Required reading

1. EU: Second Company Law Directive, arts. 25–29

2. D: AktG, §§ 182–220

3. UK: CA 2006, secs. 549–554, 560–573

4. US: DGCL, §§ 102(a)(4), 152–154, 156, 162–166

Choosing a capital structure and increasing the share capital

Introduction

We have seen that all of our jurisdictions require the creation of a share capital as a prerequisite to establishing a stock corporation. In Chapter 4, we briefly examined the constitution of such initial share capital in the context of the incorporation process, and, in Chapter 5, we discussed how members contribute assets to the company in exchange for their shares. Here we will examine a company's options when approaching an increase of the capital assets it uses to fund its activities, the factors it would consider when making a decision about the composition of its capital structure, and the rules governing capital increases in our three jurisdictions.

The determinants of capital structure

Sources of financing

Two basic sources of corporate finance present themselves to a company. First, it can retain earnings to increase capital surplus (internal financing) that can be used to fund operations. The decision to use internal financing is made in connection with a company's payout policy, as the distributable profits that the company does not pay out to shareholders as dividends or use to repurchase shares can be applied to the finance of ongoing operations. Absent sufficient expansion of profits, an increase in internal financing means a decrease in the amount of dividends distributed.