60	2  Stock Corporation (AG)

such approval is actually required: the management board may be authorized for a period of time not exceeding five years to carry out a future capital increase at a time of its own choosing, and without the need for further involvement of the stockholders’meeting.101 In order to protect minority stockholders the authorizing resolution requires a 75% majority and is limited to a maximum amount of 50% of the existing share capital. Furthermore, the issue of stocks from authorized capital requires the consent of the supervisory board.

Within the framework of the stockholders’ resolution authorizing the capital increase, the management board may, at its own discretion, decide the time, the conditions and the scope of issuing the new shares. The subscription rights of existing stockholders must be recognized (except in cases in which the authorizing stockholders’resolution has restricted such subscription rights or has delegated the power to restrict such rights to the management board).

2.3.3.4  Capital Increase from Retained Earnings

Finally, the AG may increase its stock capital by converting open reserves that are created by retained profits into capital stock.102 In contrast to a capital increase against contributions, the AG does not acquire additional funds from outside resources. Existing stockholders receive so-called bonus stocks in relation to their participation.

2.3.4  Capital Reductions

Capital reductions usually serve one of two purposes. First, a capital reduction (Kapitalherabsetzung) may be undertaken in order to repay a part of the registered share capital. Second, and far more important in practice, capital reductions are used to compensate for losses, i.e. in order to avoid a negative position in the balance-sheet: by reducing the capital figures to the lower equity, financial soundness can be restored.

Capital reductions are indicated as a separate item in the profit-and-loss statement and may be conducted in one of three different forms: so-called ordinary capital reduction (ordentliche Kapitalherabsetzung), simplified capital reduction (vereinfachte Kapitalherabsetzung) and capital reduction by redemption of shares (Kapitalherabsetzung durch Einziehung von Aktien).

2.3.4.1  Ordinary Capital Reduction

An ordinary capital reduction requires a resolution of a 75% majority of the capital represented at the stockholders’meeting.103 The articles may provide for stricter, but not for laxer requirements. The resolution must stipulate the purpose of the reduc-

101  See Secs. 202 et seq. AktG. 102  See Secs. 207 et seq. AktG. 103  See Secs. 222 et seq. AktG.