As a shareholder in a private limited company, it may be necessary to raise capital for the company for a number of different reasons. For example, it may be that the company needs capital to expand or invest in a new project. Perhaps the company has been affected by the disturbances of recent years, such as Covid-19, the war in Ukraine and higher interest rates and therefore needs an injection of capital to enable the business to progress according to plan or to avoid ending up in insolvency. There are several ways for a shareholder to raise capital for its company. This article describes two ways, a share issue and a shareholders’ contribution.
SHARE ISSUE
A share issue can be carried out if the company needs to raise new capital (for example, to make an investment). A share issue can also be used to change the existing ownership structure or to bring new shareholders into the company. Share issues may also be used if the company intends to introduce an incentive scheme for employees or senior executives.
The term issue is used as a collective term for all types of issues, such as new share issues, issues of warrants and issues of convertible instruments.
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New share issue
A new share issue means that the company issues newly-issued shares to existing or new shareholders in return for payment. The issue price is often set at a value that exceeds the quota value of the previous shares (for example, the estimated market value). That means an increase in both share capital and non-restricted equity in the company. The company thus receives more money that it can use.
Example of how a new share issue affects the capital of a company:
Assume that a company has SEK 100,000 in share capital divided into 1,000 shares, which means that the quota value of each share is SEK 100. The company is now facing the need to raise capital amounting to approximately SEK 1,000,000 in order to finance an important investment. Taking into account the fact that the company’s current market value is SEK 5,000,000, it has been resolved that the issue price for new shares will be SEK 5,000 per share. To enable capital of SEK 1,000,000 to be put into the company, the company needs to issue 200 new shares.
Because the issue price exceeds the quota value, both share capital and non-restricted equity will increase.
The company’s share capital increases by (200 (number of shares) x SEK 100 (the quota value) =) SEK 20,000.
The company’s non-restricted equity increases by (200 (number of shares) x SEK 4,900 (the share premium) =) SEK 980,000. The share premium must be transferred to the company’s restricted share premium reserve or to the non-restricted share premium reserve. The share premium can also be divided between the two funds.
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Issue of warrants
Issue of warrants means that the company resolves to issue warrants to existing shareholders and/or new investors. Through the resolution, a person entitled to subscribe is given the opportunity to subscribe for warrants within a set subscription period. When the subscription period has ended, the board of directors decides how many warrants will be allocated to each of the persons entitled to subscribe. The reason for deciding to issue warrants instead of issuing shares directly may be to provide an incentive to the company's employees or other stakeholders, for example, to invest in the company while the stakeholders are given the opportunity to become shareholders in the company at a later date.
The warrants entitle the holder to subscribe for shares in the company at a predetermined issue price at a later date, which is often a few years in the future. The period of time in which the warrant holder is able to exercise the warrants for subscription of shares is known as the “subscription period”.
Warrants can be issued free of charge or in return for payment. When a warrant is issued in return for payment, the payment is usually added to the company’s non-restricted equity. In addition to any cost for the warrants, a person entitled to subscribe also needs to pay for the shares it chooses to subscribe for at the time when the warrants are exercised. The issue price for the shares may not be lower than the quota value of the shares.
The issue of the warrants itself does not change the company’s share capital. It is only when the holder of the warrant exercises its warrant that the company’s share capital increases. As in the case of a new share issue, the share premium must be transferred to the company’s restricted share premium reserve or to the non-restricted share premium reserve or else divided between the two funds.
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Issue of convertible instruments
Issue of convertible instruments means that the company issues convertible instruments in return for granting a loan to the company. The loan can then, at the company’s or the holder’s request, be “offset” against new shares in the company instead of the loan being repaid.
In simple terms, a convertible instrument is therefore a promissory note that has been issued by a limited company in return for payment which gives the holder a right or an obligation to exchange its claim in whole or in part for shares in the company at a predetermined issue price. Issuing convertible instruments is one way for the company to raise capital through borrowed money. It is common for the interest rate for the loan to be set slightly lower than the market interest rate because the conversion option gives the holder an advantage if the company’s value rises. A convertible instrument may be subject to a conversion obligation, in which case there is always an obligation for the holder to exchange its claim against the company for shares. If the convertible instrument is not subject to a conversion obligation, the holder is always able to get the money it lent the company back when the debt has fallen due for payment, unless it has previously chosen to offset its claim against new shares in the company.
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Who decides on the issue?
As a starting point, a resolution approving an issue is adopted by the general meeting. The general meeting may also authorise the board of directors of the company to adopt a resolution approving an issue. The board of directors may adopt a resolution approving an issue despite the absence of authorisation, provided that the general meeting approves the board of directors’ decision retrospectively. If the subsequent general meeting does not approve the resolution by the board of directors, the company must repay any issue amount paid in.
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Preferential rights issue or private placement?
As a general rule, the company’s existing shareholders have a preferential right to the new shares/warrants/convertible instruments in proportion to the number of shares they own. An issue according to the main rule is known as “a preferential rights issue”.
