Capital dilution

Under equity dilution (including dilution effect ) is the impairment of shares , options or convertible bonds to shares by issuing new shares in a capital increase without subscription rights understood. Dilution effects also result from the issue of convertible bonds and subscription options.

Capital increase

backgrounds

Public companies can increase their share capital through contributions in kind or cash . According to stock corporation law, this is done by issuing new shares . The new shareholders will become shareholders in the company . The dilution effect then arises from the lowering of the share price by means of a capital increase, which results from the fact that the company receives less assets per new share than the previous company assets per share in the judgment of the market. The issue of subscription rights enables existing shareholders to participate in a capital increase and thus to keep their proportionate share in the company. The dilution does not mean any disadvantage for the existing shareholders. If the subscription right is excluded, for example in the case of capital increases against contribution in kind or to service employee options, a dilution means a financial disadvantage for existing shareholders.

Compensation through subscription rights

In order to counteract the dilution effect, stock corporation law provides that existing shareholders have a subscription right in the case of capital increases in accordance with Section 186 (1 ) AktG applies. The effect of this subscription right is the so-called compensation effect. The price reduction due to the dilution effect can be compensated for by the value of the subscription right, so that there is no overall reduction in assets for the existing shareholders.

Exclusion of subscription rights

The stock corporation can, however, regularly have an interest in not only giving shares to the existing shareholders. Especially when attracting new investors or placing them on other markets, subscription rights are excluded in accordance with Section 186 (3) AktG into consideration. Since the judgment of the BGH in the matter of Kali & Salz (BGHZ 71, 40), it has demanded a factual reason for the exclusion and checks the exclusion for its proportionality. For small stock corporations, a regulation has been introduced in Section 186 (3) AktG, according to which the exclusion of subscription rights (without an objective reason) is permissible if the capital increase does not exceed 10% of the share capital and the issue price is not significantly below the market price. The dilution effect is only minor here and the existing shareholder can maintain his stake in the market by purchasing. However, repeated exercise within short periods of time is problematic if the exclusion of subscription rights is misused to bring shareholders below important participation quotas (25% for the blocking minority or 5% for a squeeze-out ) as planned. Section 203 (1) sentence 1, Section 186 (3) and (4) AktG provide the option of excluding subscription rights even with authorized capital.

Calculation example for the dilution effect ("mixed rate")

A listed company plans a capital increase at an issue price of 24 euros / share and a subscription ratio of 5: 1. The stock market price is 36 euros / share. The new market price corresponds to the weighted average of the previous market price (36) and issue price (24), weighted in a ratio of 5: 1:

${\ displaystyle {\ frac {5 \ times 36 + 1 \ times 24} {5 + 1}} = 34}$

The dilution effect is therefore 36 - 34 = 2 euros / share. (The new "mixed price" is 34 euros / share.)

Dilution by issuing other capital stocks

The issuance of convertible bonds and (subscription) options represents a conditional capital increase in which there is often no subscription right for existing shareholders, particularly in the case of option programs to remunerate management. When reporting the earnings per share key figure , in order to assess the profitability both in accordance with IAS / IFRS and US GAAP in the annual financial statements for existing exercisable stock options (for new shares) or convertible bonds, the diluted earnings per share, taking into account the possible capital increases when options are exercised to be shown.

Individual evidence

↑ BGH, March 13, 1978 - II ZR 142/76 - contesting a resolution to increase capital; Permissibility of a capital increase through contributions in kind; Burden of proof of a shareholder contesting the capital increase resolution; Deduction of income taxes on the hidden reserves revealed during the valuation; Exclusion of subscription rights in the event of a capital increase; Requirements for the justification of the exclusion of subscription rights; Refrain from consulting an expert at the court's dutiful discretion. In: www.jurion.de. Retrieved July 24, 2016 .

[1] BGH, March 13, 1978 - II ZR 142/76 - contesting a resolution to increase capital; Permissibility of a capital increase through contributions in kind; Burden of proof of a shareholder contesting the capital increase resolution; Deduction of income taxes on the hidden reserves revealed during the valuation; Exclusion of subscription rights in the event of a capital increase; Requirements for the justification of the exclusion of subscription rights; Refrain from consulting an expert at the court's dutiful discretion. In: www.jurion.de. Retrieved July 24, 2016 .