Principles of Corporate Finance Law

704 Pages·2014·10.45 MB·English

by  Eilis Ferran

Principles Of Corporate Finance Law
Principles of Corporate Finance Law
Second Edition
EilÍs Ferran
and
Look Chan Ho
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
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Preface
In the period since the previous edition, the financial markets have experienced an
unprecedented degree of strain. Whilst banks and other financial institutions have been at
the eye of the storm, their problems have had repercussions for the financing of the
ordinary commercial companies as well. Deficiencies in the legal and regulatory
framework governing corporate finance have been exposed, leading to a multiplicity of
private lawsuits and to wide-ranging regulatory reforms.
In other words, there has been much to do in producing this new edition. I am especially
grateful to my co-author Look Chan Ho for coming on board and taking responsibility for
chapters 11 and 12. I am also grateful to numerous Cambridge LLM Corporate Finance
students for their feedback on draft chapters, and to Demetrio Maltese (LLM, 2012-13) for
specific research assistance. I would like also to record my gratitude to the trustees of the
JM Keynes Fellowship in Financial Economics, Cambridge University, for funding to
support the research.
The manuscript was delivered to the publishers in August 2013 and reflects our
knowledge and understanding of the law, regulation and practice at that time. We have been
able, however, to include brief references to significant developments that occurred during
the period between delivery of the manuscript and the final proofs.
The professionalism and dedication of the editors and others at OUP have been much
appreciated.
EVF,
November 2013
The law and practice of debt finance respond to and thus develop from financial crisis.
Two financial crises this book has now spanned. The original version of the book, entitled
Company Law and Corporate Finance, was published just after the Asian financial crisis,
and this edition is to be published when the world economy is beginning to recover from
the global economic crisis.
As an admirer of the book since its inception as Company Law and Corporate Finance, I
am delighted to be able to contribute to two chapters in the book relating to debt financing.
I am most grateful to Professor Ferran for all her kindness and echo her comments about
OUP.
Look Chan Ho
London
November 2013
Contents
Table of Cases
Table of Legislation
List of Abbreviations
I. OVERVIEW
1. The Regulatory Framework
Scope of the Book
Types of Company Limited by Shares
The Regulatory Framework for Corporate Finance
Legislation
Internal constitutional instruments
Case law
Codes and guidelines
2. Use and Abuse of the Corporate Form as a Vehicle for Raising Finance and
Managing Financial Risk
Issues Considered in this Chapter
Distinctive Features of the Company Limited by Shares
Separate legal personality
Piercing the veil of incorporation
Limited liability
Promotion of entrepreneurial activity
Passive investment
Portfolio diversification
Cost of capital
Transferability of shares
Tort liabilities
The Corporate Group
The recognition of corporate groups in company law
The definition of the corporate group for accounting purposes
The definition of the corporate group for other purposes
Substantive company law and the corporate group: a general overview
Insolvency within a corporate group
Alternatives to piercing the veil: agency
Alternatives to piercing the veil: contractual guarantees
Alternatives to piercing the veil: tort claims against other companies
Alternatives to piercing the veil: Insolvency Act 1986
Is the law on corporate groups deficient?
3. Capital Structure—Fundamental Legal, Accounting, and Financing Considerations
Scope of this Chapter
Share Capital Terminology
Accounting for an Allotment of Ordinary Shares
Characteristics of Ordinary Shares (Common Equity)
Dividends
Capital gains and risk
Voting rights
Common equity and financial regulation
Debt Finance Terminology
Characteristics of Simple Debt
Interest
Capital gain and risk
Control
Hybrid Securities in Outline
Valuation of Securities
Shares
Net asset value
Dividend valuation
Free cash flow valuation
Debt securities
Cost of capital
Capital Structure
Sources of Corporate Finance in the UK
Bank lending and its importance for SMEs
Sources of External Equity for SMEs and the Role of Venture Capital
Capital Markets: A Funding Source for Large Companies
Efficient Capital Markets
Measuring and assessing financial performance: company accounts
Statutory financial disclosure framework for UK companies: an overview
Additional financial disclosure framework under FCA Disclosure and Transparency
Rules
Additional financial disclosure framework for other publicly traded companies
II. LEGAL CAPITAL
4. Formation of Share Capital
Scope of this Part
Minimum Price of Individual Shares: Par Values
Minimum Capital
Denomination of minimum capital
Is any valuable purpose served by minimum capital requirements?
Allotted, Issued, and Equity Share Capital
Allotted share capital
Authority to allot shares
Registration of allotment and return of allotments
Issued share capital and issued shares
Equity share capital
Payment for Shares
Introduction
Paid up share capital
Called up share capital
Cash consideration for shares
Shares must not be issued at a discount
The no-discount rule and convertible securities
The no-discount rule and underwriting commissions
Regulation of non-cash consideration for shares
