CORPORATE FINANCE LAW The second edition of this acclaimed book continues to provide a discussion of key theoretical and policy issues in corporate finance law Fully updated it reflects developments in the law and the markets in the continuing aftermath of the Global Financial Crisis One of its distinctive features is that it gives equal coverage to both the equity and debt sides of corporate finance law, and seeks, where possible, to compare the two This book covers a broad range of topics regarding the debt and equity-raising choices of companies of all sizes, from SMEs to the largest publicly traded enterprises, and the mechanisms by which those providing capital are protected Each chapter analyses the present law critically so as to enable the reader to understand the difficulties, risks and tensions in this area of law, and the attempts made by the legislature and the courts, as well as the parties involved, to deal with them This book will be of interest to practitioners, academics and students engaged in the practice and study of corporate finance law Corporate Finance Law Principles and Policy Second Edition Louise Gullifer and Jennifer Payne OXFORD AND PORTLAND, OREGON 2015 PREFACE AND ACKNOWLEDGEMENTS There have been a great many changes in corporate finance law since the first edition of this book was published in 2011 At that time the global financial crisis had obviously had significant effects on the markets, especially the market for debt, and the increase in regulation which has been a feature of the post-crisis period was beginning to be seen Since 2011 the legal and regulatory changes designed to deal with the aftermath of the crisis have gathered pace Within the EU there has been a slew of new directives and regulations aimed at tackling systemic risk and advancing the goal of a single financial market Many of these have been focused on banks and financial institutions and impact on the material discussed in this book only indirectly but others have impacted very directly on ordinary commercial companies Obvious examples include the 2014 Market Abuse Regulation and Market Abuse Directive, MIFIR/MiFID, the Short Selling Regulation, the Alternative Investment Fund Managers Directive and the Capital Requirements Directive and Regulation There have also been legislative changes at a domestic level that have important effects in this area, such as the Small Business, Enterprise and Employment Act 2015, the Financial Services Act 2012 and the amendments to Part 25 of the Companies Act 2006 concerning the registration of charges There have also been many case law developments, of which some of the most significant have come from the Lehman insolvency, including the Supreme Court decision on the anti-deprivation principle, Belmont Park Investments Pty Ltd v BNY Trustee Services Ltd, the ‘client money’ case and the ‘extended lien’ case Among other cases on debt financing, two on bondholder voting (Assenagon Asset Management SA v Irish Bank Resolution Corporation Ltd and Azevedo v IMCOPA) are particularly significant, as well as Fons HF (In Liquidation) v Corporal Ltd on the meaning of the word ‘debenture’ The aftermath of the crisis has also led to an increase in regulatory enforcement actions and private lawsuits, including the launch of the first ever collective action under section 90 FSMA Market practice has inevitably evolved too, with new forms of financing emerging, such as crowdfunding and peer-to-peer lending, as well as adaptations to existing structures as a result of economic conditions and these legal and regulatory developments It has been an exciting time to be thinking about, researching and teaching corporate finance law In this second edition we have thoroughly updated the text to deal with these myriad, often very significant, developments and to reflect developments both in our own thinking and that of other academics There are new sections to deal with material which has increased in importance (on subjects as diverse as the interpretation of commercial contracts, antiassignment clauses and Islamic finance) or which has been brought into the regulatory spotlight in this period, such as the regulation of gatekeepers (particularly securities analysts and Credit Rating Agencies), short selling, crowdfunding, credit default derivatives and securitisation The book has also been reorganised somewhat and contains two new chapters: chapter four which covers equity