Authorized Capital Increase: What Rights Do Minority Shareholders Have?
With an authorized capital increase, the general meeting authorizes the board of directors to increase the capital up to a maximum amount within a maximum period of two years. The board of directors may implement such an increase at any time or carry it out in several tranches without the need for further GM resolutions. This contrasts with the less flexible ordinary capital increase, where the shareholders determine the timing and size of the capital increase.
Revised Corporate Law to offer more flexibility
The current provisions on authorized capital increases (Art. 651 et seq. Swiss Code of Obligations) are being repealed by the revised Corporate Law and replaced by the more flexible provisions on the capital band (Art. 653s et seq. revCO). Under the new rules, a general meeting may authorize the board of directors to increase or decrease the share capital within a defined range for a maximum period of five years. The capital band will give companies more flexibility to make changes to the capital and the board of directors will also have greater leeway. The amendment is expected to take effect in 2023.
Subscription rights of existing shareholders
When new shares are issued, all shareholders are entitled to retain their current shareholding quota.
This means that each shareholder has the right to subscribe to new shares in proportion to their existing shareholding. But if a capital increase is carried out in the context of a corporate takeover, a merger or on the basis of an employee share ownership program, for example, subscription rights may be restricted or cancelled. The law allows the subscription right to be revoked for other good cause, as long as no one is improperly advantaged or disadvantaged.
The resolution on the authorized capital increase and the cancellation of subscription rights must be approved by at least two thirds of the shareholders represented and an absolute majority of the share capital represented, unless the articles of association provide for higher quorums.
The decision to effectively restrict or cancel subscription rights may be delegated to the board of directors. But in such cases the general meeting must at least describe the most important instances of good cause that would justify restricting subscription rights.
Minority shareholders’ rights to challenge resolutions
Minority shareholders who have not approved a capital increase resolution of the general meeting may challenge it within two months if their subscription rights have been infringed as a result. Particularly serious infringements of the law will render a resolution void and invalid from the outset, and this can be determined by a court at any time, even beyond the time limit for raising a challenge.
Providing the board of directors with authorization which is excessive may render a GM resolution open to challenge. For example, it would not be acceptable if the board of directors were free to decide to restrict subscription rights without providing good cause.
But minority shareholders are not protected if they are unable to participate in capital increases simply because they do not have the necessary capital. With an authorized capital increase, the board of directors is regularly delegated the powers to set the issue price and the subscription right only grants the right to subscribe to the relevant shares at the intended price. But it is not permitted to set an excessively high price that is not justified and aimed solely at excluding existing shareholders. Nor is it allowed to improperly disadvantage existing shareholders by cancelling the subscription right and setting the issue price too low.