Public companies must not accept an undertaking to do work or perform services as
consideration for shares
Public companies must not accept undertakings to be performed in the future as
consideration for their shares
Valuation of non-cash consideration for shares in a public company
Takeover exemption
Mergers exemption
Relaxation of the independent valuation requirement by the 2006 amending Directive
Liability of subsequent holders
Relief from liability
Criminal liability for breach of rules relating to payment for shares
Share Premiums
Determining the issue price
Treatment of share premiums
Permissible uses for share premiums
Bonus issues
Expenses and commissions on an issue of shares
Share premiums and non-cash consideration
Group reconstruction relief
Merger relief
Statutory reliefs and accounting requirements
Importance of group reconstruction and merger relief
Other reliefs
Other Capital Contributions
Stock
5. Share Allotments
Scope of this Chapter
Regulating Share Issuance Activity: Striking a Balance
The Case for Special Protection of Shareholders’ Interests
Wealth transfers
Protection against dilution
Distortion of market for corporate control or other unconstitutional behaviour by
directors
Abuse of majority shareholder power
Shaping a balanced policy response
Shareholder Empowerment under the Companies Act 2006
Private company with a single class of shares
Authorization by company
Statutory Pre-emption Rights under the Companies Act 2006
Pre-emption rights in relation to ‘allotments’ of ‘equity securities’: definitions
The operation of the statutory pre-emption rights procedure
Consequences of non-compliance with statutory rights
Shareholders who do not take up (or sell) subscription rights
When statutory pre-emption rights do not apply
Vendor placings
Cashbox structures
Disapplication of Pre-emption Rights: All Companies
Disapplications for the purposes of making a rights issue or open offer
Timing
Tractions
Overseas shareholders
Open offers
Disapplications for placings
Disapplication or Exclusion of Pre-emption Rights: Private Companies
Other Formalities in Relation to Share Allotments
6. Classes of Shares
Scope of this Chapter
The Legal Nature of a Share
Financial Incidents of Shares: Capital and Dividends
What financial entitlements do investors in shares acquire? The position of holders of
ordinary shares
Default capital rights of ordinary shares
Default dividend rights of ordinary shares
What financial entitlements do investors in shares acquire? The position of holders of
preference shares
Default capital rights of preference shares
Default dividend rights of preference shares
Enfranchisement when preferential dividends are in arrears
Payment of accumulated unpaid cumulative preferential dividends
What financial entitlements do investors in shares acquire? The position of holders of
redeemable shares
Incidents of Shares: Transferability
Incidents of Shares: Voting Rights
The Juridical Nature of the Relationship Between a Company and Its Registered
Shareholders
Variation of Rights Attaching to Shares
Provision for entrenchment
Identifying a class of shares
Golden shares
Rights conditional on holding a specified percentage shareholding
Shares with different par values
Shares on which different amounts have been paid up
When class distinctions matter
Variation of class rights
What is a right attached to a class of shares for this purpose?
What is a ‘variation’ of a right attached to a class of shares?
Variation of rights by enhancement
The procedure for variation of class rights
Voting to alter class rights—a fettered power?
Statutory protection of minorities in a class of shareholders
Class rights and reduction of capital
Class rights and redemption of shares/share buy-backs
7. Maintenance and Reduction of Capital
Protection of Creditors’ Interests: Introduction
Questioning the value of the legal capital doctrine
The Development of the Maintenance of Capital Regime in the UK
Application of the common law rule prohibiting the return of capital to shareholders
An unlawful return of capital is ultra vires
The doctrinal test for distinguishing between genuine transactions and disguised
distributions
Gratuitous dispositions to third parties and directors’ duties
Reduction of Capital under the Statutory Procedures
Why reduce capital?
Forms of reduction of capital sanctioned by the Companies Act 2006
Limitation on the use of solvency statement reduction of capital procedure
The Court Approval Procedure
Special resolution of the shareholders
The oversight of the court in respect of creditors’ interests
The oversight of the court in respect of shareholders’ interests
General powers of the court
Registration
Where allotted capital is reduced below the authorized minimum
Effect of a court-approved reduction of capital
Reduction of Capital under the Solvency Statement Procedure: Private Companies Only
Special resolution of the shareholders and class consents
Solvency statement
Contents of solvency statement
Sanctions in respect of false solvency statements
Registration requirements relating to the solvency statement procedure
Effect of a reduction of capital under the solvency statement procedure
Reductions of Capital and Schemes of Arrangement: Two Case Studies
Re Uniq
Cape Group
Exceptional Reduction of Capital Procedures
Reduction of capital following redenomination of shares
Reduction of capital pursuant to an order of the court
Reduction of capital in respect of forfeited or acquired shares
8. Share Buy-backs and Redeemable Shares
Introduction