§ 55 Increase in share capital

1Section 55 limited liability company code (GmbHG) is the initial standard of the limited liability company code (GmbHG) for the procedure of increasing the share capital of the limited liability company; additional the sections 56-57 limited liability company code (GmbHG) apply. In addition to some provisions relating to the capital increase in general, there are special regulations on the various types of capital increase.

A. Economic importance & use cases

2Economic reasons for carrying out capital increases can be, in particular, the acceptance of new shareholders or the increase of the equity base in order to create financing scope for investments. In addition to the direct inflow of funds resulting from the capital increase itself, the capital increase also makes it easier for the company to take out loans, as its creditworthiness increases. Especially, if the company is in a crisis and cannot provide any other collateral and would therefore no longer be able to obtain loans from banks due to its underfunding, a capital increase can be elementary in order to secure the continued existence of the company itself.

The consequence of the capital increase is that the strict provisions of the limited liability company code (GmbHG) on capital maintenance also apply to the increased share capital. The violation of this rules can lead to the personal liability of the respective shareholders.

In the case of the limited liability company, various types of capital increase are conceivable, between which a choice can be made depending on the situation. Firstly, it is conceivable that the shareholders of the GmbH directly inject new capital in the form of cash capital or other assets (in the case of the so-called non-cash capital increase/contribution in kind). In addition, it is possible to increase the equity capital by converting the company's reserves. Since no further capital is injected in this case, the liquidity of the company does not improve in this case. The participation of the shareholders in the capital does not change in this case either, as it is a case of pure internal financing. In addition, various mixed forms are also conceivable.

B. Procedure of a capital increase

3A capital increase first requires an effective shareholders' resolution in which the specific capital increase is decided, i.e. in particular the amount by which the share capital is to be increased. If the above-mentioned option of increasing the capital in non-cash contribution is to be chosen, the resolution must still contain the information specified in section 56 limited liability company code (GmbHG). When adopting the resolution, the statutory requirements for the form (notarization) and the required majorities (3/4 majority of votes) must be complied with. In addition, further requirements in the articles of association of the company may apply.

The existing shareholders of the company are generally entitled to a subscription right in the event of the capital increase. This ensures that the shareholders have the opportunity to hold the same percentage share in the company before and after the capital increase.

Example:

If a shareholder holds approximately 50% of the company’s previous share capital of € 25,000, i.e. € 12,500, he has the right to increase his own shareholding by a further € 12,500 in the event of a capital increase to € 50,000, so that he again holds 50%.

If a shareholder does not have sufficient financial resources to increase his share further or waives his right to do so, the other shareholders may exercise this right proportionaly.

Example:

A, B and C each hold 1/3 of the previous share capital of the company, which amounts to € 30,000. It is resolved to increase the capital to € 60,000. Each shareholder thus has the right to increase his shareholding by a further € 10,000. Since C is financially unable to do so or voluntarily waives his right, A and B can each increase their shareholding by an additional € 5,000.

In the event of a capital increase by conversion of reserves, the shareholders do not have to make an additional financial commitment in order to retain their previous relative shareholding in the company. There is no risk here that shareholders will not have sufficient funds to increase their shares further, which is why the previous shareholding is regularly retained (see above).

However, the subscription rights of existing shareholders may also be excluded. This may be necessary if additional shareholders are to be taken on as investors. In this case, the relative amount of shares of the existing shareholders in the company must be reduced. However, the exclusion must meet certain legal requirements. In particular, there must be an objective reason for the exclusion of the subscription right. Also, the purpose of the capital increase must be in the interests of the company itself and not merely in the interests of a single individual shareholders. These reasons may include the aim of taking on additional shareholders - for example, in order to bind particularly important employees more strongly to the company and to give them a share in its success. In the case of venture capital investments in young companies, usually their urgent need for financing cannot otherwise be covered. It is also conceivable that the capital increase and the associated exclusion of subscription rights are intended to enable the company to establish strategic alliances.

Furthermore, there must be no other means of achieving the desired objective that interferes less intensively with the interests of the excluded shareholders. In addition, the disadvantages for the shareholders concerned resulting from the exclusion must be weighted and balanced against the advantages for the company resulting from it.

If such an exclusion of subscription rights has been resolved and the existing shareholders are to participate after the capital increase in a way that deviates from their previous percentage shares, or if in the future additional investors other than the existing shareholders are to participate in the company, the existing shareholders must pass an additional shareholders' resolution. This resolution regulates the ratio in which the persons are to be entitled to subscribe. In practice, both resolutions can also be adopted jointly.

