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UCL FACULTY OF LAWS. LLM Corporate Finance 2010/11 Introduction. What is the course about?. E ssentially what it says on the tin: i t is how companies finance their operations The three primary sources of corporate finance: equity financing , that is share capital, debt financing and - PowerPoint PPT Presentation
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LLM Corporate Finance LLM Corporate Finance 2010/112010/11
IntroductionIntroduction
UCL FACULTY OF LAWS
What is the course about?What is the course about?
EEssentially what it says on the tin: ssentially what it says on the tin: iit is how companies finance their operationst is how companies finance their operations
The three primary sources of corporate finance: The three primary sources of corporate finance:
1.1. equity financingequity financing, that is share capital, , that is share capital, 2.2. debt financingdebt financing and and 3.3. the regulation of companiesthe regulation of companies in terms of their use of in terms of their use of retained earningsretained earnings. .
A fair amount of A fair amount of company law,company law, in particular the in particular the regulation of legal capitalregulation of legal capital, which is a , which is a major topic within the UK and also in Europe as well, where there is a very lively major topic within the UK and also in Europe as well, where there is a very lively ongoing debate about reforming the law relating to legal capital. ongoing debate about reforming the law relating to legal capital.
In looking at the debt finance side, we pick up on issues in the In looking at the debt finance side, we pick up on issues in the law of contractlaw of contract and and some some property lawproperty law aspects. aspects.
We also examine some of the We also examine some of the company law rulescompany law rules relating to, in particular, relating to, in particular, disclosure of disclosure of the debt financing arrangementsthe debt financing arrangements within a company. within a company.
With regard to distributions, we look at the way that company law deals with issues With regard to distributions, we look at the way that company law deals with issues relating to relating to profits, dividends, share buy-backs and reductions in capitalprofits, dividends, share buy-backs and reductions in capital and similar and similar transactions. transactions.
The sources of corporate financeThe sources of corporate finance
private sourcesprivate sources, such as bank borrowing , such as bank borrowing
the way in which companies access the the way in which companies access the public marketspublic markets - - public issues of securitiespublic issues of securities, both , both domestically and internationally as well, through international equity offerings, domestically and internationally as well, through international equity offerings, international bond issues etc. international bond issues etc.
The law we will be concentrating on is a The law we will be concentrating on is a mix of primarily company law and securities mix of primarily company law and securities regulationregulation. .
Both company law and securities regulation in the UK are, to a large extent, driven from Both company law and securities regulation in the UK are, to a large extent, driven from Brussels. So, there is a Brussels. So, there is a great deal of European lawgreat deal of European law which takes effect in the UK and which which takes effect in the UK and which sets the framework within which we operate. sets the framework within which we operate.
some of the very prominent themes in the some of the very prominent themes in the international debate about the capital marketsinternational debate about the capital markets, , the ways in which law, for example, can promote the competitiveness of one market over the ways in which law, for example, can promote the competitiveness of one market over the otherthe other
market Abuse and insider dealingmarket Abuse and insider dealing. It is becoming common these days to see insider . It is becoming common these days to see insider dealing as merely an example, albeit an important one, of market abuse. Will focus on the dealing as merely an example, albeit an important one, of market abuse. Will focus on the FSA's recent approach to preventing, detecting and prosecuting market abuse.FSA's recent approach to preventing, detecting and prosecuting market abuse.
Overall there is a very vibrant debate relating to a lot of the issues we will be touching onOverall there is a very vibrant debate relating to a lot of the issues we will be touching on,, domesticallydomestically (with company law having been reformed dramatically in recent years), (with company law having been reformed dramatically in recent years), regionallyregionally (where there is a major programme of EU activity) and (where there is a major programme of EU activity) and internationallyinternationally as well. as well.
