24. Equity

The foremost objectives of our financial management are to help bring about a sustained increase in the value of the Bayer Group for the benefit of all stakeholders, and to ensure the Group’s creditworthiness and liquidity. The pursuit of these goals means reducing our cost of capital, optimizing our capital structure, improving our financing cash flow and effectively managing risk.

The rating agencies commissioned by Bayer assess the financial risks of the Bayer Group as follows:

Rating	[Table 4.61]
	Long-term rating	Outlook	Short-term rating
Standard & Poor’s	A-	negative	A-2
Moody’s	A3	stable	P-2

These investment-grade ratings reflect the company’s good creditworthiness and ensure access to a broad investor base for financing purposes. Bayer’s capital management strategy is based on the debt ratios published by the rating agencies, which – by somewhat differing methods – look at the cash flow for a given period in relation to debt. The financial strategy of the Bayer Group focuses on an “A” rating and on preserving our financial flexibility. Apart from utilizing cash inflows from our operating business to reduce net financial debt, we are implementing our financial strategy by way of vehicles such as the subordinated hybrid bond issued in July 2005, the authorized (conditional) capital created by resolutions of the Annual Stockholders’ Meeting, and our share buyback program. Bayer’s Articles of Incorporation do not stipulate capital ratios.

The changes in the various components of equity during 2008 and 2009 are shown in the statements of changes in equity.

Capital stock and capital reserves

The capital stock of Bayer AG on December 31, 2009 amounted to €2,117 million (2008: €1,957 million), divided into 826,947,808 (2008: 764,343,225) no-par registered shares, and was fully paid in. Each share confers one voting right. In 2009 the conversion of the €2.3 billion mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, in 2006 resulted in an increase of €160 million in the capital stock and the issuance of 62,604,583 new shares. An amount of €2,139 million was allocated to capital reserves. A fractional amount was disbursed to bondholders in cash.

Authorized capital

Authorized capital of €465 million was approved by the Annual Stockholders’ Meeting on April 28, 2006. It expires on April 27, 2011. It can be used to increase the capital stock by issuing new no-par registered shares against cash contributions and/or contributions in kind, but capital increases against contributions in kind may not exceed a total of €370 million (Authorized Capital I). Stockholders must normally be granted subscription rights. However, subject to the approval of the Supervisory Board, the Board of Management is authorized to exclude subscription rights for the stockholders with respect to any excess shares remaining after rights have been allocated (fractional amounts) and also to the extent necessary to grant subscription rights for new shares to holders of convertible bonds or bonds with attached warrants or mandatory convertible bonds issued by Bayer AG or its Group companies, who would be entitled to subscription rights upon exercise of the conversion rights or warrants. In addition, the Board of Management is authorized to exclude stockholders’ subscription rights, subject to the approval of the Supervisory Board, in cases where an increase in capital against contributions in kind is carried out for the purpose of acquiring companies, parts of companies, participating interests in companies or other assets.

Further authorized capital was approved by the Annual Stockholders’ Meeting on April 27, 2007. The Board of Management is authorized until April 26, 2012 to increase the capital stock, subject to the approval of the Supervisory Board, by up to a total of €195 million in one or more installments by issuing new no-par registered shares against cash contributions (Authorized Capital II). Under the resolution adopted by the Annual Stockholders’ Meeting, stockholders must normally be granted subscription rights. However, the Board of Management is authorized to exclude subscription rights for stockholders with respect to one or more capital increases out of the Authorized Capital II, subject to the approval of the Supervisory Board, provided that such capital increase does not exceed 10% of the capital stock existing at the time this authorization becomes effective or the time this authorization is exercised, for purposes of issuing new shares against cash contributions at a price that is not significantly below the market price of shares in the company that are already listed on the stock exchange at the time the issue price is finally determined. Shares acquired on the basis of an authorization of the Stockholders’ Meeting and sold pursuant to Section 71, Paragraph 1, No. 8, Sentence 5 of the German Stock Corporation Act in conjunction with Section 186, Paragraph 3, Sentence 4 of that Act during the term of this authorization shall count toward the above 10% limit. Shares issued or to be issued to service bonds with conversion rights, attached warrants or mandatory conversion rights shall also count toward this limit where such bonds were issued during the term of this authorization and stockholders’ subscription rights were excluded by application of Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act.

