Types of corporate financing

Two ways:
■ Through borrowing (which creates debts/debt financing)
■ Through the investment of funds by owners (which creates equity capital -
equity financing) von co phan
A. Debt financing
○ Lending creates a debtor - creditor relationship
○ Creditors have priority over equity holders and must be paid interest on the
money borrowed befor dividends are paid to shareholders.
○ In a dissolution of the corporation, creditor receive their principal before equity
holders receive anything
=> payment obligation
B. Equity financing
○ Occurs where a company issues to one or more investors who become
shareholders of the company. In return for the shares, the shareholder pays the
issue price of the shares to the company. The company receives its funding and
the shareholder receives and owns shares in the company.
=> doesn't have any payment obligation
○ Shareholders in the public traded company cong ty dai chung may sell their shares
in the stock market thi truong chung khoan but the price depends on the success
of the business.
○ Compared to creditors, the shareholders have greater risk (lower priority than
creditros) but also the potential for greater return (increased profits benefit the
shareholders).
○ SHARES AND SHARE CAPITAL OF A COMPANY: von dieu le
1.1. Nature of shares and membership
○ "share" in a company means share in the company's share capital. A share is a
piece of personal property (s541).
○ A share is a fraction of capital, denoting the holder's propotionate financial stake
in the company and defining his or her liability to its equity funding;
○ The relationship between a company and its shareholder is governed by a
"standard form contract" - The articles of association.
○ Shareholders are part- owners of the compnay, have the role as part of the
decision-making of the company, manifest in voting rights to their shares.
The law usually requires that a shareholder is given a share certificate in respect
of his shares (s769, s776 Ca 2006).
1.2. classes of shares
Shares that provide the owners with the same rights and liabilities are called a class of
shares.
=> various types of shares deliver financing flexibility to companies
Attrac many different investors (may have different needs: want to become manager,..
Don't care about the manager/money)
○ ORDINARY SHARES
■ Most basic types of shares
■ One ordinary share carries one vote
 ■ Ordinary shares carry the basic rights of shareholders (right to share in the
profits of the company; right to share the residual wealth of the company
when the company is wound up; right to company vote on shareholder
resolution)
○ OTHER CLASSES OF SHARE
■ Preference shares co phan uu dai
In the UK, rarely called voting-preference share
○ Usually be entitled to have dividends paid at a predetermined rate (e.g at a rate of
10% on their nominal value) in priority to any dividend on the ordinary shares.
○ Have the 1st claim on the corporate profits in any year, a right to priority over the
ordinary shareholders when capital is returned to the members in a winding up.
○ It is quite usual for preference shareholders to have no voting rights at the
shareholder meetings.
■ Redeemable co phan hoan lai
○ Fully paid-up shares that either will be redeemed (bought back by the company)
at the option of the company or the shareholder, on certain dates and subject to
such terms are stated in the articles or company resolutions.
■ Deferred co phan kem uu dai
○ Have rights which are deferred to the ordinary shares; they will only get dividends
after a specified minimum has been paid to the ordinary shareholders, and as
regards to the return of capital on a winding up.
■ Non-voting
○ Carry no rights to vote and no right to attend general meetings
○ A company may issue employees with non-voting shares because they want them
to be able to benefit from dividends or distribution of profits but do not want them
to participate in decision making.
=> VN has 2
○ Optional
○ Carry rights differing from ordinary shares:
■ Provide more benefits associated with a certain right (to profit)
■ Limitation on a certain right.
1.3. Share capital
Total nominal value of the shares of a company that have been issued/allotted (cannot
identify)
Initial share capital: total nominal value of the shares taken by or issued to the first
shareholders who sign the memorandum of association at the time of registration.
A statement of initial share capital must be included in an application to register a
company (s.9)

E.g: A and B both subscribe to the memorandum of association of Company C Ltd

which they each agree to take 1 share with the value of 1 pound

--> initial share capital: 2 pounds

--> share capital: 2 pounds

If A and B has each paid 40 pence on their shares

--> paid-up share capital: 80 pence

And if Company C Ltd could subsequently called-up 20 pence per share (40 pence)

--> called-up share capital: 1.20 pounds (80 pence + 40 pence)

Paid-up share capital : is the sum of those parts of the nominal value of issued shares
already contributed to the company.

