I turned to my news feed and hacked “VC restructuring” into the search. I got a couple of hundred hits returning posts on bankruptcy and fire sales for instance to distressed asset investors and the likes (as usual TechCrunch has got it all covered – in one post). All of the above are less-than-ideal solutions for less-than-ideal situations. Founders and their VC investors should only turn to these last resorts after inside deals have failed. Failure on the inside – founders and current investors – is far too often assumed if the current share holders are not unanimously behind the influx of fresh capital via a capital increase.
Form the German perspective I would like to add to that discussion. I will stick to the limited liability company, GmbH, to keep it simple. I can see to inside options:
Forcing a capital increase against 25 percent of the shareholder vote
A capital increase constitutes a change of the company’s articles. It follows from section 53 GmbHG that such changes require a 75 percent majority of shareholder vote unless the articles require a higher threshold. Therefore, share holdings of 25 percent or less can be disregarded by statute alone. Thus, fresh money can be inserted into the company at almost any time even if 25 percent or less of the shareholders do not support such actions. To make it clear though, they cannot be forced to invest themselves (If the the bar is raised by the articles the following applies accordingly.)
Dissenting 25+ percent
In a crisis even larger share holdings can be forced to vote for the capital increase. If a company has got its back against the wall all share holders may be required by their fiduciaries duties towards the company to give their consent – not to put their own money up, but at least not to block others willing to do so. These fiduciary duties become more clear-cut the closer the company comes to situations qualifying for bankruptcy sooner rather than later. They override German statute and majority requirements set out in the company’s articles.