In order to take over the shares, the company and the respective transferees must now conclude a contract in which the obligation of the transferee to pay its contribution is regulated. This agreement is called takeover agreement. Subsequently, the transferee is obliged to pay the share of the contribution attributable to him. Under no circumstances should the payment be made to a debit account of the Company without first obtaining legal advice. 

C. Problematic cases

4Particular problems may arise if, following the conclusion of this takeover agreement, there are disputes between the parties involved, e.g. in cases where the capital increase is to serve the purpose of admitting new shareholders and the latter come into dispute with the existing shareholders. The transferee does not become a shareholder as long as the capital increase has not been fully executed, i.e. its registration with the Commercial Registry has not taken place. However, if disputes arise, the registration will often not take place. The takeover agreement also does not give the transferee any enforceable claim to be admitted as a shareholder. He cannot therefore sue his way into his position as a shareholder. On the other hand, the obligation to make the contribution remains in principle. This is sometimes very disadvantageous for the transferee concerned. Therefore, after a certain period of delay, he is granted the right to unilaterally withdraw from his obligation to make the contribution under the takeover agreement. If the company can be accused of fault, it is also possible under certain circumstances that it may be obliged to pay damages to the transferee. However, this must not result in the transferee being placed in the  same economic position as if he had actually become a shareholder. He will only be compensated for the financial losses he has suffered because he trusted in the execution of the transaction and which he would not have incurred if the takeover agreement had not been concluded from the outset.

It may therefore be advisable to regulate further modalities of the takeover of the shares in the final takeover agreement beyond the above-mentioned minimum content.  These include,  for example, the questions of which obligations are to apply to the company in detail and what consequences are to occur in the event of delay or thwarting of the registration of the capital increase. In the absence of such clear contractual rules, only the above-mentioned statutory institutes take effect, which may not always lead to a satisfactory result.

D. Effectiveness of the capital increase

5The respective increase in the share capital is to be registered with the commercial register by all managing directors pursuant to Secs. 57 para. 1, sec. 78 limited liability company code (GmbHG). After examination by the respective registry court in accordance with sec. 57a GmbHG in conjunction with sec. 9c limited liability company code (GmbHG), the capital increase is entered in the commercial register and published. Only then does the capital increase become effective. If the capital increase is entered and published in the registry, even if certain formalities are not complied with in the takeover declaration in the previous procedure, these errors are frequently cured and are therefore irrelevant. Regularly, the relevant defects can then no longer be challenged in court.

E. Squeeze Out

6A squeeze-out is the targeted exclusion of shareholders by resolution of the remaining shareholders. However, this term, which originates from stock corporation law, is to be defined differently under the limited liability company code (GmbHG). Under the stock corporation act (AktG), the squeeze-out of shareholders is possible in accordance with §§ 327a ff. stock corporation act (AktG) if a majority shareholder who holds 95% of the shares of the company resolves to squeeze out the remaining shareholders. Under the limited liability company code (GmbHG) the exclusion of other shareholders is not possible if a participation threshold has been reached. Whereas the stock corporation is generally understood as a capital pool, the bond between the shareholders in the limited liability company is much tighter. The shareholders of a limited liability company have a mutual duty of loyalty to each other. Within the framework of the relationship of proximity that gives rise to this duty of loyalty, the shareholders are obliged to take into account the interests of the other shareholders.

7Nevertheless, under the limited liability company code (GmbHG) the exclusion of shareholders is possible. For example, it is possible to exclude a shareholder from the company under certain conditions by means the statues of the company. The limited liability company code (GmbHG) itself contains only incomplete provisions on the (involuntary) exclusion of a shareholder.

8In practice, shareholder will regularly agree in the articles of association under which conditions shareholder can be excluded. For this purpose, it is agreed that the exclusion of a shareholder can only take place for good cause. Typical reasons are, for example, foreclosure on shares in the company, particularly serious breach of duty, criminal acts or, for example, serious infringements of a prohibition on competition. The decisive factor in each case is that the exclusion of the shareholder is the last resort.

9Another option to exclude disagreeable shareholders from a limited liability company is the targeted dilution of the company shares. Through capital increases to which the disagreeable shareholder does not subscribe, his relative share in the company's capital stock is in fact reduced and the shareholder's influence thus regularly shrinks. In individual cases, it is also conceivable that the capital stock could be increased with the exclusion of the subscription rights of the disliked shareholder.