Corporate Finance Flashcards
what does debt include ?
Debt include:
• Debt instruments;
o E.g. a debenture (an acknowledgement of debt) – an “I owe You” (a loan from an individual – generally a shareholder. It is NOT called a loan in company law)
• Loans (long or short term);
o E.g. Loan from a bank to buy a property
• Lease agreements;
o E.g. A hire purchase agreement e.g. buying a vehicle in terms of the National Credit Act.
• Credit from suppliers;
o E.g. Buying merchandise on credit
• Overdrafts from banks.
o E.g. A loan from the bank without fixed monthly payments – only banking fees must be paid.
What does Equity include ?
Equity include:
• Shares; and
o A company amongst other obtains funding by issuing shares.
o A “share” means one of the units into which the proprietary (ownership) interest (claim) in a profit company is divided.
o It is possible for a company to have different classes of shares (see below). Different rights are attached to different classes of shares (see below)
o A “shareholder”, subject to section 57(1), means the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be.
o The holder of a share (a shareholder) is entitled to a defined interest in the company as set out in the MOI.
• Retained income (Net Profit).
o The company may decide to some profit for future operations rather than paying the profits out as dividends.
o The Act gives directors the default power (this means that the directors will have that power where the MOI is silent on the matter – thus the MOI may change the position), to declare dividends.
What does security mean ?
“Securities” means any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company.
Discuss shares
General Revision: In simple terms a share is an interest in the company, consisting of personal rights. A company may have one homogeneous type of share or different classes of shares.
Stated differently: Shares are movable property, which creates a personal right that entitles shareholders to share in the profits of a company, if the company declares dividends. The share certificate serves as proof that that a person is the owner of shares in the company. The information of all shareholders are entered into the company’s securities register. The Securities register is a record of particulars of the members of the company that serves as proof that one is a member of the company.
We can distinguish between:
• authorized shares/ authorised share capital (is the amount of shares specified in the MOI as the maximum number of shares to be issued to persons);
• issued shares/ Issued share capital (those authorized shares which have actually been issued to persons in return for consideration)
• unissued shares/ unissued share capital (those authorized shares which have not been issued to persons in return for consideration or have been issued and then later bought back by the company)
Discuss classes of shares
Classes of authorised shares include:
• Preference shares - either cumulative, non–cumulative, participating, redeemable, and/or convertible shares (These shares will share in retained earning first – i.e. they will get dividends first.)
o Cumulative preference shares - if any dividend payments have been missed in the past, the dividends owed must be paid out to cumulative preferred shareholders first. (These shares allow for arrear dividends to accumulate and be added to a dividend declared in a subsequent financial year)
o Non–cumulative preference shares - if any dividend payments have been missed in the past, the shareholder does not have the right to claim any of the unpaid dividends in the future
o Participating preference shares - the right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid is given (These shares entitle shareholders to share distributions of surplus profits after the payment of their dividends.)
o Redeemable preference shares (at a fixed future date the company is contractually obliged to repurchase the shares at an agreed price)
o Convertible preference shares - an option for the holder to convert the preferred shares into a fixed number of common shares, usually any time after a predetermined date (Shares which give shareholders the right to convert these shares into shares of another class at a specific time, or after the occurrence of a specific event.)
• Ordinary shares (get dividends after preference shares) Dividends are not fixed. Only entitled to dividends after having been declared.
• Deferred shares – also known as equity -, promotor’s – or founder’s shares. (directors which promoted/created the company usually get such shares) The holders of such a share is entitled to a portion of the profits if the dividend on ordinary shares exceeds a fixed percentage. Holders of deferred shares receive payment after the holders of ordinary and preference shares has been paid dividends. Although they receive dividends last their yield may be the greatest.(These shares qualify for a dividend after a prescribed minimum dividend has been paid to ordinary shareholders. These shares are also called Founder shares.)
• Bonus shares (capitalisation shares – instead of paying a dividend the company issue shares)
• Unclassified shares (subject to classification by the Board of Directors – number/ amount indicated but not class)
• “Blank” shares (the preferences, rights and limitations and other terms associated with the shares are not specified and are subject to determination by the Board of Directors) number/ and class amount not indicated
• Etc.
The preferences, rights and limitations and other terms associated with the shares include:
• Voting rights (special, conditional or limited voting rights);
• Sharing in profits;
o Whether shares are redeemable of coverable
o Entitle shareholders to distributions e.g. to cumulative, non- cumulative, partly cumulative dividends.
• Participating in new issues of capital
• Participating in the distribution of assets when the company is wound up (Provide for shares to have preference over other classes of chares with respect to distributions or rights upon the final liquidation of the company.)
• etc.
All shares of the same class have the same preferences, rights and limitations attached to them. Different classes of shares have different preferences, rights and limitations attached to them.
Discuss issued shares
2.1 Issued shares
2.1.1 What are issued shares?
Issued shares are authorised shares which are allocated to a particular shareholder in return for consideration.
2.1.2 Who has the power to issue shares?
The Act gives the board of directors the default power (this means that the directors will have that power where the MOI is silent on the matter – thus the MOI may change the position), to determine the company’s issued shares
2.1.3 Consideration
Section 40 of the Act regulates “Consideration for shares”. In essence consideration may consist of cash, assets other than cash, labour and future services or benefits.
Discuss unissued shares
Unissued shares authorized shares which have not been issued to persons in return for consideration or have been issued and then later bought back by the company.
The default position is that directors may:
• Reclassify authorized, unissued shares;
• Increase or decrease authorized, unissued shares.