Course OutlineCourse Outline Term 1Term 1
Equity financingEquity financing (5) (1-5) 12, 19, 26 October; 2 and 9 November (5) (1-5) 12, 19, 26 October; 2 and 9 November
Public distributions of securities (IPO)Public distributions of securities (IPO) (3) (6-8) 16, 23, 30 (3) (6-8) 16, 23, 30 November November
Insider dealing; Market abuseInsider dealing; Market abuse (2) (9-10) 7, 14 December (2) (9-10) 7, 14 December
Term 2Term 2
Debt financingDebt financing (4) (11-14) 11, 18, 25 January and 1 February (4) (11-14) 11, 18, 25 January and 1 February
Schemes of ArrangementSchemes of Arrangement (1) (15) 8 February (1) (15) 8 February
European law and policyEuropean law and policy (1) (16) 16 February (1) (16) 16 February
Credit Rating Agencies Credit Rating Agencies (1) (17) 23 February(1) (17) 23 February
Corporate Governance Corporate Governance (1) (18) 1 March (1) (18) 1 March
TakeoversTakeovers (1) (19) 8 March (1) (19) 8 March
Combined CodeCombined Code (1) (20) 15 March (1) (20) 15 March
Corporate taxation Corporate taxation (1) (20) 22 March(1) (20) 22 March
TeachersTeachers
Dr Arad Reisberg (Convenor)Dr Arad Reisberg (Convenor)
Visiting Professor, Dan PrenticeVisiting Professor, Dan Prentice (formerly: (formerly: Allen and Overy Professor of Corporate Law, Oxford Allen and Overy Professor of Corporate Law, Oxford
UniversityUniversity
Distinguished guest speakers:Distinguished guest speakers:
John Papanichola John Papanichola (Partner at Slaughter and May) (Partner at Slaughter and May) Jonathan MarshJonathan Marsh (Partner, BLP Law (Partner, BLP Law)) John ConeJohn Cone (Head of Erskine Chambers) (Head of Erskine Chambers) Miranda Leung and Mark DwyerMiranda Leung and Mark Dwyer ( (Slaughter And May partners)Slaughter And May partners) Edward Walker-ArnottEdward Walker-Arnott, an Honorary Visiting Professor, UCL , an Honorary Visiting Professor, UCL
(a former senior partner of Herbert Smith, solicitors, London) (a former senior partner of Herbert Smith, solicitors, London) John VellaJohn Vella (Oxford University Centre for Business Taxation, Senior (Oxford University Centre for Business Taxation, Senior
Research Fellow)Research Fellow) Dr. Iris Chiu Dr. Iris Chiu ( UCL Laws) ( UCL Laws)
Teaching MethodTeaching Method
SeminarsSeminars
There will be 21 seminars. Seminars will start in first There will be 21 seminars. Seminars will start in first term, and run until last week of 2nd term. There will term, and run until last week of 2nd term. There will also be lectures given by external speakers during the also be lectures given by external speakers during the year.year.
TutorialsTutorials
There will be 4 tutorials (i.e. on 4 different topics) in There will be 4 tutorials (i.e. on 4 different topics) in the second term. Further details to follow. the second term. Further details to follow.
Course RequirementsCourse Requirements
Lecture / seminar interactive format- every Lecture / seminar interactive format- every seminar taught jointly by Dan Prentice and Arad seminar taught jointly by Dan Prentice and Arad Reisberg unless otherwise specified Reisberg unless otherwise specified
4 Tutorials (24 Tutorials (2ndnd term) term)
PreparationPreparation
100% examination: one 3-hour exam (unseen) or 100% examination: one 3-hour exam (unseen) or DissertationDissertation
Textbook and background readingTextbook and background reading
The following reading is recommended by way of background:The following reading is recommended by way of background:
Ferran, Principles of Corporate Finance Law, chs 1-3Ferran, Principles of Corporate Finance Law, chs 1-3Davies, Introduction to Company Law, chs 1-4Davies, Introduction to Company Law, chs 1-4Kraakman et al, The Anatomy of Corporate law, ch 1Kraakman et al, The Anatomy of Corporate law, ch 1
Main textbook: Main textbook:
Principles of Corporate Finance Law/ Principles of Corporate Finance Law/ EilísEilís Ferran (Oxford, OUP) Ferran (Oxford, OUP) Price: £45.00 (Paperback)Price: £45.00 (Paperback)ISBN-13: 978-0-19-923051-8ISBN-13: 978-0-19-923051-8June 2008June 2008
Corporate Finance Law in the UK and EUCorporate Finance Law in the UK and EU [February 2011] [February 2011] Dan PrenticeDan Prentice, , Arad ReisbergArad Reisberg (ed.) (ed.)
