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 philip.baker@ucl.ac.uk Phil Baker philip.baker@ucl.ac.uk 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