Capital increase

What is a capital increase?

A capital increase consists of the issuance of new shares by a company in order to finance new investments and acquisitions or to help rebalance its financial structure (in the case of highly indebted companies). Such an operation must first be validated by a vote of the company’s shareholders, since a capital issue can dilute the value of a shareholders’ equity or the net earnings per share. Existing shareholders can subscribe to some or all of the newly issued shares – or they can be taken up by new investors.

What are the different forms of capital increase?

A capital increase can take different forms:

Capital increase with preferential subscription rights 

A company’s existing shareholders can be entitled to a preferential subscription right, which allows them to maintain their participation rate in the capital. In the case of a publicly listed company, the preferential subscription right is detached from the share at the beginning of the operation and is listed separately during the subscription period. It can be sold by the existing shareholders who do not wish to participate in the operation. The purchasers of the preferential subscription rights exercise them and subscribe to the capital increase. 

Capital increase with the abolition of the preferential subscription right 

The general meeting of shareholders approving the capital increase may decide to abolish the preferential subscription right. Two options are then possible:

• in the case of a listed company, a subscription priority period shall be granted to existing shareholders. This time limit is limited in duration (3 trading days) and allows existing shareholders to subscribe new shares upstream of the other solicited investors;
• in the case of a listed or non-listed company, the capital increase is reserved to a named person. A new investor (or group of investors) subscribes all the new shares issued. This type of operation is common in the case of firms in difficulty or when restructuring the shareholding of a company.

Role of the bank

The bank plays a role of Advisor, of presenter of the operation to the market (in the case of listed companies) and, in certain cases, it acts as guarantor of the successful completion of the operation:

• As an Advisor, it helps the company to structure and calibrate the size of the capital increase, to define the price of the new shares to be issued and to prepare its communication on the operation. 
• As the presenter of the operation, it is in charge of drafting, with the company's legal advisors, the transaction note distributed at the time of the issue and of organizing, if necessary, the meetings with existing shareholders and potential new investors (roadshows). 
• As guarantor, it undertakes to subscribe for the new shares that would not have been subscribed by existing shareholders or new investors (a capital increase with preferential rights, for example, can only be carried out if it is subscribed for 75% of the amount issued).