Kapitalschnitt (capital cut)

In a Kapitalschnitt, share capital is first reduced, in practice usually to zero, which renders the existing shareholders' interests worthless or extinguishes them outright. In the same step, the shareholders' meeting — or, in an insolvency plan, the majority competent under § 225a InsO — resolves a capital increase subscribed by new investors, by existing creditors as part of a debt-equity swap, or both.

Outside insolvency, a Kapitalschnitt at a GmbH generally requires incumbent shareholders' consent, making it a negotiated point in voluntary restructurings. In an insolvency plan proceeding, by contrast, the cut can be forced through against incumbent shareholders' wishes, since their consent to the equity conversion is not required and the cross-class cram-down (§ 245 InsO) can override a dissenting shareholder.

For buyers and investors, the Kapitalschnitt is the technical execution step that makes a debt-equity swap or a fresh equity injection legally clean: without a reduction to zero, old and new shares would coexist and dilute the intended controlling stake. It is accordingly a standard, integral part of the insolvency plan or an out-of-court restructuring agreement, not a separate step negotiated afterwards.