However, the shareholders’ preferential right does not apply if the issue amount must be paid with property other than cash (known as a “non-cash consideration”). The preferential right also does not apply if the preferential right is governed in the resolution approving the issue, in the company’s articles of association or by terms and conditions announced in connection with a previous issue of warrants or convertible instruments. Shares held by the company itself or its subsidiaries do not confer any preferential rights.
However, the resolution approving the issue may state that the issue must take place with deviation from the shareholders’ preferential right, which is known as a “private placement”. A private placement means that the new shares/warrants/convertible instruments are instead offered to certain specified persons or companies outside the existing circle of shareholders and/or certain existing shareholders. Typically, companies use private placement when the company wishes to acquire new, strategically important shareholders in the company in the event of uncertainty as to whether the existing shareholders are willing to invest the necessary capital or in the case of an incentive scheme.
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Other things to bear in mind regarding issues
The following matters must always be taken into consideration in connection with issues:
- It is important to check that the shares that are newly issued or that may be due to a person through the exercise of a warrant or conversion fall within the specified limits for share capital and number of shares in the articles of association. If the issue means that the limits will be exceeded, the company must increase the limits by adopting new articles of association. The resolution to adopt new articles of association and the resolution approving the issue itself may be adopted at the same general meeting, provided that the resolution to adopt new articles of association is adopted before the resolution approving the issue.
- A bank certificate must be issued confirming that the money is in the issue account before the company can use the capital provided.
- If the general meeting or the board of directors adopts a resolution approving the issue after authorisation from the general meeting, the issue must be entered for registration within six months of the resolution.
- An issue resolved by the board of directors with subsequent approval by the general meeting must be entered for registration within one year of the resolution by the board of directors.
- When issuing warrants or convertible instruments, the company’s board of directors also needs to notify the Swedish Companies Registration Office when the holder of the warrant has exercised its warrant or when conversion has taken place. That notice must be given no later than three months after the expiry of the period for subscription of shares or conversion. If the subscription period or conversion period exceeds one year, the notice of the number of shares subscribed for or converted must be given no later than three months after the end of each financial year.
- In view of the fact that a new law on foreign direct investments entered into force on 1 December 2023, it may be necessary in the case of a private placement of shares in a company that carries on activities worthy of protection for the investor to give notice of the investment to the Swedish Agency for Non-Proliferation and Export Controls before the investment is made. You can read more about the new law and the types of activities that are considered worthy of protection here.
One particular issue to take into consideration is the fact that an issue may mean a change in the ownership structure of the company and what is referred to as dilution of existing shareholders that do not participate in the issue.
SHAREHOLDERS’ CONTRIBUTION
A shareholders’ contribution is a contribution made by a shareholder to the company without any connection to subscription of shares. Typically, these contributions are made by shareholders who wish to strengthen the company’s financial position, for example to save the company from the obligation to enter into liquidation.
A shareholders’ contribution does not mean that any debt arises at the company. Instead, the funds contributed increase non-restricted equity at the company. When the company is provided with capital through a shareholders’ contribution, there is no increase in the company’s share capital.
A shareholders’ contribution is made by means of a contribution of funds by the shareholder to the company. The contribution is normally made in cash, but the shareholders’ contribution may also consist of a contribution to the company of an asset other than cash or remission by the shareholder of a claim that it has with the company. A shareholders’ contribution may be unconditional or conditional.
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Unconditional shareholders’ contribution
An unconditional shareholders’ contribution is not associated with any right to repayment for the person that made the contribution and can be likened most closely to a pure capital contribution from the shareholder. Since an unconditional shareholders’ contribution is not repaid to the shareholder, the acquisition value of the shareholder’s shares is instead increased by the corresponding amount, which is significant in terms of tax in the case of a future capital gains calculation.
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Conditional shareholders’ contribution
A conditional shareholders’ contribution is associated with a right of repayment for the person who made the contribution. The right of repayment usually arises when the company has sufficient non-restricted equity to make the repayment.
The repayment is regarded as a dividend under company law, which means that the repayment can only take place when annual financial statements with distributable earnings have been drawn up and adopted. A person who has made a conditional shareholders’ contribution may not increase the acquisition value of the shares by the corresponding amount, which will be significant in terms of tax in the case of a future capital gains calculation.
The claim for repayment is not filed against the company but against the company’s shareholders. If the shareholders’ contribution is conditional, the shareholders have usually agreed that the shareholders will be required to vote at the general meeting in favour of repayment of the shareholders’ contribution before any dividend is paid out to the shareholders. If the claim is instead filed against the company, the contributed funds are regarded as a liability for the company and not as a shareholders’ contribution, which means that the company’s equity is not affected by the funds contributed to the company.
Finally, it should be stated that the above is only an overall summary of certain issues relating to raising capital. This article does not therefore constitute legal advice in an individual case.
About the author of the article
Jannica Stefansson is a member of the Lindahl Corporate M&A team. Questions about raising capital? Contact Jannica. At Lindahl, we have extensive experience of raising capital.
