24. Stockholders’ 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 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:

	Long-term rating	Outlook	Short-term rating
Standard & Poor’s	A-	stable	A-2
Moody’s	A 3	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 upholding our “A” rating and maintaining our financial flexibility. Apart from utilizing cash inflows from our operating business to reduce net debt, we are implementing our financial strategy by way of vehicles such as the subordinated hybrid bond issued in July 2005, the mandatory convertible bond issued in April 2006, which will be converted to equity in 2009, 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 components of stockholders’ equity and their changes during 2007 and 2008 are shown in the following table.

	Capital stock of Bayer AG	Capital reserves of Bayer AG	Other reserves	Equity attributable to Bayer AG stock- holders	Equity attributable to non- controlling interest	Stock- holders’ equity
	€ million	€ million	€ million	€ million	€ million	€ million
December 31, 2006	1,957	4,028	6,782	12,767	84	12,851
Capital contributions	-	-	-	-	-	-
Other changes	-	-	3,967	3,967	3	3,970
December 31, 2007	1,957	4,028	10,749	16,734	87	16,821
Capital contributions	-	-	-	-	-	-
Other changes	-	-	(471)	(471)	(10)	(481)
December 31, 2008	1,957	4,028	10,278	16,263	77	16,340

The capital stock of Bayer AG totals €1,957 million, as in the previous year, and is divided into 764,343,225 (2007: 764,341,920) no-par bearer shares. Each share confers one voting right.

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 bearer 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 bearer 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 €186.88 million, corresponding to 72,998,695 shares, exists to service the conversion rights contained in a mandatory convertible bond issued by Bayer Capital Corporation B.V., Netherlands, on April 6, 2006. Based on the conversion prices valid as of December 31, 2008, the number of issued shares would increase in 2009 by at least 60,040,823 and at most 70,238,509 as a result of the conversion of the mandatory convertible bond issued in 2006. The conditional capital declined by €3,341 in 2008 due to conversion of part of the mandatory convertible bond.

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 €195.58 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 in accordance with the authorizations granted by the Annual Stockholders’ Meeting of April 25, 2008 by Bayer AG or a Group company in which Bayer AG has 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 towards 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.

The individual components of other reserves and their changes during 2007 and 2008 are shown in the following table.

	Retained earnings			Accumulated other comprehensive income
	Revaluation surplus	Other retained earnings	Net income	Exchange differences	Fair-value measure- ment of securities	Cash flow hedges	Other reserves
	€ million	€ million	€ million	€ million	€ million	€ million	€ million
December 31, 2006	58	6,536	1,683	(1,495)	18	(18)	6,782
Changes in stockholders’ equity not recognized in net income
Changes in fair value of securities and cash flow hedges					31	157	188
Changes in actuarial gains/losses on defined benefit obligations for pensions and other post-employment benefits		1,406					1,406
Exchange differences on translation of operations outside the euro zone				(822)			(822)
Deferred taxes on valuation adjustments offset directly against stockholders’ equity		(627)			(11)	(41)	(679)
Other changes in stockholders’ equity	(4)	4					-
Transfer of changes recognized in income					(6)	(67)	(73)
	54	7,319	1,683	(2,317)	32	31	6,802
Dividend payments			(764)				(764)
Allocations to retained earnings		919	(919)				-
		919	(1,683)				(764)
Changes in stockholders’ equity recognized in net income
Net income 2007			4,711				4,711
			4,711				4,711
December 31, 2007	54	8,238	4,711	(2,317)	32	31	10,749
Changes in stockholders’ equity not recognized in net income
Changes in fair value of securities and cash flow hedges					(32)	(110)	(142)
Changes in actuarial gains/losses on defined benefit obligations for pensions and other post-employment benefits		(1,085)					(1,085)
Exchange differences on translation of operations outside the euro zone				(416)			(416)
Deferred taxes on valuation adjustments offset directly against stockholders’ equity		459			9	40	508
Other changes in stockholders’ equity	4	4					8
Transfer of changes recognized in income					1	(32)	(31)
	58	7,616	4,711	(2,733)	10	(71)	9,591
Dividend payments			(1,032)				(1,032)
Allocations to retained earnings		3,679	(3,679)				-
		3,679	(4,711)				(1,032)
Changes in stockholders’ equity recognized in net income
Net income 2008			1,719				1,719
			1,719				1,719
December 31, 2008	58	11,295	1,719	(2,733)	10	(71)	10,278

The revaluation surplus of €58 million reported under stockholders’ equity is due to 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. In addition, an amount of €4 million (2007: €4 million) that constitutes scheduled amortization/depreciation of the respective assets and is recognized in income was transferred in 2008 from the revaluation surplus to retained earnings.

The retained earnings contain prior years’ undistributed income of consolidated companies.

Retained earnings also include all actuarial gains and losses related to defined benefit pension plans that are not recognized in income. Changes in fair values of cash flow hedges and available-for-sale financial assets are recognized in other comprehensive income.

The dividend paid for the 2007 fiscal year was €1.35 per share, compared with €1.00 for 2006. The proposed dividend for fiscal year 2008 is €1.40 per share, which would result in a total dividend payment of €1,070 million.

The components of non-controlling interest in Group equity and their changes during 2008 and 2007 are shown in the following table.

	Equity attributable to non-controlling interest
	2007	2008
	€ million	€ million
January 1	84	87
Changes in stockholders’ 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)	3
Deferred taxes on valuation adjustments offset directly against stockholders’ equity	-	-
Other changes in stockholders’ equity	12	(9)
Dividend payments	(11)	(9)

Changes in stockholders’ equity recognized in net income	5	5

December 31	87	77

Non-controlling interest mainly comprises the equity of Sumika Bayer Urethane Co. Ltd., Japan; Bayer CropScience Ltd., India; Berlimed, S.A., Spain; BaySystems Pearl, Dubai; Bayer CropScience Nufarm Ltd., United Kingdom; Justesa Imagen, S.A., Spain; Bayer East Africa Ltd., Kenya, and Bayer Jinling Polyurethane Company Ltd., China.

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