Capital Increase and New Contributions: Procedure and Costs

Why a capital increase

A capital increase brings fresh resources into the company. It usually meets one of these needs:

• Funding an investment or a hire.
• Strengthening equity before applying for a loan.
• Bringing in a new shareholder or investor.
• Turning a debt owed to a shareholder into equity.

Every capital increase also shifts the balance between shareholders. So prepare the operation on the human side as much as on the financial side.

SRL or SA: a difference in wording

The SA keeps share capital, with a minimum of 61,500 euros. There, the operation works as an amendment of the articles. The SRL, by contrast, has had no capital since the Code of Companies and Associations (CCA).

In an SRL, people therefore speak of an additional contribution and an issue of new shares. Still, founders keep using the term capital increase most often. Our guide to choosing a legal form sets out both approaches.

Types of contribution

Cash contributions

Shareholders pay in money. In an SA, the funds pass through a special blocked account before the deed, and each new share must be paid up by at least a quarter. This kind of capital increase strengthens cash straight away.

In-kind contributions

A shareholder contributes an asset: equipment, property, a business or a receivable. In principle, a company auditor checks the valuation in a report, alongside a report from the board. This route therefore costs more in fees.

Converting a loan

A shareholder who lent money to the company can contribute that receivable. The debt disappears and equity rises. Legally, the operation follows the rules for in-kind contributions.

The capital increase procedure

In an SRL, ask your notary to confirm the exact formalities of the share issue. For majorities and notice, read our guide to amending articles of association.

Pre-emption rights

Existing shareholders normally enjoy a pre-emption right on new shares issued for cash. They subscribe first, in proportion to their holding. As a result, a capital increase does not dilute them against their will.

The general meeting can restrict or cancel that right, for example to welcome an investor. It then relies on special reports that justify the operation and its price.

Authorised capital in an SA

The articles of an SA can empower the board to decide on its own to raise funds by issuing shares. That authorisation lasts five years at most and can be renewed. It adds flexibility to a funding round in several tranches.

A dilution example

Take an SA with 1,000 shares split equally between Anne and Bruno. An investor subscribes for 500 new shares in a capital increase. After the operation, the company has 1,500 shares.

Anne and Bruno each hold 33.3% instead of 50%. The investor also holds 33.3%. No one controls the company alone, so a shareholders agreement becomes valuable.

What does a capital increase cost?

The budget depends mainly on the type of contribution. A capital increase in cash involves notary fees, a registration duty and publication. An in-kind contribution adds the company auditor's report. Ask for quotes before you set the timetable.

Before the operation, also model its effect on cash and the balance sheet with a financial forecast. A banker or investor will ask about it.

Common mistakes

• Forgetting the pre-emption right of existing shareholders.
• Underestimating how long the auditor's report takes for an in-kind contribution.
• Setting an issue price without figures to back it up.
• Failing to update the share register after the deed.

A poorly prepared capital increase causes friction between shareholders or delays. If the reverse operation interests you, read our article on the share buyback.