Textbook and background readingTextbook and background reading
Statute bookStatute book
Blackstone’s Statutes on Company Law 2010-11Blackstone’s Statutes on Company Law 2010-11 edited by Derek French (14th edition).– it contains edited by Derek French (14th edition).– it contains the CA 2006 – and you will be able to bring this, the CA 2006 – and you will be able to bring this, provided it is provided it is unmarkedunmarked, into the examination. , into the examination.
NB previous editions (apart from 2007/08 editions NB previous editions (apart from 2007/08 editions onwards) will onwards) will notnot contain the 2006 Act. contain the 2006 Act.
NB The Companies Act 2006 is available online at NB The Companies Act 2006 is available online at
http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en.http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en.pdfpdf
No common law/company law No common law/company law
background?background? B. Pettet, J. Lowry & A. Reisberg, Pettet’s Company Law,
3rd ed. (Longman, 2009)
J. Lowry & A. Dignam, Company Law, 6th ed. (2010, OUP). P.L. Davies, Gower and Davies’ Principles of Modern Company
Law, 8th ed. (2008, Sweet & Maxwell); B. Hannigan, Company Law, 2nd ed. (2009, OUP)
Guidance on the reading list Guidance on the reading list (on Moodle) (on Moodle)
It look somewhat intimidating in terms of length It look somewhat intimidating in terms of length
The course will draw from a range of sources, The course will draw from a range of sources, including lots of articles to which you’ll be referred including lots of articles to which you’ll be referred during the course of the year. during the course of the year.
In the reading lists a starring system has been used to In the reading lists a starring system has been used to indicate the material which we consider it to be indicate the material which we consider it to be essential to have read before the relevant seminar. essential to have read before the relevant seminar.
Unstarred items are important, and will aid Unstarred items are important, and will aid understanding, but can be read after the relevant understanding, but can be read after the relevant seminar if necessary.seminar if necessary.
Dissertation in this course?Dissertation in this course?
Corporate Finance dissertation- titles previously submitted by students– see Moodle for full list
Why not? – 50 students in 2008/9– 23 students in 2009/2010– Likely to be different supervision
arrangements (no reading of drafts)
Useful course resources (Moodle)Useful course resources (Moodle)
Companies Act 2006:Companies Act 2006:BERR - what's new?BERR - what's new?
Copy of the ActCopy of the Act
Explanatory notesExplanatory notes
Regulations and Commencement OrRegulations and Commencement Ordersders
Other LegislationOther LegislationBanking (Special Provisions) Act (20Banking (Special Provisions) Act (2008)08)
Financial Services and Markets Act (Financial Services and Markets Act (2000)2000)
Fraud Act (2006) Fraud Act (2006)
Insolvency Act (1986) Insolvency Act (1986)
Limited Liability Partnerships Act Limited Liability Partnerships Act (2000) (2000)
Partnership Act (1890) Partnership Act (1890)
USA: Sarbanes-Oxley Act (2002) USA: Sarbanes-Oxley Act (2002)
Other links: Other links: Westlaw, LexisNexis Westlaw, LexisNexis
All England Reports All England Reports
Acts of Parliament Acts of Parliament
Journal of Corporate Law Studies Journal of Corporate Law Studies
Social Sciences Research Network Social Sciences Research Network
Corporate law links: Corporate law links: European Corporate Governance InstituteEuropean Corporate Governance Institute
Financial Services Authority (FSA)Financial Services Authority (FSA)
Global Corporate Governance ForumGlobal Corporate Governance Forum
Institutional Shareholders CommitteeInstitutional Shareholders Committee
Corporate Governance Corporate Governance Reports: Reports: CadburyCadbury
GreenburyGreenbury
HampelHampel
HiggsHiggs
TurnbullTurnbull
News Sources: News Sources: Financial Times newspaperFinancial Times newspaper
Governance newsletterGovernance newsletter
International Herald TribuneInternational Herald Tribune
Jurist UK legal newsJurist UK legal news
Wall Street JournalWall Street Journal
Want to get in touch?Want to get in touch?