financing issues generally and brings together material which has been located in a number of different chapters in the first edition; and chapter twelve which deals with market misconduct and covers market abuse (previously covered in the chapter on secondary market regulation) as well as the new material on short selling regulation and a new section on high frequency and algorithmic trading Other chapters, particularly seven and nine, have been internally reorganised to enable there to be greater focus on specific issues such as financial collateral, and the application of transfer techniques to loans and receivables This book aims to state the law and major policy developments as at May 2015 As with the first edition, many of the issues discussed here have been shaped and developed by the Corporate Finance Law course which we teach in Oxford, and we would like to acknowledge and thank those alongside whom we have taught the course, and argued these points, especially Paul Davies, Ed Greene, Chris Hare, Jeremias Prassl and Richard Salter and the BCL/MJur/MLF classes who have taken the course Special thanks are due to Chris Hale and Emma Watford for continuing to share their knowledge and expertise on Private Equity with us and with the students In writing this book we were assisted by a great many people, to whom we have a continuing debt, namely friends and colleagues in Oxford and beyond with whom we have continued to discuss corporate law and the issues arising out of this book, and we would like to acknowledge their advice and assistance Particular thanks are due to Hugh Beale, Michael Bridge, Roy Goode, Niamh Moloney and Kristin van Zwieten In preparing this second edition we have also been assisted by a number of excellent research assistants: Natalie Mrockova, Jenifer Varzaly, Elizabeth Howell and, in particular, Matteo Angelini, whose assistance was particularly invaluable We would also like to thank Hart Publishing, and in particular Sinead Moloney and Ruth Massey (our really excellent copy editor), for overseeing the production of this book through its various stages with great care and skill Finally, we would like to thank our families for their unfailing patience and support during the writing of this book, and in particular to thank Robert and Nick (respectively) who have been sources of inspiration and encouragement and without whom this project could not have been completed This second edition, like the first edition, is dedicated to them Louise Gullifer and Jennifer Payne Oxford, July 2015 SUMMARY TABLE OF CONTENTS Preface and Acknowledgements Detailed Table of Contents List of Abbreviations List of Common Texts Table of Cases Table of Legislation Introduction Overview of Financing Options The Relationship Between Equity and Debt Issuing Shares Legal Capital Creditor Protection: Contractual Creditor Protection: Proprietary Multiple Lenders Transferred Debt 10 Public Offers of Shares 11 Ongoing Regulation of the Capital Markets: Mandatory Disclosure 12 Ongoing Regulation of the Capital Markets: Market Misconduct 13 Regulation of Debt 14 Takeovers 15 Schemes of Arrangement 16 Private Equity Index DETAILED TABLE OF CONTENTS Preface and Acknowledgements Summary Table of Contents List of Abbreviations List of Common Texts Table of Cases Table of Legislation Introduction Overview of Financing Options 2.1 Introduction 2.2 Equity Financing 2.2.1 Different Types of Shares 2.2.1.1 Ordinary Shares 2.2.1.2 Preference Shares 2.2.2 Sources of Equity Finance 2.3 Debt Financing 2.3.1 General 2.3.1.1 Sources of Debt Finance 2.3.1.2 Choice of Debt Financing Transaction 2.3.1.3 Protection of Creditors: Contractual and Proprietary 2.3.1.4 Protection of Creditors: Regulation 2.3.1.5 Multiple Lenders and Transfer of Debt 2.3.2 Loans 2.3.2.1 Bank Loans 2.3.2.2 Multiple Lenders 2.3.2.3 Peer-to-Peer Lending 2.3.3 Debt Securities 2.3.3.1 General 2.3.3.2 Securities versus Loan 2.3.3.3 Who Issues Bonds? 