The Capital Increase Procedure in Companies

This is one of the most frequently asked questions in our law firm, both by clients who manage companies and by company administrators.

This question often seems to be of little importance; however, understanding business decisions and maneuvers to manage share capital correctly is essential for carrying out strategic operations and effectively managing a company’s capital.

In this article, we will discuss the different business needs that may lead to legal strategies for increasing share capital, while understanding the main features and steps to formalize such strategies. If you need to carry out the reverse operation, you can find all the information in the article on the procedure for reducing share capital.

What reasons might lead the partners and shareholders of the company to carry out a capital increase?

Among the main reasons, we find the need to finance business growth or expansion. By carrying out this operation, companies can significantly increase financial resources to boost and expand operations and launch new products or lines of business.

We also encounter clients who need to improve their company’s solvency, all with the aim of enhancing their financial and credit position to obtain new external capital. Essentially, this is to increase the company’s borrowing capacity, for example, to request business loans that would not be granted without the capital increase, due to an insufficiently strengthened balance sheet.

It is common for capital increases to occur in small companies or Startups that need to pave the way for the incorporation of new investors and shareholders.

Lastly, though less common, a capital increase may be carried out when the shareholders consider using it to pay off debts or finance very specific projects, without resorting to banks and, thus, avoiding increasing the company’s debt.

What is the legal process for increasing capital?

Generally, a General Meeting must be convened, meaning that the company’s management must formally call and communicate a General Meeting of shareholders to deliberate and vote on the capital increase. Among the legal requirements, it is necessary that this convening includes the topic of the capital increase in the agenda, explaining it in detail.

A detailed proposal for the amount of capital needed for the increase must be made, explaining and detailing the reasons the management considers necessary to carry out the increase and the details required. Among these details, the number of shares to be issued, their nominal value, and the conditions must be known, among other factors.

Subsequently, the General Meeting of shareholders must approve the capital increase according to the majority stated in the company's bylaws. Otherwise, a qualified majority will always be required.

Once the capital increase is approved, the shareholders at the time of the increase will have preemptive rights to subscribe to the new shares.

Finally, the agreement must be formalized through a notarial deed and must also be communicated to the Commercial Registry for registration. In this way, the approved capital increase becomes public and takes effect against third parties, as required by the registry’s publicity obligations.

It is vital to have a law firm specializing in corporate transactions

As we have mentioned, a capital increase is a strategic tool that can help companies manage their resources and structure efficiently.

To carry out these processes, careful legal planning in the company, strict regulatory compliance, and effective communication with shareholders are essential. At Forcam Lawyers, we are committed to providing the best advice and support to guide companies through these corporate transactions.