What Is Share Dilution?
Share dilution is a phenomenon that frequently occurs in corporate practice, particularly when a company increases its capital through the issuance of new shares. According to The Law Dictionary, dilution refers to the act of reducing the proportion of ownership held by existing investors as a result of the issuance of new common shares—whether through direct issuance, the exercise of stock options, or the conversion of bonds.
In simple terms, dilution reduces the percentage of ownership held by existing shareholders in the company. For example, if a company initially has 1,000 outstanding shares, all of which are held by investors, and subsequently issues 1,000 additional shares, the ownership percentage of existing shareholders is reduced by half, as the total number of shares becomes 2,000.
Dilution from the Perspective of Company Law
Indonesian law, through Law Number 40 of 2007 on Limited Liability Companies (“Company Law”), provides clear regulations on capital increases to prevent potential losses for existing shareholders resulting from dilution.
The following are key provisions under the Company Law:
Article 41 paragraph (1):
An increase in the Company’s capital shall be made based on the approval of the General Meeting of Shareholders (GMS).
This means that capital increases cannot be carried out unilaterally by the Board of Directors. A formal resolution of the GMS is required.
Article 42 paragraph (1):
A GMS resolution to increase the authorized capital shall be valid if it satisfies the quorum and voting requirements for amending the Articles of Association as stipulated in this Law and/or the Articles of Association.
Thus, any amendment to the authorized capital must not only be agreed upon but must also fulfill the legal formalities regarding quorum and voting thresholds.
Article 43 paragraph (1):
All shares issued in relation to a capital increase must first be offered to each shareholder in proportion to their ownership in the same class of shares.
This provision reflects the principle of preemptive rights, which entitles existing shareholders to subscribe for new shares proportionally before they are offered to third parties. The aim is to prevent the dilution of existing ownership.
Preemptive Rights as a Mechanism for Investor Protection
Preemptive rights function as a legal safeguard to preserve the balance of ownership structure within the company. If this right is disregarded, existing shareholders risk losing their proportional influence in corporate decision-making.
Conclusion
Share dilution is not an action that may be undertaken unilaterally by the Board of Directors. In order to maintain fairness and protect the interests of shareholders, every capital increase through the issuance of new shares must be approved by the GMS and must uphold the principle of preemptive rights. This ensures that investor protection—particularly for existing shareholders—remains intact within a transparent and sound corporate legal framework.