Week 9: Financing and Listing Securities Flashcards
Includes Chapter 11
What is proprietorship?
- Most basic form of business organization.
- Proprietor is owned and operator of business.
- Business is not a separate legal entity – therefore owner is personally liable for a legal perspective
- Difficult to generate captain/grow business
Describe a partnership
Similar to proprietorship except 2+ owners.
What’s a Limited vs. General Partnership?
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
General Partnerships:
- 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 liability issues
How is ownership seperated in a corporation?
- 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
Furthermore, much easier for corps to gain access to capital compared to other forms of organization
What are by-laws and shareholder rights? How are shareholder rights decided?
By-laws are rules and regulations.
Shareholder rights:
- Most decisions within a corp. are decided by BOD and/or management
- Significant events such as electing directors, selling corp requires shareholder approval
- Most decisions passed with 50.1% from shareholders
What is a proxy?
A proxy allows someone else to vote on behalf of a shareholder (if shareholder gives person right to do so)
How do proxy fights inititate?
Increasingly activist investors have engaged in proxy fights (or proxy contests) to influence boards or management teams
Describe details about the BOD’s role in the Corporation process
- BOD elected by shareholders. They have the best interest of shareholders.
- The CEO of the corporation is typically on the BOD.
- Chair of BOD oversees and chairs board meetings and typically has greater influence on its actions
- CEO is often the chairman – shareholders don’t like this (b/c conflict of interest)
- Boards are required to have min. # of independent directors
What is a prospectus?
A length legal doc that sets out the terms of the Public Offerings
What is a greensheet (or bluesheet if working for RBC)
It is a marketing doc is a marketing doc. that summarizes the offering that is used by investment dealers to sell the offering.
How is share price of an IPO determined?
Investment dealer / underwriter will do extensive investigating abt corporation’s operations and financial viability
- From this, future financial projections are made
- Other similar companies and IPOs are reviewed to see how they are valued
From investigations & discussion, a total value of of the company is estimated
What may be applied if equity is being sold for the first time?
A discount
How is value per share set to balance in an IPO?
i) high enough to maximize proceeds for corporation
ii) low enough to ensure all shares sold and that there is positive buying in the market after the IPO
What are Secondary/Equity Issues
They are issuance of equity after first/initial share.
Who gets the proceeds of secondary/equity issues?
- If sale is from NEWLY issued, corps get proceeds. Uses to pay down debt/invest in products or markets
- If sale is from EXISTING shares owned by current holders, those holders get proceeds.
What is a “bought deal” and what risks do investment dealers take?
Bought Deal – Investment dealers buy shares from a company and resell them to investors, taking on the risk.
Example:
- Stock Trades at $50
-Dealers buy at $46 (4% commission + $2 buffer for price drop)
- Goal: Sell to investors before market opens (typically next morning)
Process:
1. Dealers contact investors after market closes
2. Asks how many shares they want and at what price
3. Dealers aim to sell at highest possible price
Risk:
- Stocks can drop overnight, causing the dealer to lose money per share
- If not all shares are sold, dealers may be stuck holding declining shares, risking large financial losses