Called-up share capital: CA 2006 s.547 also defines called-up share capital as the sum
of the amounts paid for shares when issued, sums subsequently called up (paid or not
paid) and sums due on a specified date without further call.

1.4. Alteration (increasing/reducing) of share capital

Each tim the company's share capital is altered; an updated statement of capital mus be
sent to the registrar of companies.

** A company having a share capital may alter its share capital ONLY in the ways
provided for in s.617 of the CA 2006

1.4.1. Increasing the share capital (Unit of total access of the company)

ALLOTTING NEW SHARES

○ 617 (2a): a company may increase its share capital by allotting new shares in
accordance with Part 17 of the Act
○ Offering of shares to the public => detailed securities rgulation must be complied
with.
○ The terms "allotment" and "issue"often used interchangeably.
Authority to allot new shares:
○ Shareholders (ordinary resolutions)
■ Article 553 => the direction s550
■ S 550: for private companies with one class of shares only, the
Act authorizes the directors to issue shares of that same class
■ S551: for
■ Private companies with one class of shares seeking to issue
a different class
■ Private companies with more than one class of shares
■ Public companies
==> either the articles, or an ordinary resolution can authorize the directors to
issue shares.
STATUTORY PRE-EMPTION RIGHTS OF EXISTING SHAREHOLDERS

Preserve each shareholder's proportionate interest in the equitable share capital of the
company.

The offer must open for acceptance for at least 21 days (s562 (5))
(i) Statutory pre-option rights apply only to the issue of ordinary shares.
(ii) statutory pre-emption rights also do not apply to a variety of circumstances (see
hand-outs)
ISSUE PRICE

○ All shares must have a fixed nominal value (s 542)

=> is also the minimum amount for which a share can be issued
○ Shares cannot be issued at a discount (s580)
Premium
○ Shares can be issued at a prices higher tan nominal value --> the share premium
Ex: a share with a nominal value of 1 pound is issued at 1.20 pounds, the share
premium is 20 pence
○ S 610: the amount of the premiums must be kept in a separate account (share
premium account) and may be used for some certain purpose only.

1.4.2. reduction of the share capital

A company cannot reduce its share capital except in one of the ways listed in Chapter 10
of the CA 2006
○ CAPITAL MANTENANCE - duy tri von
Is a principle or doctrine with two components:
○ A limited company having a share capital may not reduce its share capital except
as authorized by law
○ Distributions of a company's assets to its members, whether in cash or otherwise,
may only be made out of profits available for the purpose.
Acquisition - thu hoi of own shares
○ S658: a company is not permitted to acquire its own shares (repurchase of shares
or redemption of shares), except in accordance with Part 18 - CA 2006.
 ○ REDEEMABLE SHARES: s684 - 689 provide rules for the issue and redemption
of redeemable shares.
■ The terms for redemption of shares must be met. These terms are
determined by the Articles or by the directors if being authorized (s685)
■ Shares cannot be redeemed unless they are fully paid (s686)
=>must them be cancelled, and the company must reduce its issued share capital
by the nominal value of the cncelled shares (s688)
○ REPURCHASE OF SHARES: difference between a repurchase and a redemption
■ In a repurchase, the buyer and the seller need to agree to the terms and
conditions of repurchase at the time of the repurchase
■ In a redemption, the shares will have been issued as redeemable shars, so
that the terms and conditionos of the re-acquisition will be know from the
outset. (s694 - s701)
NOTE:
(I) share cannot be repurchased unless fully paid (s691)
(II) The repurchased shares must be canceled, and the company must reduce its issued
share capital by the nominal value of the canceled.
○ Distribution:
○ The first and primary rule (s830), applicable to all companies, is that a company
may not make a distribution to any of its members except out of profits which are
available for the purpose.
○ Additional limit on distributions by public companies:
■ Net asset test:
■ S831 states that a public company may only make a distribution up
to the amount by which its net assets exceed the aggregate of its
called up share capital and undistributable reserves.