Conditional capital

Of the €187 million conditional capital created by resolution of the Annual Stockholders’ Meeting on April 30, 2004, corresponding to 72,998,695 shares as of December 31, 2008, an amount of €160 million, corresponding to 62,604,583 shares, was used in 2009 to service conversion rights under a mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, on April 6, 2006. The remaining amount of €27 million expired with the deletion of the respective provision of the Articles of Incorporation, which deletion was entered in the Commercial Register on January 22, 2010.

The Annual Stockholders’ Meeting on April 25, 2008 approved the creation of Conditional Capital 2008 I and Conditional Capital 2008 II and authorized a conditional increase in the capital stock in each case of €196 million through the issue of 76,400,000 shares. This conditional capital increase may be used to grant shares to the holders of bonds with warrants or convertible bonds, profit-sharing rights or profit participation bonds (or combinations of these instruments) with option or conversion rights or obligations, issued on or before April 24, 2013 by Bayer AG or a Group company in which Bayer AG holds a direct or indirect interest of at least 90%. The authorization to issue such instruments is limited to a total nominal value of €6 billion. In principle, stockholders have a statutory right to be granted subscription rights to such instruments. However, the Board of Management is authorized to exclude subscription rights, subject to the approval of the Supervisory Board, if the instruments are issued at a price that is not significantly below the market price. The limit of 10% of the capital stock set analogously with Section 186 Paragraph 3 Sentence 4 of the German Stock Corporation Act for the exclusion of stockholders’ subscription rights may not be exceeded. Both shares and other such instruments shall count toward this limit if they were issued under exclusion of subscription rights in direct or analogous application of Section 186, Paragraph 3, Sentence 4 of the German Stock Corporation Act.

Retained earnings

The retained earnings comprise prior years’ undistributed income of consolidated companies and all actuarial gains and losses related to defined benefit pension plans that are not recognized in income.

Accumulated other comprehensive income

Accumulated other comprehensive income comprises exchange differences, the changes in fair values of cash flow hedges and available-for-sale financial assets, and the revaluation surplus. The latter results from the acquisition in 2005 of the remaining 50% interest in an OTC joint venture with Roche in the United States that was established in 1996 and the acquisition of the remaining 50% interest in BaySystems, Oldenburg, Germany, in 2008. An amount of €6 million (2008: €4 million) that constitutes scheduled amortization/depreciation of the respective assets and is recognized in income was transferred in 2009 from the revaluation surplus to retained earnings.

Dividend

Under the German Stock Corporation Act (AktG), the dividend payment is determined by the distributable profit reported in the annual financial statements of Bayer AG, which are prepared according to the German Commercial Code. Retained earnings were diminished by payment of the dividend of €1.40 per share for 2008 (2007: €1.35 per share). The proposed dividend for the 2009 fiscal year is €1.40 per share, which would result in a total dividend payment of €1,158 million. The proposed dividend is subject to approval by the company’s stockholders at the Annual Stockholders’ Meeting and has not been recognized as a liability in the consolidated financial statements of the Bayer Group.

Non-controlling interest

The changes in the non-controlling interest in Group equity during 2009 and 2008 are shown in the following table:

Components of Non-Controlling Interest in Equity	[Table 4.62]
	2008	2009
	€ million	€ million
January 1	87	77
Changes in equity not recognized in net income
Changes in fair value of securities and cash flow hedges	-	-
Changes in actuarial gains/losses on defined benefit obligations for pensions and other post-employment benefits	-	-
Exchange differences on translation of operations outside the euro zone	3	2
Deferred taxes on valuation adjustments recognized directly in equity	-	-
Other changes in equity	(9)	(21)
Dividend payments	(9)	(4)

Changes in equity recognized in net income	5	-

December 31	77	54

Non-controlling interests mainly comprise the equity of Bayer CropScience Ltd., India; Sumika Bayer Urethane Co. Ltd., Japan; BaySystems Pearl FZCO, United Arab Emirates; Bayer East Africa Ltd., Kenya; Bayer Jinling Polyurethane Company Ltd., China; and Bayer S.A., Peru.

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