Chapter 11: Financing & Listing Securities Flashcards
what are the basic forms of business organization
- proprietorship
- partnership
- corporation
what is a proprietorship
- The most basic form of business ownership
- Exists for very simple, one-person businesses
- Proprietor is owner and operator of business
- The business is not a separate legal entity – therefore owner is personally liable from a legal perspective
- personal assets are used as collateral
- Difficult for owners to generate / obtain capital to grow business
what is a partnership
Similar to proprietorship except that there are 2 or more owners
what is the process if you were an employee and were asked to become a partner of the company
- need to first resign and are no longer an employee
- you would then need to buy equity in the company (since you are an owner, you need ownership in the business; partnerships are private companies)
- the company may give you a loan to purchase shares in the company if needed
since shareholders own the corporation, what can they do
they have ultimate say in how the company is run
what are the different types of partnerships
- limited partnerships
- general partnerships
what is a limited partnership
- must include one general partner who has to be involved in the business and has 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
what is a general partnership
- Partners have unlimited liability and partners are liable for the actions of all partners
- Most partnerships have moved away from this model in recent years given the liability issues
what is a corporation
- By far, the most dominant 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 governs the regulation of corporations
- Government act of incorporation
- The corporation’s charter (original act of incorporation setting out basic rules and regulations)
- By-laws (subsequent to charter, these are rules and regulations set by the corporation’s board of directors and approved by shareholders
Ex. compensation policies, payments of dividends, authority of senior management)
what is a proxy
allows someone else to vote on behalf of a shareholder (if that shareholder gives that person the right to do so)
what are shareholder rights like in a corporation
- Most decisions within a corporation are decided by the board of directors and / or management
- Significant events such as electing directors, selling the corporation (or even a lot of shares)
requires shareholder approval - Most decisions are passed with 50.1% approval from shareholders
who engage in proxy fights
Increasingly activist investors
what does the COB do
oversees and chairs board meetings and typically has greater influence on its actions
who elects the BOD
- shareholders
- to ensure that corporate decisions are made are done in the best interests of shareholders
what is a proxy fight
- proxy contest
- when you are a shareholder and you try to get other shareholders’ proxies
- done to influence boards or management teams
who are activist investors
- investors who are active
- actively trying to change management
what does it mean when a director is independent
directors who are not management or aligned with a very large shareholder
who is often the COB
CEO is often the chairman although some shareholders don’t like this, the BOD would be more independent when the CEO isn’t the COB
who is usually on the BOD
the CEO
what is something more boards are required to have
are required to have a minimum # of independent directors
why would shareholders insist on a minimum # of independent directors
- makes sure they care about the shareholder’s interests
- make sure they are making decisions objectively for other shareholders
who needs capital/money and who has it
- governments and corporations need it
- investors have it
what are private placements
- Sale of corporate debt or equity to private investors
- when there are one on one negotiations
- Not available to the general public
- Managed by investment dealers
- Typically do not require a prospectus
who facilitates the raising of capital
- investment firm/investment dealers/brokerage firms
- they act as a “go-between”
what kind of process is raising capital
a negotiated one
what is the government’s cost of capital
the investor’s return
what are public offerings
- The sale of securities (generally debt or equity) to the public from corporations
- Investment dealers manage the process
why do private placements sometimes generate controversy
- because retail investors are not given access / fear that large institutions are given preferential access / valuation for securities
- because retail investors don’t have access to invest in the corporations
what is a prospectus
sets out the terms of the offering (timing, price, what the proceeds will be used for); it is a lengthy legal document
what is a greensheet
a marketing document that summarizes the offering and is used by the investment dealer to sell the offering
who drafts prospectuses and greensheets
analysts or associates at an investment bank
what is an IPO
- Initial public offerings
- Sale of corporate equity for the first (initial) time
- This is when equity is first listed on a stock exchange or when they “go public
how is value per share determined when pricing an IPO
- set to balance:
1. high enough to maximize proceeds for corporation
2. low enough to ensure that all shares are sold and that there is positive buying in the market after the IPO
how is the share price for an IPO determined
- Investment dealer / underwriter will do extensive investigating (“due diligence”) about the corporation’s operations and financial viability
- From this, future financial projections are made
- Other similar companies are reviewed to see how they are valued
- Other similar IPOs are reviewed to see how they were valued
- From these investigations and valuation discussions, 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
- Typically only a certain % will be sold via an IPO
- That value is divided by a certain # of shares to get to a price range
- Company management will go on a “road show” to meet prospective investors to gauge interest
- Investment dealer will gather feedback and “build a book”
- Investors will indicate interest at various prices based on how much you want to sell and the price potential investors are willing to buy for
what are secondary issues (equity issues)
Issuance of equity after the first (or initial sale)
who gets the proceeds from the sale of stock if its from newly issued shares? & what do they do with it
the corporation gets the proceeds and uses them to pay down debt, invest in new products / markets
who gets the proceeds from the sale of stock if its from existing shares owned by current holders?
those holders get the proceeds
what system are secondary issues done
Secondary issues are often done under the Short-Form Prospectus Distribution (SFPD) System
what is the short-form prospectus distribution (SFPD) system
- Allows companies to issue “short-form” prospectuses which are much shorter than prospectuses for IPOs
- Saves a great amount of time, hassle and money
when are short form prospectuses commonly used for
- most often used for “bought deals”
- Investment dealers / underwriters “buy the deal”, hence the name
- Corporation is guaranteed proceeds
- Investment dealers (consisting of the Financing Group and Banking Group)
how does a bought deal work
- the stock will trade at an amount
- the investment dealers will “buy” the stock at the stock price - the typical 4% commission and also a discount to protect them against the stock declining
- Stock is typically “bought” after 4:00 pm markets close and sold to investors that evening or in the morning before 9:30 am market open
what are investors contacted about in a bought deal
- the # of shares they would buy
- at what price they would buy
what would an investment dealer want in a bought deal
will want to get rid of all of the # of shares at the highest price
what happens after the bought deal
- Corporation gets money
- Investors gets stock
- Investment dealer gets commission
What if overnight markets decline or investors are not interested in buying the issue?
- if the share price declines, investment dealers will loose the amount it declined by
- if investment dealers cannot sell all of the offering and have to hold the shares and if their value continues to decline, tens of $$$ millions can be lost (and a few jobs for those that made the decisions for that bought deal)
what is done to protect investment dealers against declines in a share price after an IPO or equity issue
several after-market stabilization procedures
what are the after-market stabilization procedures
- Underwriters sell more shares than was originally intended (usually about 5%)
- If the share price declines after the equity issue, the underwriters exercise their “over-allotment” or “green shoe” option that allows them to buy shares in the market to cover this “short” position (they have sold shares that they don’t own); This is very common
- Penalize other underwriters whose customers sell shares in aftermarket (not common)
- Establish a “stabilizing bid” to purchase shares less than the offering price (not common)
