Assumption Premium and Adjustment Premium in Capital Increases

Assumption Premium and Adjustment Premium in Capital Increases

In the context of capital increases, two key concepts often raise questions: the assumption premium and the adjustment premium. Both have significant implications for companies seeking to inject new funds or restructure their capital, and it is essential to understand how they work and when to apply them.

What is the Assumption Premium?

The share premium is an additional amount to the par value of the shares that new shareholders must contribute when acquiring new units or shares in a capital increase. This amount reflects the real value of the company at the time of the capital increase, as opposed to the nominal value of the shares, which may be outdated or not reflect the current financial situation.

For example, if a company has a nominal value of 1 euro per share, but the real market value of each share is 5 euros, the takeover premium will be the difference, i.e. 4 euros per share. This premium allows new shareholders to enter the company on an equal footing with existing shareholders, avoiding an unfair dilution of value for previous shareholders.

Justification of the Assumption Premium

If the equity of the company has a value greater than the share capital, the shares will have a real value greater than the nominal value. In a capital increase, if all existing shareholders participate proportionally, there would be no detriment. However, in the case of new shareholders, the existing shareholders must protect their interest by establishing a share premium. In this way, any new shareholders, or even existing shareholders participating in the capital increase, will have to pay not only the nominal value, but also a premium or surcharge reflecting the actual value of the shares.

In addition, if a capital increase in a limited partnership is intended to exclude the right of pre-emptive acquisition of existing shareholders, it is mandatory to agree on a takeover premium to ensure that the actual value of the shares remains intact for the existing shareholders.

Legal Admission of the Assumption Premium

The share premium is legally recognized in several articles of the Capital Companies Act (LSC) and in the Mercantile Registry Regulations (RRM). Article 303 of the LSC mentions the possibility of a capital increase with additional paid-in capital, when referring to the additional paid-in capital reserves.

Likewise, Article 308 of the LSC requires that, in the case of exclusion of preemptive rights, the nominal value of the new shares, plus the amount of the premium, must correspond to the actual value of the shares according to the directors’ report, in the case of limited liability companies. 

Article 198 of the RRM also mentions the obligation to include the premium, if agreed, with its corresponding amount for each share created, in the deed of capital increase.

What is the Adjustment Premium?

The adjustment premium is the difference in value of the last of the units when a capital increase is carried out. This adjustment is made to round the total value of the investment in relation to the price of the units issued.

For example, if you invest 100 euros in a capital increase and the value of each share is 49 euros, you will receive two shares: one of 49 euros and the other of 51 euros, so that the investor reaches the total value of his investment. This 2 euro differential that rounds up the value is called the adjustment premium.

Role of Both Premiums in Capital Increases

In a capital increase, the company issues new shares or units to raise funds. The assumption premium ensures that the new investors pay the real value of the company, while the adjustment premium allows the shares to be rounded up to the total value of the investment made, maintaining the balance between the value of the shares issued and the investment.

Both premiums contribute to maintaining a balance between the interests of new and old shareholders, ensuring a correct valuation of the company and avoiding conflicts between the parties.

Conclusion

The assumption premium and the adjustment premium are essential tools in capital increases to ensure a fair and balanced capital structure. Understanding how they work is key to carrying out a successful capital increase that protects both new and existing shareholders, while respecting the real values of the company and complying with current regulations.