2.3  The Capital of the AG	55

ownership, as well as their right to earnings from the company. In contrast, admitting new shareholders (by selling shares of the existing shareholders’ equity in the company or by creating new shares by way of a capital increase) as a typical form of equity financing will generally dilute the influence of the existing stockholders in the stockholders’meeting and will also dilute their right to the net profits.

On the other hand, a disadvantage of debt financing is that it typically requires payments to the lender in regular intervals, these payments being completely independent of the project’s degree of success. Such payments will have an adverse effect on the company’s working capital, i.e. its net assets, and may restrict the financial freedom of the company to a considerable extent.82 Extensive repayment obligations of the company may lead to liquidity squeezes and finally to cash-flow insolvency (Zahlungsunfähigkeit, see Sec. 17 Insolvency Code, InsO). Lenders and investors might consider a large amount of debt financing to be a risk factor, which would make further fundraising more difficult. Compared to these disadvantages of debt financing, equity financing is less risky, because equity constitutes an obligation to pay dividends to the stockholders only to the extent that the company returns a net profit. Thus, equity investors typically have a strong interest in the success of the company, i.e. its growth, its profitability and an increase of its value. Finally, a sufficient amount of equity capital is essential for raising further debt equity.

2.3.2  Share Capital of the Stock Corporation

The registered share capital of a stock corporation is divided into stocks (Aktien).83 Stocks can be subscribed either by the founders at the time of formation or subsequently by the stockholders in the case of a capital increase. Furthermore, stocks can be acquired via transfer or transmission from existing shareholders, typically on an organized secondary market, i.e. a stock exchange.

2.3.2.1  Types of Stock

Under the German Stock Corporation Act, there are various classes and forms of stock.

Distinction as to Denomination

As to their denomination, stocks may be issued as either par value shares or non-par value shares.84 The company may choose freely between the two classes, but may not simultaneously adopt both types of denomination.

82 Additional disadvantages may arise from requirements to pledge assets of the company to the lender or to provide personal guarantees of the owners of the company for repayment. Furthermore, debt instruments often contain restrictions on the company’s activities, preventing the entrepreneurs from pursuing non-core business activities or alternative financial options.

83  See Sec. 1 para. 2AktG. 84  See Sec. 8 para. 1AktG.

56	2  Stock Corporation (AG)

•Par value stocks (Nennbetragsaktien) have an individual nominal value (par value) denominated in EUR, which is printed on the share and stated in the articles. The minimum par value is EUR 1.00.85 The fraction of the share capital attributable to a par value share is determined by the ratio of its nominal value to the registered share capital.86

•Non-par value stocks (Stückaktien) have no specific individual nominal value. All non-par value shares participate equally in the registered share capital.87

Therefore, the exact amount attributable to each share is determined by the total number of stocks outstanding in relation to the share capital88, which is stated in the articles of association and must have a total nominal amount denominated in EUR.89

Issuing shares without a par value should not be confused with issuing shares at a price below their value (so-called Unter-Pari-Emission). According to Sec. 9 para. 1 AktG an AG is not allowed to issue shares under conditions in which the contribution of the subscriber made for the subscribed share is less than the EUR amount attributable to each subscribed share, i.e. their par value or the amount of share capital attributable to the individual no-par value share.

In contrast, issuing shares for a price exceeding their value is permissible and quite common in practice. In these cases, the resulting premium (Agio) between the contribution of the subscriber and the value of the shares has to be allocated to the capital reserves.

Distinction as to Membership Rights (Classes of Stocks)

With regard to the membership rights conferred to the stockholder, one can distinguish between three different classes of stocks (Aktiengattungen): ordinary stocks, preferred stocks and stocks with limited voting rights.

Ordinary Stocks

Ordinary Stocks (Stammaktien) confer the full set of membership rights and obligations available under the AktG to the stockholder, including the right to participate in (Teilnahmerecht), as well as to vote in (Stimmrecht) the stockholders’ meeting, the right to receive the distributable profits (Gewinnbeteiligungsrecht) and the right to subscribe for new stocks in case of a capital increase (Bezugsrecht).

Preferred Stocks

Preferred stocks (stimmrechtslose Vorzugsaktien) confer no general voting rights to the stockholder but, in return, have priority over common stock in the payment of dividends.90 Dividend payments on ordinary stocks may only be made after a

85  See Sec. 8 para. 2 sentence 1AktG. 86  See Sec. 8 para. 4AktG.

87  See Sec. 8 para. 3 sentence 2AktG. 88  See Sec. 8 para. 4AktG.

89  See Sec. 6AktG.

90  See Sec. 139 para. 1AktG.

2.3  The Capital of the AG	57

preference dividend (Vorzugsdividende) has been paid on all preferred stocks outstanding. Preferred stocks may amount to 50% of the registered stock capital.91 As a general rule, preferred stocks do not include voting rights in the stockholders’ meeting. However, with regard to specific subject matters, in particular, their approval is mandatorily required for any changes of the articles of association which could adversely affect the privileged status of the preferred stockholders (Vorzugs aktionäre).92

Stocks with Limited Voting Rights

Stocks with limited voting rights (Aktien mit beschränktem Stimmrecht) serve as a tool for dealing with majority power. The articles of association may stipulate a restrictionofthevotingrightsregardlessofthenumberofstocksownedbytherespective stockholder. However, the practical significance of such a restriction is limited: firstly, the limitations described above are only admissible for unlisted stock corporations.93 Secondly, limitations of voting rights apply only to such resolutions of the stockholders’meeting, which require a simple majority (50% of the votes cast) and, consequently, do not prevent the exercise of majority power regarding the more fundamental resolutions (including a change of the articles of association, e.g. the abolishment of the voting rights limitation itself, which requires a higher majority).

Distinction as to the Form of the Stocks

A third distinction can be made as to the form of the stocks issued by the AG (Aktienart). According to the AktG, the founders may choose to issue either bearer stocks (Inhaberaktien) or registered stocks (Namensaktien).94 According to a recent survey approximately 40% (approx. 5,700) of all stock corporations registered in Germany (16,932) have issued registered stocks.95

Bearer Stocks

Bearer Stocks are anonymous securities, which indicate that whoever holds the physical stock certificate is entitled to the underlying stocks. The issuing AG neither registers the owner of the stock nor does it track subsequent transfers of ownership on a secondary market. Dividends are paid upon presentation of a coupon to the firm. In general, a transfer of ownership requires the physical delivery of the stocks.96 As a practical matter, however, since most stocks are kept in collective security custody (Sammelverwahrung), such physical delivery will typically be replaced by a transfer of accounts.

Since bearer stocks are not registered, they are ideally suited for investors who wish to keep their anonymity. On the other hand, bearer stocks may bear the risk of

91  See Sec. 139 para. 2AktG. 92  See Sec. 141AktG.

93  See Sec. 134 para. 1AktG. 94  See Sec. 10 para. 1AktG.

95  Bayer and Hoffmann 2011, p. 6. 96  See Sec. 929 sentence 1 BGB.