2.3.3.4 Debt Securities versus Equity 2.3.3.5 Varieties of Bonds 2.3.4 Finance Based on Assets 2.3.4.1 2.3.4.2 2.3.4.3 2.3.4.4 2.4 2.5 2.6 2.7 Receivables Financing Supply Chain Financing Asset-Based Lending Devices Based on Retention of Title 2.3.4.4.1 Sale and Leaseback 2.3.4.4.2 Asset Finance 2.3.4.4.3 Stock Finance 2.3.4.4.4 Sales on Retention of Title Terms 2.3.5 Specialised Forms of Finance 2.3.5.1 Project Finance 2.3.5.2 Financing of Group Companies 2.3.5.3 Trade Finance 2.3.5.4 Islamic Finance Hybrids Retained Profits The Debt/Equity Mix Conclusion The Relationship Between Equity and Debt 3.1 Introduction 3.2 The Relationship Between Equity and Debt in a Solvent Company 3.2.1 Position of Shareholders in a Solvent Company 3.2.1.1 Ordinary Shares 3.2.1.1.1 Rights to Capital 3.2.1.1.2 Rights to Income 3.2.1.1.3 Voting Rights 3.2.1.1.4 Summary 3.2.1.2 Preference Shares 3.2.1.2.1 Rights to Capital 3.2.1.2.2 Rights to Income 3.2.1.2.3 Voting Rights 3.2.1.2.4 Summary 3.2.1.3 Role of Shareholders in a Solvent Company 3.2.1.3.1 Section 172 of the Companies Act 2006 3.2.1.3.2 Explaining the Pre-Eminence of Shareholders 3.2.1.3.3 The Corporate Governance Role of Shareholders 3.2.2 Position of the Creditors in a Solvent Company 3.2.2.1 Non-Adjusting Creditors 3.2.2.2 Risks to Creditors from the Operation of a Solvent Company 3.2.2.3 Restrictions on the Company’s Activities 3.2.2.4 The Corporate Governance Role of Debt 3.2.2.4.1 Debt Covenants 3.2.2.4.2 Monitoring by Lenders 3.3 3.4 3.2.2.4.3 Lender Influence on Breach 3.2.2.4.4 Lenders as Directors? 3.2.2.4.5 Is Lender Governance Efficient? 3.2.2.4.6 Effect of Transfer of Risk by Lenders 3.2.2.4.7 The Twilight Period before Insolvency The Relationship Between Debt and Equity in an Insolvent Company 3.3.1 Order of Payment Out on a Winding Up or Distribution by an Administrator 3.3.1.1 Holders of Proprietary Claims 3.3.1.2 Order of Priority 3.3.1.2.1 Liquidation or Administration Expenses 3.3.1.2.2 Preferential Creditors 3.3.1.2.3 The Prescribed Part 3.3.1.2.4 General Unsecured Creditors 3.3.1.2.5 The Shareholders 3.3.2 Preservation of the Assets for Creditors on and During the Run-up to Insolvency 3.3.2.1 Preventing Reduction of the Asset Pool 3.3.2.1.1 Statutory Provisions 3.3.2.1.2 The Anti-Deprivation Principle 3.3.2.2 Preventing Uneven Distribution of the Assets 3.3.2.3 Potential Overlap Between the Prevention of Reduction of the Asset Pool and the Prevention of Uneven Distribution of Assets 3.3.2.4 Protection of Creditors 3.3.3 The Balance Between Creditors and Shareholders in an Insolvent Company 3.3.3.1 Directors’ Duties 3.3.3.2 Lifting the Veil Between the Creditors and the Shareholders 3.3.3.2.1 Common Law Mechanisms 3.3.3.2.2 Statutory Mechanisms: Sections 213 and 214 Insolvency Act 1986 Conclusion Issuing Shares 4.1 Introduction 4.2 Shareholder Protection when Shares are Issued 4.2.1 The Need for Shareholder Protection 4.2.1.1 Dilution of Existing Shareholders’ Interests 4.2.1.2 Misuse by the Directors of the Power to Issue New Shares 4.2.2 Existing Company Law Mechanisms that Operate to Protect Shareholders 4.2.2.1 Directors’ Duties 4.2.2.2 Minority Shareholder Protection 4.2.3 Justification for Additional Protection in Relation to Share Issues 4.3 Directors’ Authority to Allot Shares 4.4 Pre-Emption Rights 4.4.1 Scope of Pre-Emption Rights 4.4.2 Renounceable Letters of Allotment cash, here–here creditor protection, here–here currency, here, here financial assistance, here–here no discount rule, here–here, here non-cash, here–here, here, here–here, here par value, here–here rules, here–here sanctions, here–here shareholder protection, here–here debentures and, here debt securities and, here, here–here dematerialisation, here–here global certificates, here income rights, here, here intangible property, here, here intermediaries, here–here issues see share issues legal capital rules see capital rules liquidity, here, here mortgages, here ordinary shares see ordinary shares pre-emption see pre-emption rights preference shares see preference shares price manipulation, here public offers see IPOs redemption, here–here, here, here registration, here, here, here rights, here, here, here secondary markets see secondary markets shareholding methods, here–here transfer see share transfer trusts, here–here types, here–here, here–here voting rights, here, here Sharia law, here, here–here shelf companies, here ships: securities, here short selling: bans, here, here–here circuit breakers, here–here covered selling, here, here–here debt securities, here–here distabilisation of markets, here–here ESMA role, here–here EU law, here, here–here justifying regulation, here–here mandatory disclosures, here–here, here–here market abuse, here–here meaning, here–here naked short selling, here, here–here national authorities and, here–here settlement periods, here settlement risk, here–here, here–here uncovered selling, here, here–here upstick rules, here–here