Chapter 11 - financing + listing securities Flashcards
what are the 3 basic forms of business organization
proprietorship
partnership
corporation
what’s a proprietorship
the most basic form of business ownership
exits for very simple, one-person business
proprietor is owners and operator of business
proprietor is owner and operator of business
the business is not a separate legal entity - therefore owner is personally liable from a legal perspective
difficulty for owners to generate/obtain capital to grow business
what’s a partnership
similar to proprietorship except that there’s 2 or more owners
define a limited partnership
must include 1 general partner who has to be involved inthe business an dhas personal liability
- limited partners cannot be involved in the running of business and liability is limited to their investment
- many hedge fund are structured as limited partnerships
define general partnerships
partners have unlimited liability and partners are liable for the actions all partners
- most partnerships have moved away from this model in recent years given the liability issues
what’s a corporation
most domoniant form of organization when measured by dollars of assets or sales
ownership is separate from management
-ownership is transferred by the buying and selling of shares
- separate legal entity - therefore owners do not have legal liability for the actions of the corporation or its employees
- much easier to corporations to access capital vs other forms of organization
what happened to the organization of investment banks?
many went from partnerships to corporation for capital
who governs the regulation of corporations
government act of incorporation
the corporation’s charter - original act of incorporation setting out basic rules + regulation
by-lay (subsequent to chart, these are rules and regulations set by the corporation’s board of directors and approved by shareholders
how are most decisions made within a corporation?
most are decided by BOD and/or management
which decisions require shareholders approval
significant events - electing directors, selling the coporation
- most decisions are passed with a 50.1% approval from shareholders
define a proxy
allows someone else to vote on behalf of a shareholder - if that shareholder gives that person the right to do so
define activist investors
investors influencing the actions of the firm/senior management team
have more activist investors engaged in proxy fights?
yes they have to influence boards or management teams
is the CEO typically on the board?
yes
why do shareholders have the ultimate say in how a company is run
bc they own the corporation
what are board of directors
elected by shareholders to ensure that corporate decisions are made that are in the best interests of shareholders
define independent directors
directors who are not management or aligned with a very large sharholders
why would shareholder insist on a minimum number of independent directors?
not influenced by management, and stay clear and focused on protecting shareholders interest
who are the “go-between” to facilitate the raising of capital
investment firms/investment dealers/brokerage firms
what’s the government’s cost of capital
the investor’s return
what’s raising of capital
a negotiated process
what’s the financing procedure for private placements ( not done on public markets)
sale of corporate debt or equity to private investors
not available to the general public
managed by investment dealers
typically do not require a prospectus
why are private placements controversial?
retail investors aren’t given access, fear that large institutions are given preferential access, valuation for securities
what’s the financing procedure for public offerings?
the sale of securities to the public from corporations
investment dealers manage the process
a prospectus sets out the terms of the offering - lengthy legal document
a greensheet (or bluesheet if you work at rbc) is a marketing document that summarizes the offering and is used by the investment dealer to sell the offering
how is the share price for an IPO determined?
based on PV from due diligence of future financial projections
- other similar companies are reviewed to se how they are valued, other similar IPOs are reviewed to see how they were valued
- a total value of the company is estimated
- a discount to this total value may be applied given that equity in the corporation is being sold for the first time
how much % of ownership is sold in an IPO
only a certain percentage
that value is dividend by a certain number of shares to get a to a price range
how does an investment dealer
“build a book”
after the company management goes on a road show to meet prospective investors to gauge interest
investment dealer will gather feedback to build the book
- investors will indicate interest at various prices
how is the value per share set to balance?
- high enough to maximize proceeds for corporation
- low enough to ensure that all shares are sold and that there is positive buying in the market after the IPO
how are secondary issues done?
done under the short-form prospectus distribution system (SFPD)
what’s the SFPD?
allows the companies to issue short form prospectuses which are much shorter than prospectuses for IPOs, saves a great amount of time, hassle + money
- most often used for “bought deals”
- investment dealers/underwriters “buy the deal”, hence the name
- corporation is guaranteed proceeds
investors will buy the stock after the market close and sold to other investors that evening or in the morning before the market opens at 9:30AM
investors are contacted and asked about the number of shares they would buy and at what price
the investment dealer will want to get rid of all the number of shares at the highest price
how to protect against declines in a share price after an IPO or equity issue
several after-market stabilization procedures
underwriters sell more shares than was originally intended
penalize other underwrites whose customer sell share in aftermarket
establish a stabilizing bid to purchase shares less than the offering price