Please try Please try avoidavoid e-mailing me with e-mailing me with questions/queries on a daily basis questions/queries on a daily basis
A signing up sheet is on the board outsideA signing up sheet is on the board outside G3 G3 with the times and slots of my office hourswith the times and slots of my office hours
Administrative assistant: Administrative assistant: Phil Baker [email protected] Phil Baker [email protected] room G3, ground floor, Bentham House room G3, ground floor, Bentham House +44 (0)20 7679 1478 | +44 (0)20 7679 1478 |
Introduction to the Introduction to the BasicsBasics
Terminology GlossaryTerminology Glossary
Company = corporationCompany = corporation
Ordinary shares = common shares / stockOrdinary shares = common shares / stock
Preferred shares = preferred shares / stockPreferred shares = preferred shares / stock
Securities = SecuritiesSecurities = Securities
Memorandum of association = charter or articles Memorandum of association = charter or articles of incorporationof incorporation
Articles of association = by-lawsArticles of association = by-laws
Corporate Law BasicsCorporate Law Basics
The Structure of a CompanyThe Structure of a Company– Board of directorsBoard of directors– Shareholder meetingsShareholder meetings
Two versus the unified boardTwo versus the unified board
The corporate constitution / the corporate contractThe corporate constitution / the corporate contract– Memorandum of association / articles of associationMemorandum of association / articles of association– Articles of incorporation / by-lawsArticles of incorporation / by-laws
Mandatory versus default rulesMandatory versus default rules
Closely-held and publicly-held companiesClosely-held and publicly-held companies
Corporate Law Basics: Corporate Law Basics: Public v Private Companies in the Public v Private Companies in the
UKUK
0
20
40
60
80
100
PublicPrivate
DBERR (DBIS): Public and private companies DBERR (DBIS): Public and private companies incorporated and on the Register 2004-05 to 2008-09 incorporated and on the Register 2004-05 to 2008-09
2004-52004-5 2005-2005-66
2006-72006-7 2007-82007-8 2008-92008-9
PUBLIC PUBLIC COMPANIES COMPANIES
New New incorporationsincorporations
1,1001,100 1,0001,000 1,0001,000 600600 500500
Public companies Public companies as percentage of as percentage of effective registereffective register
0.6%0.6% 0.5%0.5% 0.5%0.5% 0.4%0.4% 0.4%0.4%
PRIVATE PRIVATE COMPANIES COMPANIES
ThousandsThousands
New New incorporationsincorporations
332.7332.7 370.8370.8 448.7448.7 371.7371.7 329.6329.6
Effective number Effective number on register at on register at end of periodend of period
1,9681,968.5.5
2,118.72,118.7 2,330.12,330.1 2,412.72,412.7 2,260.42,260.4
Closely Held Managed by Closely Held Managed by ShareholdersShareholders
Dan’s Electronics Ltd
Manager: Dan
Shareholder: Dan
• Manager and shareholder incentives completely aligned
Closely Held Professional Closely Held Professional ManagementManagement
Dan’s Electronics LtdProfessional Manager
Dan Bill Jim
• Managerial and shareholder incentives not fully aligned
• Agency costs
Publicly HeldPublicly Held
Dan’s Electronics Plc
Professional Management
DanA B WWWHGFEDC
• Company managed and controlled by management
• Collective Action Problem: Shareholders have poor incentives to monitor and control
Collective Action ProblemCollective Action Problem
0
10
20
30
40
50
60
70
80
90
100
Holdings in the Company
Ince
nti
ve t
o M
on
ito
r
• The cost of gathering information and monitoring versus the return on
that information/ monitoring
• Do shareholders exercise any real control over the board of a public company?