signalling, here, here, here, here, here, here single-member companies, here small companies: capital rights, here equity capital, here equity crowdfunding, here–here, here–here equity finance, here finance leases, here guarantees, here hire purchase, here options, here, here overdrafts, here–here peer-to-peer lending, here receivables financing, here–here share issues, here share repurchase, here supply chain financing, here sole traders, here solvency statements: alternative to capital rules, here–here auditing, here capital reduction, here–here civil liability, here criminal liability, here, here, here, here–here law reform, here–here recovering unlawful payments, here–here share repurchases, here solvency test, here–here sophisticated investors, here, here, here, here, here, here–here, here, here, here, here–here, here, here, here sovereign wealth funds, here, here special purpose vehicles (SPVs): asset-based securities, here Islamic finance, here–here project finance, here, here securitisation, here–here, here–here squeeze-outs, here–here, here, here, here, here stakeholders: directors’ duties, here, here, here, here, here private equity and, here–here, here, here takeovers and, here, here–here, here stamp duty, here standby credits, here, here stock see loan stock Stock Exchange Pre-Emption Group, here structural subordination, here, here sub-participation, here, here, here, here–here subordination: administration, here asset-based lending, here contingent debts, here, here contractual subordination, here–here creditor protection, here–here debt securities, here, here, here effect, here hybrid instruments, here–here, here insolvency and, here–here meaning, here, here–here multiple lenders, here, here, here pari passu principle and, here, here–here private equity, here, here schemes of arrangement and, here shareholder claims on insolvency, here structural subordination, here, here turnover trusts, here–here, here types, here–here subprime mortgages, here subrogation, here, here, here, here, here, here, here supply chain financing: meaning, here swaps, here swinglines, here syndicated loans: arrangers, here–here bonds and, here–here covenants, here–here, here, here debt buybacks, here, here democratic structure, here, here–here duty exclusion clauses, here–here, here, here, here fiduciary duties of arrangers, here–here fiscal agents v trustees, here–here information memoranda, here, here–here, here information rights, here–here majority lenders, here–here meaning, here modification of agreements, here monitoring borrowers and, here, here overview, here–here position of agent banks, here private equity, here pro-rata clauses, here, here secondary market, here, here securitisation, here standard terms, here sub-participation, here, here, here, here–here transfer, here, here, here, here–here, here, here underwriting, here uses, here waiver of breach, here takeover bids: advertising, here agency conflict, here, here, here allocative efficiency, here bidder directors and bidder shareholders, here–here bidders and target shareholders, here–here equality principle, here, here–here EU law, here undistorted choice, here–here breakthrough rule, here City Code, here, here amending, here, here–here break fee arrangements, here competing bids, here directors’ opinions, here–here, here equal treatment, here, here formal offers, here–here further offers, here information to bidder shareholders, here initial approaches, here–here minority shareholders, here, here, here objectives, here origins, here–here pre-bid defences, here private equity takeovers, here role, here sanctions, here schemes of arrangement, here, here sell-outs, here shareholders v directors, here undistorted choice, here–here creditors and, here effect, here employee rights, here, here–here EU regulation, here, here, here–here, here, here formal offers, here–here further offers, here hostile bids, here, here, here, here–here, here, here–here, here, here initial approaches, here–here insider dealing, here, here international comparisons, here, here–here law reform, here, here–here mandatory bids, here–here meaning, here minority shareholders bypassing, here exit rights, here–here prevention of oppression, here–here protection, here, here–here no frustration principle, here, here, here, here–here effect, here–here EU law, here stakeholders and, here UK v US, here–here Unocal test, here–here overpayment, here post-bid defences, here–here