Principles of corporate finance law, second edition ferran, eilis ho, look chan

Principles of corporate finance law, second edition ferran, eilis ho, look chan Principles of corporate finance law, second edition ferran, eilis ho, look chan Principles of corporate finance law, second edition ferran, eilis ho, look chan Principles of corporate finance law, second edition ferran, eilis ho, look chan Principles of corporate finance law, second edition ferran, eilis ho, look chan Principles of corporate finance law, second edition ferran, eilis ho, look chan Principles of corporate finance law, second edition ferran, eilis ho, look chan

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 Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © E Ferran and L C Ho 2014 The moral rights of the authors have been asserted Second edition published in 2014 Impression: All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Crown copyright material is reproduced under Class Licence Number C01P0000148 with the permission of OPSI and the Queen’s Printer for Scotland Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2013949382 ISBN 978–0–19–967134–2 (Hbk) 978–0–19–967135–9 (Pbk) Printed in Great Britain by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work 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 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 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 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? 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 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 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 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 not take up (or sell) subscription rights When statutory pre-emption rights 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 Classes of Shares Scope of this Chapter The Legal Nature of a Share Financial Incidents of Shares: Capital and Dividends What financial entitlements 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 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 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 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 118 European Commission, Proposal for a Directive on Markets in Financial Instruments repealing Directive 2004/39/EC (COM(2011) 656); European Commission, Proposal for a Regulation on Markets in Financial Instruments and Amending Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (COM(2011) 652) 119 FH Kung, ‘The Regulation of Corporate Bond Offerings: a Comparative Analysis’ (2005) 26 University of Pennsylvania Journal of International Economic Law 409, 410–1; IOSCO, Transparency of Corporate Bond Markets 120 GA Ferrarini, ‘Market Transparency and Best Execution: Bond Trading under MiFID’ in M Tison et al (eds), Perspectives in Company Law and Financial Regulation (Cambridge: CUP, 2009) 121 COM(2011) 656; COM(2011) 652, 7–9 122 COM(2011) 652, 7–9 123 R Healey, MiFID II and Fixed-Income Price Transparency: Panacea or Problem? (TABB Group, 2012) 124 Regulation (EU) No 648/2012 of the European Parliament and of the Council of July 2012 on OTC derivatives, central counterparties and trade repositories [2012] OJ L201/1 125 European Commission, Proposal for a Regulation on Improving Securities Settlement in the European Union and on Central Securities Depositories (CSDs) (COM(2012) 73) 126 , accessed July 2013 127 , accessed July 2013 128 LSE, Listing and Admitting Retail Bonds 129 European Commission, Proposal for a Regulation on Improving Securities Settlement in the European Union and on Central Securities Depositories (CSDs) (COM(2012) 73) 130 Directive (EC) 98/26 of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems [1998] OJ L166/45 (amended in certain respects by Directive 2009/44/EC, [2009] OJ L156/37) 131 European Commission, Proposal for a Regulation on Improving Securities Settlement in the European Union and on Central Securities Depositories (CSDs) (COM(2012) 73) 132 , accessed July 2013 .. .Principles Of Corporate Finance Law Principles of Corporate Finance Law Second Edition EilÍs Ferran and Look Chan Ho Great Clarendon Street, Oxford, OX2... comments about OUP Look Chan Ho London November 2013 Contents Table of Cases Table of Legislation List of Abbreviations I OVERVIEW The Regulatory Framework Scope of the Book Types of Company Limited... 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