Verwatering

Dilution occurs in corporate law when a company issues new shares to third parties or existing shareholders without all shareholders participating on a pro rata basis. This results in a reduction of a shareholder’s percentage interest in the share capital, thereby diminishing their voting rights and entitlements to profits.

This concept is significant because shareholders may see their position eroded if they fail to exercise their statutory or articles-based pre-emptive rights upon an issuance of shares. In practice, dilution is frequently mitigated through shareholders’ agreements, share transfer restrictions or provisions in the articles of association that safeguard against unwanted capital increases.

In the context of mergers, acquisitions or capital increases, dilution is a key consideration, as existing shareholders may protect their interests by subscribing for new shares or by negotiating compensatory arrangements.