directors’ opinions, here–here, here directors’ share purchase, here insufficient price, here White Knights, here–here pre-bid defences crown jewels defence, here directors’ duties, here–here directors v shareholders, here–here new share issues, here, here poison pills, here, here–here, here–here removal of directors, here–here special dividends, here staggered boards, here–here voting rights, here, here principles, here process, here–here profit forecasts, here promises, here regulatory objectives, here–here sell-outs, here–here, here, here, here, here shareholder-centric model, here, here, here–here, here, here short-termism, here, here–here squeeze-outs, here–here, here, here, here, here tactical litigation, here–here target directors v shareholders, here–here target stakeholders and, here, here–here, here time limits, here, here UK regulatory structure flexibility, here history, here–here overview, here–here speed, here, here Takeover Panel: appeals to, here, here–here bidder shareholders and, here Eurotunnel decision, here immunity, here institutional investors and, here judicial review, here–here membership, here, here–here objectives, here origins, here private equity takeovers and, here role, here, here–here sanctions, here, here schemes of arrangement and, here, here short-termism and, here–here speedy reactions, here status, here–here, here takeovers: bids see takeover bids dispersed shareholdings and, here–here, here–here, here, here effect, here, here, here governance and, here–here Panel see Takeover Panel public-to-private takeovers, here–here schemes of arrangement or, here–here share-exchange, here tangible property, here taxation: absolute or security interests, here corporation tax, here, here Crown preference, here, here debt securities, here dividends, here eurobonds, here finance leases, here group companies, here hybrid instruments, here non-adjusting creditors, here, here private equity, here, here, here, here, here schemes of arrangement, here significance, here third parties: absolute or security interests and, here, here breach of covenants and, here–here contractual rights against, here, here–here, here benefits, here bonds, here categories of parties, here credit insurance, here, here–here derivatives see credit derivatives forms, here guarantees see guarantees indemnities, here–here, here–here nature of liability, here performance bonds, here, here–here, here–here subordination see subordination floating charges and, here–here insurance, here multiple lenders and, here ranking of security interests and, here–here schemes of arrangement and, here tort claims: breach of covenants, here–here class actions, here compulsory insurance, here–here deceit see deceit defective prospectuses, here–here importance, here misrepresentation: syndicated loans, here–here non-adjusting creditors, here, here rights, here security interests and, here US v UK, here trade creditors, here, here, here–here, here trade finance, here trade marks, here transaction costs, here, here, here, here, here, here, here, here transfer of debts: alternative structures, here–here assignment see assignment borrowers’ knowledge, here debt securities see debt securities intermediated securities, here–here loans see loan transfer methods, here–here multiple lenders, here–here, here negotiable instruments, here–here novation, here, here, here–here price transparency, here reasons, here–here receivables, here–here restrictions, here security transfer, here shares see share transfer survey, here–here syndicated loans, here, here, here, here–here, here, here transfer of obligations, here–here transferable securities: bonds see bonds debentures see debentures definition, here hybrids see hybrid instruments mandatory disclosures, here, here–here shares see shares treasury shares, here–here trustees: bonds, here–here, here–here, here–here, here conflicts of interest, here, here debt securities events of default, here–here excluding duties, here–here functions, here–here information rights, here–here modifying trust deeds, here–here monitoring, here, here–here no-action clauses, here, here–here, here–here obligations, here–here duty exclusion clauses construction, here–here debt securities, here–here forms, here–here public policy, here–here unfair contract terms, here fiduciary duties, here–here bonds, here, here–here, here fiscal agents v trustees, here, here–here loan stock, here, here–here professional corporate