies, failure to comply with capital markets rules may result in:

• Regulatory fines.
• Suspension of trading.
• Civil liability for misrepresentation.

Strategic and Financial Considerations

Issuing securities as a capital increase impacts:

• Shareholder structure – Potential dilution of control.
• Market perception – Positive when seen as growth-oriented; negative if perceived as distress financing.
• Cost of capital – Dependent on interest rates, market conditions, and credit rating.

Common Pitfalls and Legal Risks

• Failure to properly notify existing shareholders.
• Non-compliance with capital markets authority requirements.
• Mispricing securities, leading to unfair dilution.
• Inadequate corporate governance documentation.

Capital increase via securities issuance is a powerful tool for corporate growth, but it requires meticulous legal compliance, strategic planning, and transparent communication with stakeholders. Whether the company opts for a public offering, private placement, or rights issue, adherence to commercial code provisions and capital markets regulations is critical to ensure validity and avoid disputes.