Capital increase with the elimination of preferential subscription rights: Legal and due diligence aspects

Section 292 of the CCC:

The increase in the share capital may be achieved by issuing new shares or by increasing the nominal value of existing shares.

The new shares may be paid up in cash, by offsetting certain debts due the amount of which is known by the company, by incorporation of reserves, profits, and issue premiums, by contribution shares, or by conversion of bonds.

I. Capital increase with the elimination of preferential subscription rights[1]

A. Provisions applicable to SAs

Section 296 of the CCC:

Shareholders have, in proportion to the amount of their shares, a right of preference to the subscription of cash shares issued to realize a capital increase. Any clause to the contrary shall be deemed null and void.

During the subscription period, the preferential subscription right is negotiable when it is detached from the shares themselves negotiable.

Otherwise, the preferential right is transferable under the same conditions provided for the action itself.

Shareholders may individually waive their preferential subscription right.

Article 300 of the CCC:

The extraordinary general meeting that decides or authorizes an increase in the share capital may waive the pre-emptive subscription right for the entire increase in capital or for one or more parts of this increase.

It shall approve, mandatory and under penalty of nullity of the increase, the report of the board of directors or the executive board and that of the statutory auditors concerning the increase in capital and the waiver of said pre-emptive right.

Author’s comments:

• The preferential subscription right (DPS) is a right allowing a shareholder to subscribe for new shares during a capital increase on a priority basis, so it is called «  an irreducible subscription right » ;

• Like the issue premium, the preferential subscription right is a means of safeguarding the rights of the company’s former shareholders;

• The abolition of preferential subscription rights is only valid for public limited companies;

• The deletion of DPS is only possible when the capital is increased in cash;

• No provision in the CCC specifies the content of the report of the board of directors and that of the statutory auditors concerning the capital increase and the waiver of pre-emptive subscription rights.

[1] The deletion of the DPS is within the prerogatives of the special general meeting of the limited company only. The capital increases in the LLC must exhaust the subscription periods to consider that such a partner has waived his subscription right to a capital increase.

B. The auditor’s due diligence

The auditor shall:

• Check the information contained in the report of the Board of Directors;

• Former Article 116 of the French Commercial Code clarified the content of such a report: The board’s report must indicate the reasons for a capital increase with the deletion of the DPS, the person for whom the capital increase is reserved, the number of shares to be issued, the methodology for calculating the issue premium.

• Needless to say, there is no statutory deadline.