What is Share dilution?
Share dilution occurs when a company issues additional shares, which increases the total number of outstanding shares. As a result, existing shareholders’ ownership percentage and voting power are reduced. This process typically happens during events such as capital raises, mergers, or the exercise of stock options. In Switzerland, share dilution is an important consideration for investors and companies, as it impacts ownership control, the value of shares, and overall market perception.
Key Features of Share Dilution
- Ownership Reduction: When new shares are issued, the percentage of the company owned by existing shareholders decreases. For example, if a shareholder owns 10% of a company with 100,000 shares, and the company issues an additional 100,000 shares, the shareholder’s ownership will be reduced to 5%.
- Impact on Earnings per Share (EPS): Share dilution can reduce a company’s earnings per share (EPS), as the earnings are now spread across a larger number of shares. This can potentially decrease the attractiveness of the company’s stock for investors.
- Voting Power: Dilution also affects the voting power of shareholders, as their proportionate control in the company is reduced. This can influence decisions made at shareholder meetings, particularly if significant dilution occurs in companies with concentrated ownership.
Share Dilution in Switzerland
In Switzerland, share dilution is regulated under the Swiss Code of Obligations, which governs corporate actions such as capital increases, share issuances, and stock options. Swiss companies are required to disclose the potential for dilution to shareholders, particularly when issuing new shares or engaging in activities that could significantly affect shareholding.
- Capital Increases and Shareholder Approval: When a company in Switzerland issues additional shares, it typically requires approval from shareholders. The company must follow a transparent process, which includes informing shareholders of the potential dilution impact.
- Protection Against Dilution: In some cases, companies offer existing shareholders the right to purchase additional shares in proportion to their current holdings, known as pre-emptive rights. This allows shareholders to maintain their ownership percentage and avoid dilution, though it may not always be guaranteed.
Share dilution in Switzerland can have significant implications for both companies and their investors. Companies must carefully consider the long-term effects of dilution on shareholder value, control, and market perception, while investors should assess dilution risk before buying shares or participating in funding rounds.