Authorised capital (Genehmigtes Kapital)
October 18, 2022
Basic idea: Authorised capital
The instrument of authorised capital, which has also been available in the GmbH (Gesellschaft mit beschränkter Haftung = Limited Liability’s Company) since 2008, is intended to facilitate the supply of share capital. The shareholders' meeting grants the management in the articles of association the right to issue a certain number of shares, but no more than half of the existing share capital, without further shareholder resolution. This provision can be used, for example, to convert debt capital, such as convertible bonds, into company shares more quickly when certain milestones are reached.
According to section 55a Limited Liability Act (GmbHG), the articles of association can stipulate that the managing director(s) are authorised for a maximum of five years after registration of the company or registration of the amendment to the articles of association to increase the share capital up to a certain nominal amount (authorised capital) by issuing new shares in return for contributions. The authorised capital may not exceed half of the share capital available in the company at the time of authorisation. Authorised capital may only be issued against contributions in kind if this is provided for in the authorisation.
Further design by the general meeting
The shareholders' meeting can issue further instructions to restrict the management in the possibility of issuing new shares, since the management should not normally be given carte blanche to issue new shares.
The provision of section 55a GmbHG is not exhaustive in this respect. It may, for example, concern the question in which cases authorised shares may be issued.
Authorised capital in the start-up sector
Authorised capital can typically be used for start-up financing in two cases:
Milestone based financing
If part of the investor payments into the capital reserve are only due when certain milestones are reached, the risk of not reaching the milestones can be cushioned by a construction via authorised capital. The capital participation will then only be made upon achievement of the milestone and payment by the investor into the capital reserve. If the milestone is not reached, there will be no capital increase.
For the existing shareholders, this has the advantage that the investor only receives the shares that he has paid for. For the investor, on the other hand, the risk is slightly increased, because otherwise he/she could obtain more favourable shares if the milestones are not reached.
Evaluation of service packages
Some investors offer a package of services to facilitate the company's growth, in addition to an equity investment. These packages are often valued relatively highly. In order to ensure that the services are provided, it makes sense to "pay" for them by issuing shares only after the services have actually been provided.