trustees, here, here–here security trustees, here, here trusts: anti-assignment clauses and, here–here, here–here bonds, here, here, here–here advantages, here–here bearer bonds, here–here subject matter, here certainty of intention, here certainty of objects, here–here certainty of subject matter, here–here, here concept, here–here equitable interests, here–here equity, here–here implied trusts, here multiple lenders and, here pre-payments, here property, here proprietary interests, here Quistclose trusts, here shares, here–here turnover trusts, here–here, here, here use in commercial transactions, here–here turnover trusts, here–here, here, here UK Stewardship Code, here underinvestment, here undervalue transactions, here, here, here, here, here undue influence, here unfair contract terms, here, here, here, here unfair preferences, here–here, here UNIDROIT: Geneva Securities Convention, here United States: algorithmic trading, here asset-based lending, here banks: monitoring borrowers, here bonds: minority protection, here class actions, here comparative law, here corporate rescue procedure, here credit default swaps, here creditor governance role, here creditor protection: contract, here cross-listing, here debt restructuring, here debt securities, here Delaware, here–here, here dispersed shareholdings, here, here–here D&O insurance, here financial crisis, here financial reporting, here, here, here Flash Crash (2010), here–here fraud on the market, here inside information, here insider dealing, here, here junk bonds, here legal capital, here leveraged buy-outs, here, here market manipulation, here, here notice filing system, here, here pay-for-performance, here pre-emption rights, here, here private equity, here–here, here, here private placement market, here prospectuses: criminal enforcement, here–here Sarbanes-Oxley Act, here security interests, here–here, here, here staggered boards, here subprime mortgages, here takeover bids, here 1990s, here administration, here–here agency conflict, here–here defences, here–here Delaware model, here–here poison pills, here–here stakeholders, here tort claims, here unlimited companies, here unsecured creditors see ranking of creditors Vandepitte procedure, here–here venture capital, here, here, here, here, here, here, here–here, here, here, here voting rights: dilution, here institutional investors, here intermediaries, here ordinary shares, here, here–here preference shares, here, here–here takeover bids and, here, here waiver: no-waiver clauses, here Walker Report (2007), here–here warranties see covenants waterfall clauses, here, here, here websites, here Wheatley Report (2012), here, here White Knights, here–here winding up see liquidations Winter Group Report, here wrongful trading, here, here, here, here, here–here, here, here, here zero coupon bonds, here Published in the United Kingdom by Hart Publishing Ltd 16C Worcester Place, Oxford, OX1 2JW Telephone: +44 (0)1865 517530 Fax: +44 (0)1865 510710 E-mail: mail@hartpub.co.uk Website: http://www.hartpub.co.uk Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA Tel: +1 503 287 3093 or toll-free: (1) 800 944 6190 Fax: +1 503 280 8832 E-mail: orders@isbs.com Website: http://www.isbs.com © Louise Gullifer and Jennifer Payne 2015 Louise Gullifer and Jennifer Payne have asserted their right under the Copyright, Designs and Patents Act 1988, to be identified as the authors of this work 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 of Hart Publishing, or as expressly permitted by law or under the terms agreed with the appropriate reprographic rights organisation Enquiries concerning reproduction which may not be covered by the above should be addressed to Hart Publishing Ltd at the address above British Library Cataloguing in Publication Data Data Available ISBN: 978-1-78225-959-6 Typeset by Compuscript Ltd, Shannon ... the practice and study of corporate finance law Corporate Finance Law Principles and Policy Second Edition Louise Gullifer and Jennifer Payne OXFORD AND PORTLAND, OREGON 2015 PREFACE AND ACKNOWLEDGEMENTS.. .CORPORATE FINANCE LAW The second edition of this acclaimed book continues to provide a discussion of key theoretical and policy issues in corporate finance law Fully updated... been shaped and developed by the Corporate Finance Law course which we teach in Oxford, and we would like to acknowledge and thank those alongside whom we have taught the course, and argued these