• Increased scope for agency costs
Control in ContextControl in Context
UK / US: diverse shareholdingsUK / US: diverse shareholdings
Continental Europe: Continental Europe: blockholding/ cross-holdingsblockholding/ cross-holdings
Liquidity versus controlLiquidity versus control
Explaining Incorporation: Explaining Incorporation: Limited LiabilityLimited Liability
Salomom v SalomonSalomom v Salomon [1897] AC 22, [1897] AC 22, 51 51 perper Lord Macnaghten: Lord Macnaghten:
““The company is at law a different person The company is at law a different person altogether from the subscribers to the altogether from the subscribers to the memorandum; and, though it may be that after memorandum; and, though it may be that after incorporation the business is precisely the incorporation the business is precisely the same as it was before, and the same persons same as it was before, and the same persons are managers, and the same hands receive the are managers, and the same hands receive the profits, the company is not in law the agent of profits, the company is not in law the agent of the subscribers or trustee for them. the subscribers or trustee for them. Nor are the Nor are the subscribers as members liable, in any shape or subscribers as members liable, in any shape or form, except to the extent and in the manner form, except to the extent and in the manner provided by the Act.”provided by the Act.”
Section 3 CA 2006: Limited and unlimited companies Limited and unlimited companies
(1) A company is a “limited company” if the liability of its members is limited by its constitution.
(2) If their liability is limited to the amount, if any, unpaid on the shares held by them, the company is “limited by shares”.
(4) If there is no limit on the liability of its members, the company is an “unlimited company”.
see also: CA 2006, section 7(1), (2) and s 8(1)
Unlimited LiabilityUnlimited Liability
Dan (1 share)
£500,000
Shareholder B (1 share)
£100M
Shareholder C (1 share)
£5M
Dan’s Electronics
£40M
£100M Claim
• Joint and several
• Pro rata
Limited LiabilityLimited Liability
Dan
£500,000
Shareholder A
£100M
Shareholder B
£5M
Dan’s Electronics Ltd
£40M
£100,000 Claim
A shareholders is only liable to pay the amount s/he agreed to pay for the shares held by him/her. The minimum amount of the contribution in respect of each share is its par value (i.e. its fixed nominal value) – s. 542 CA 2006
The modern world is built on two The modern world is built on two centuries of industrialisation. centuries of industrialisation. Much of that was built by equity Much of that was built by equity finance which is built on limited finance which is built on limited liability liability
The Economist, 31 December The Economist, 31 December 1999 1999
Economic Rationales for Economic Rationales for Limited Liability -1 Limited Liability -1
FerranFerran: Limited liability acts as a shield against having to : Limited liability acts as a shield against having to contribute over and above the fixed amount of the investment contribute over and above the fixed amount of the investment they agree to make in return for their shares. they agree to make in return for their shares.
Encouraging entrepreneurial activity: Encouraging entrepreneurial activity: allows people to limit allows people to limit the risks involved in conducting business (in small family run the risks involved in conducting business (in small family run companies but also leads to economies of scale (a major companies but also leads to economies of scale (a major factor in economic progress) factor in economic progress)
Passive investment (investment on the basis that the investor Passive investment (investment on the basis that the investor will not play part in management): leads to separation will not play part in management): leads to separation between ownership and control (but: ’moral hazard’) between ownership and control (but: ’moral hazard’)
Would Dan have taken the risk of personal exposure?Would Dan have taken the risk of personal exposure?
Is Dan risk averse?Is Dan risk averse?
