UCL FACULTY OF LAWS LLM Corporate Finance 2010/11Introduction
What is the course about? • Essentially what it says on the tin: it is how companies finance their operations • The three primary sources of corporate finance: • equity financing, that is share capital, • debt financing and • the regulation of companies in terms of their use of retained earnings. • A fair amount of company law, in particular the regulation of legal capital, which is a 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. • In looking at the debt finance side, we pick up on issues in the law of contract and some property law aspects. • We also examine some of the company law rules relating to, in particular, disclosure of the debt financing arrangements within a company. • With regard to distributions, we look at the way that company law deals with issues relating to profits, dividends, share buy-backs and reductions in capital and similar transactions.
The sources of corporate finance • private sources, such as bank borrowing • the way in which companies access the public markets - public issues of securities, both domestically and internationally as well, through international equity offerings, international bond issues etc. • The law we will be concentrating on is a mix of primarily company law and securities regulation. • Both company law and securities regulation in the UK are, to a large extent, driven from Brussels. So, there is a great deal of European law which takes effect in the UK and which sets the framework within which we operate. • some of the very prominent themes in the international debate about the capital markets, the ways in which law, for example, can promote the competitiveness of one market over the other • market Abuse and insider dealing. 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 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 on,domestically (with company law having been reformed dramatically in recent years), regionally (where there is a major programme of EU activity) and internationally as well.
Course Outline • Term 1 Equity financing (5) (1-5) 12, 19, 26 October; 2 and 9 November Public distributions of securities (IPO) (3) (6-8) 16, 23, 30 November Insider dealing; Market abuse (2) (9-10) 7, 14 December • Term 2 Debt financing (4) (11-14) 11, 18, 25 January and 1 February Schemes of Arrangement (1) (15) 8 February European law and policy (1) (16) 16 February Credit Rating Agencies (1) (17) 23 February Corporate Governance (1) (18) 1 March Takeovers (1) (19) 8 March Combined Code (1) (20) 15 March Corporate taxation (1) (20) 22 March
Teachers • Dr Arad Reisberg (Convenor) • Visiting Professor, Dan Prentice (formerly: Allen and Overy Professor of Corporate Law, Oxford University • Distinguished guest speakers: • John Papanichola (Partner at Slaughter and May) • Jonathan Marsh (Partner, BLP Law) • John Cone (Head of Erskine Chambers) • Miranda Leung and Mark Dwyer (Slaughter And May partners) • Edward Walker-Arnott, an Honorary Visiting Professor, UCL (a former senior partner of Herbert Smith, solicitors, London) • John Vella (Oxford University Centre for Business Taxation, Senior Research Fellow) • Dr. Iris Chiu ( UCL Laws)
Teaching Method • Seminars There will be 21 seminars. Seminars will start in first term, and run until last week of 2nd term. There will also be lectures given by external speakers during the year. • Tutorials There will be 4 tutorials (i.e. on 4 different topics) in the second term. Further details to follow.
Course Requirements • Lecture / seminar interactive format- every seminar taught jointly by Dan Prentice and Arad Reisberg unless otherwise specified • 4 Tutorials (2nd term) • Preparation • 100% examination: one 3-hour exam (unseen) or Dissertation
Textbook and background reading The following reading is recommended by way of background: Ferran, Principles of Corporate Finance Law, chs 1-3 Davies, Introduction to Company Law, chs 1-4 Kraakman et al, The Anatomy of Corporate law, ch 1 Main textbook: Principles of Corporate Finance Law/ Eilís Ferran (Oxford, OUP) Price: £45.00 (Paperback)ISBN-13: 978-0-19-923051-8June 2008 • Corporate Finance Law in the UK and EU [February 2011] Dan Prentice, Arad Reisberg (ed.)
Textbook and background reading • Statute book Blackstone’s Statutes on Company Law 2010-11 edited by Derek French (14th edition).– it contains the CA 2006 – and you will be able to bring this, provided it is unmarked, into the examination. NB previous editions (apart from 2007/08 editions onwards) will not contain the 2006 Act. • NB The Companies Act 2006 is available online at http://www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en.pdf
No common law/company law 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 (on Moodle) • It look somewhat intimidating in terms of length • The course will draw from a range of sources, including lots of articles to which you’ll be referred during the course of the year. • In the reading lists a starring system has been used to indicate the material which we consider it to be essential to have read before the relevant seminar. • Unstarred items are important, and will aid understanding, but can be read after the relevant seminar if necessary.
