LEGL2002 Law of Business Organisations Semester 1, 2020 Week 10 Financing a Company via Equity or Debt: Best Exam and Study Materials.

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Content 1. Choosing between equity and debt 2. Share issues 3. Types of shares 4. Debt financing 5. Debentures 6. Securing loans 7. Disclosure requirements for equities Content 1. Choos... ing between equity and debt 2. Share issues 3. Types of shares 4. Debt financing 5. Debentures 6. Securing loans 7. Disclosure requirements for equities Question 2 – Racing Parts Question • If you were an investor, would you prefer to buy $100 000 in shares in Racing Parts Pty Ltd or to lend the company $100 000? • If you were David, would you prefer that the company issue $100,000 worth of new shares or that the company borrow $100,000 Question 1 • What is the difference between a share issue and a share sale? • What is the difference between an initial public offering (IPO) and a seasoned equity offering? Hint: See section 10.2.2 of the textbook. Lisa’s family from Singapore are interested in investing in the company. Their proposal is to put in $900  000 by way of equity, but they want a guaranteed return per annum of 5.5 per cent. They suggest they will contribute the funds in three stages of $300  000 each time, provided certain milestones are met. • Lisa’s family want her to be a director of the company to look after their investment. They also want her to be an ordinary shareholder of the company. This is part of the condition of the $900  000 being invested in the company. • If Lisa’s family invests, would you recommend fully paid shares being issued each time or partly paid shares being issued and making a call each time? • Should David transfer 5 per cent of his shares to Lisa or should more shares be issued by the company? What is the consequence for David by transferring shares to Lisa? • If the company makes a profit from trading, does it have to pay the amount out as a dividend to all the shareholders? • If Lisa’s family take up preference shares, should they ask for cumulative or non-cumulative preference shares? If Lisa’s family invests, would you recommend fully paid shares being issued each time or partly paid shares being issued and making a call each time? Should David transfer 5 per cent of his shares to Lisa or should more shares be issued by the company? What is the consequence for David by transferring shares to Lisa? Hint: Lisa’s family only wants to invest if Lisa herself is an ordinary shareholder in the company. Why might they want this? (What rights do ordinary shareholders have, that preference shareholders do not?). If If the company makes a profit from trading, does it have to pay the amount out as a dividend to all the shareholders? Hint: This question revises material we covered in Module 6. See the discussion of ss 254T and 254U on page 158 of the textbook (section 6.3.2).Equity Financing (Shares) If Lisa’s family take up preference shares, should they ask for cumulative or non-cumulative preference shares? If Lisa’s family take up preference shares, should they ask for cumulative or non-cumulative preference shares? If Lisa’s family take up preference shares, should they ask for cumulative or non-cumulative preference shares? David, Helen and Lisa are now the ordinary shareholders of the company. David owns 90 per cent of the company, Helen 5 per cent and Lisa 5 per cent. This was the result of David transferring 5 per cent to Lisa. • Lisa has also been appointed as a director to represent the interest of her family, who will ultimately hold $900 000 worth of preference shares in the company. Her family hold their shares through a company (called Tiger Lily Investments Pty Ltd) as trustee for the Tiger Lily Family Trust. • You have completed the paperwork to transfer the shares from David to Lisa, appoint Lisa as a director and resign Sarah as the alternate director now that Helen is back. Alex and Paco recently purchased a block of land in Surfers Paradise for $1 million. They want to develop the land by building an apartment block and selling the apartments at a profit. Unfortunately, Alex and Paco don’t have the money to proceed with the development. • Alex and Paco come up with a plan to develop the land whereby they will register a company called Bug Ltd. Alex, Paco and their friend Goofy will be the directors of Bug Ltd. They plan to get investors to buy shares in Bug Ltd for $2 million. • With the proceeds of the share issuance, they will have Bug Ltd buy the land from them for $1.5 million. With the remaining $500,000, they plan to build the apartment building. • If Alex and Paco proceed with their plan and register Bug Ltd, would they be required to comply with the disclosure requirements in Ch 6D of the Corporations Act (Cth) 2001 in connection with the fundraising they propose? CORPORATIONS ACT 2001 - SECT 246B - Varying and cancelling class rights If constitution sets out procedure (1) If a company has a constitution that sets out the procedure for varying or cancelling: (a) for a company with a share capital--rights attached to shares in a class of shares; or (b) […]; those rights may be varied or cancelled only in accordance with the procedure. The procedure may be changed only if the procedure itself is complied with. If constitution does not set out procedurePreference shares give shareholders the right to: • receive a fixed dividend • be repaid the principal at a certain point in time or at maturity [Show More]

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