Economic Rationales for Economic Rationales for Limited Liability -2Limited Liability -2
Transferring business risk to parties better Transferring business risk to parties better capable of bearing the riskcapable of bearing the risk
Bank’s risk is diversifiedBank’s risk is diversified Banks may be better monitorsBanks may be better monitors
Dan’s Electronics (Sole Trader) £10,000
Debt Capital
Bank
Economic Rationales for Economic Rationales for Limited Liability -3Limited Liability -3
Limited liability promotes the free Limited liability promotes the free transfer of sharestransfer of shares
It eliminates shareholder – It eliminates shareholder – shareholder monitoring costsshareholder monitoring costs
Free transfer of shares facilitates Free transfer of shares facilitates the market for corporate controlthe market for corporate control
Economic Rationales for Economic Rationales for Limited Liability -4Limited Liability -4
Limited liability promotes Limited liability promotes diversification of shareholdingsdiversification of shareholdings
Why is diversification a good thing?Why is diversification a good thing?
How does limited liability promote it?How does limited liability promote it?
Economic Rationales for Economic Rationales for Limited Liability -5Limited Liability -5
Spread wealth more widely in societySpread wealth more widely in society
Reduces the cost of capital (i.e. the Reduces the cost of capital (i.e. the return required by the providers of a return required by the providers of a company’s share capital and debt). company’s share capital and debt).
Insulate shareholders from tort liabilities Insulate shareholders from tort liabilities
Responses to Limited Responses to Limited LiabilityLiability
Voluntary Creditors: self help: Voluntary Creditors: self help: • Disclosure obligations Disclosure obligations • Rate of returnRate of return• GuaranteesGuarantees
Involuntary CreditorsInvoluntary Creditors• Insurance / compulsory insuranceInsurance / compulsory insurance• Bankruptcy priorityBankruptcy priority• Qualified pro-rata unlimited liabilityQualified pro-rata unlimited liability
Piercing or lifting the Corporate VeilPiercing or lifting the Corporate Veil
Director and shadow director liability (e.g. ss. Director and shadow director liability (e.g. ss. 213 + 214 IA 1986) 213 + 214 IA 1986)
Limited v Unlimited Companies in Limited v Unlimited Companies in the UKthe UK
0102030405060708090
100
UnlimitedLimited
Is Unlimited Liability Is Unlimited Liability Plausible?Plausible?
Consider economic rationales 1-5Consider economic rationales 1-5
Public companies / insurance can normally cover thePublic companies / insurance can normally cover theexposureexposure
What would be the effect of selective What would be the effect of selective unlimited liability (e.g. ‘Relational Company’)?unlimited liability (e.g. ‘Relational Company’)?
Why companies choose to have unlimited Why companies choose to have unlimited liability? liability?
Steps to Starting a Business in the UKSteps to Starting a Business in the UK It requires 6 procedures, takes 13 days, and costs It requires 6 procedures, takes 13 days, and costs
0.76 % GNI per capita to start a business in the 0.76 % GNI per capita to start a business in the United KingdomUnited Kingdom
Source: World Bank Source: World Bank Doing Business 2010 ReportDoing Business 2010 Report
Economy Rankings - Ease of Doing Business Economy Rankings - Ease of Doing Business 20102010
United Kingdom is ranked 5 out of 183 economies. United Kingdom is ranked 5 out of 183 economies. Singapore is the top ranked economySingapore is the top ranked economy
Source: World Bank Source: World Bank Doing Business 2010 ReportDoing Business 2010 Report
United Kingdom's ranking in Doing Business 2010United Kingdom's ranking in Doing Business 2010 Source: adapted from World Bank Source: adapted from World Bank Doing Business 2009 and 2010 Doing Business 2009 and 2010
ReportsReports Ease of…Ease of… Doing Doing
Business Business 20102010
Doing Doing Business Business
20092009
Change in Change in rank rank
Doing Business Doing Business 55 6 6 +1+1Starting a BusinessStarting a Business 1616 99 -7-7Dealing with Dealing with Construction Permits Construction Permits
1616 6161 +45+45
Protecting InvestorsProtecting Investors 1010 99 -1-1Registering PropertyRegistering Property 2323 2222 -1-1Getting CreditGetting Credit 22 22 00Paying TaxesPaying Taxes 1616 1616 00Employing WorkersEmploying Workers 3535 3434 -1-1Enforcing ContractsEnforcing Contracts 2323 2323 00Closing a BusinessClosing a Business 99 99 00
THE ENDTHE END