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)
Want to get in touch? • Please try avoid e-mailing me with questions/queries on a daily basis • A signing up sheet is on the board outside G3 with the times and slots of my office hours • Administrative assistant: Phil Baker email@example.com room G3, ground floor, Bentham House +44 (0)20 7679 1478 |
Terminology Glossary • Company = corporation • Ordinary shares = common shares / stock • Preferred shares = preferred shares / stock • Securities = Securities • Memorandum of association = charter or articles of incorporation • Articles of association = by-laws
Corporate Law Basics • The Structure of a Company • Board of directors • Shareholder meetings • Two versus the unified board • The corporate constitution / the corporate contract • Memorandum of association / articles of association • Articles of incorporation / by-laws • Mandatory versus default rules • Closely-held and publicly-held companies
DBERR (DBIS): Public and private companies incorporated and on the Register 2004-05 to 2008-09
Closely Held Managed by Shareholders • Manager and shareholder incentives completely aligned Dan’s Electronics Ltd Manager: Dan Shareholder: Dan
Closely Held Professional Management • Managerial and shareholder incentives not fully aligned • Agency costs Dan’s Electronics Ltd Professional Manager Bill Dan Jim
Publicly Held • Company managed and controlled by management • Collective Action Problem: Shareholders have poor incentives to monitor and control
Collective Action Problem • 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 Context • UK / US: diverse shareholdings • Continental Europe: blockholding/ cross-holdings • Liquidity versus control
Salomom v Salomon  AC 22, 51 per Lord Macnaghten: “The company is at law a different person altogether from the subscribers to the memorandum; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.”
Section 3 CA 2006: 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 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 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 centuries of industrialisation. Much of that was built by equity finance which is built on limited liability The Economist, 31 December 1999
Economic Rationales for Limited Liability -1 • Ferran: Limited liability acts as a shield against having to contribute over and above the fixed amount of the investment they agree to make in return for their shares. • Encouraging entrepreneurial activity: allows people to limit the risks involved in conducting business (in small family run companies but also leads to economies of scale (a major factor in economic progress) • Passive investment (investment on the basis that the investor will not play part in management): leads to separation between ownership and control (but: ’moral hazard’) • Would Dan have taken the risk of personal exposure? • Is Dan risk averse?
Economic Rationales for Limited Liability -2 • Transferring business risk to parties better capable of bearing the risk • Bank’s risk is diversified • Banks may be better monitors Bank Debt Capital Dan’s Electronics (Sole Trader) £10,000
Economic Rationales for Limited Liability -3 • Limited liability promotes the free transfer of shares • It eliminates shareholder – shareholder monitoring costs • Free transfer of shares facilitates the market for corporate control
Economic Rationales for Limited Liability -4 • Limited liability promotes diversification of shareholdings • Why is diversification a good thing? • How does limited liability promote it?
Economic Rationales for Limited Liability -5 • Spread wealth more widely in society • Reduces the cost of capital (i.e. the return required by the providers of a company’s share capital and debt). • Insulate shareholders from tort liabilities
Responses to Limited Liability • Voluntary Creditors: self help: • Disclosure obligations • Rate of return • Guarantees • Involuntary Creditors • Insurance / compulsory insurance • Bankruptcy priority • Qualified pro-rata unlimited liability • Piercing or lifting the Corporate Veil • Director and shadow director liability (e.g. ss. 213 + 214 IA 1986)
Is Unlimited Liability Plausible? • Consider economic rationales 1-5 Public companies / insurance can normally cover the exposure • What would be the effect of selective unlimited liability (e.g. ‘Relational Company’)? • Why companies choose to have unlimited liability?
Steps to Starting a Business in the UKIt requires 6 procedures, takes 13 days, and costs 0.76 % GNI per capita to start a business in the United KingdomSource: World Bank Doing Business 2010 Report
Economy Rankings - Ease of Doing Business 2010United Kingdom is ranked 5 out of 183 economies. Singapore is the top ranked economySource: World Bank Doing Business 2010 Report
United Kingdom's ranking in Doing Business 2010Source: adapted from World Bank Doing Business 2009 and 2010 Reports