10.05.2011
[] Equity-line financings, which involve "standby equity purchase agreements," have become a popular way for publicly traded companies in the US to obtain financing. This alternative type of financing is also being used with increasing frequency in Germany. Many publicly traded stock corporations either cannot obtain financing or cannot obtain adequate financing. This can be due in particular to the overall economic environment or the situation in the industry in which a company is active. For example, it is currently difficult for companies involved in biotechnology to obtain outside financing. But equity financing can also involve pitfalls. It is not always possible to place new shares from capital increases optimally in a difficult stock exchange environment. And this is where equity-line financing can provide a solution.
Equity-line financing basically consists of the use of a structure that involves an investor who enters into an agreement with a publicly traded stock corporation to purchase new shares from authorized capital representing a previously agreed amount over a specific period (for example, three years) when requested to do so by the company. The company itself, on the other hand, may decide at its sole discretion whether or not to avail itself of the draw down rights it so acquires and, if so, to what extent.
Equity-line financing therefore involves draw downs agreed in advance and thus a series of capital increases from authorized capital. The issued capital of the stock corporation therefore gradually increases accordingly. This process continues until either the agreed commitment period expires or the aggregate volume agreed is reached. During this process, the capital increase takes place to the exclusion of preemptive rights of other shareholders and the aggregate amount is therefore limited. This amount may not exceed a total of 10% of the current capital stock. Since this available authorized capital is as a rule quickly "used up" and may prove insufficient to cover the aggregate volume of the issuing program, it is usual practice for stock corporations to have additional capital authorized by shareholders at each annual general meeting. This then again makes available an amount equal to 10% of the capital stock free of any preemptive rights. Immediately upon the registration of execution of each individual capital increase in the commercial register, i.e., after the creation of the new shares, the number of shares that can be publicly traded is increased within a specific period of time. As a result, the number of shares that can be publicly traded is gradually increased as is the amount of capital stock.
What at first sight seems tempting is in fact extremely complex in terms of the legal aspects involved. For example, the floor price, i.e., the price at which the new shares are sold to the investor, must exceed a certain amount. Investors have an interest in acquiring the shares at the lowest possible price in order to be able to place them on the capital market at a profit soon thereafter. They will therefore attempt to secure the lowest possible floor price. Companies on the other hand would like to receive the highest possible price for their shares and limit the dilution of the equity held by their shareholders. It is likely to be usual to agree to a discount of from 3 to 5% on the average trading price of the shares during a specific period agreed to in advance prior to each draw down.
Caution is also called for when structuring fees. Investors will as a rule not be satisfied with a discount on the trading price, but also insist upon commitment and structuring fees for making the equity-line financing available. In this context, it is necessary to comply with the relevant provisions of legislation governing securities in respect of the acquisition and maintenance of capital.
Each individual draw down is in practice rather complicated. In particular, it is necessary to adhere to a rigid timetable that involves not only the court of registry but also the stock exchange, i.e., third parties. Since equity-line financing is likely to be familiar only to very few registry court judges, the possibility of requests for further information cannot be excluded. This can interfere with the rigid timetable and cause considerable inconvenience not only for the company but also for the investor if arrangements have already been made to issue new shares. As a result, it is recommended that the individual draw downs or increases in capital and the timetable be coordinated with the respective court of registry or stock exchange in advance.
All in all, equity-line financing may be complicated in terms of the legal aspects involved, but this alternative financing instrument can contribute significantly to the financial strength of publicly traded stock corporations if properly structured. Companies involved in the biotechnology industry have been at the cutting edge in this area in Germany and are already making use of this financing instrument. It is likely that further companies will follow their example.
