Unit 4 the raising and maintenance of capital(1).ppt

Unit 4 the raising and maintenance of capital(1).ppt - Unit...

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Unformatted text preview: Unit 4 the raising and maintenance of capital 1. The capital of corporation 1.1 definition Capital is the property that the shareholders put into the corporation, such as money, land, furniture, patents, copyrights, trade secrets and so on. Article 26 of Comany Law of PRC 旧法 The registered capital of a limited liability company shall be the amount of the paid-up capital contributions of all its shareholders as registered with the company registration authority. The amount of the initial investment contributed by all shareholders shall not be lower than twenty percent (20%) of the registered capital or the minimum amount prescribed by the law, the remaining of which shall be fully paid up within two years of the establishment of the company. In the case of an investment company, the remaining amount of the registered capital may be paid up within five years of the establishment of the company. The minimum amount of the registered capital of a limited liability company shall be RMB 30, 000. Where laws and administrative regulations provide for more than the minimum amount, such provisions shall apply. Article 27 Except for assets forbidden to be used as contribution by laws and administrative regulations, a shareholder may make its capital contributions to a company in currency or by contributing such noncurrency property as material objects, intellectual property rights and land-use rights that can be evaluated in the form of currency and transferred in accordance with the law. The non-currency property to be contributed as capital shall undergo an asset valuation and verification, and shall not be overvalued or undervalued. Where there are other provisions of laws and administrative regulations on the valuation and verification of non-currency property, such provisions shall apply. The amount of the capital contributions in currency shall not be lower than thirty percent (30%) of the amount of the registered capital of the limited liability company. 1.2 different forms of capital Registered capital (注册资本) Authorized share capital ( 授权资本) Issued share capital ( 发行资本) The authorised capital of a company (sometimes referred to as the authorised share capital, registered capital or nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its constitutional documents to issue (allocate) to shareholders. Part of the authorised capital can (and frequently does) remain unissued. This number can be changed by shareholders' approval. The part of the authorised capital which has been issued to shareholders is referred to as the issued share capital of the company. 1.3 the difference between capital and assets 1.4 capital and net assets 资产=资本+其他积累+负债 1.5 capital and total investment 2. Raising of capital Most large commercial corporations have grown from small family businesses which were originally incorporated as private companies. A private company may enlarge its scale through issuing it’s shares and debentures with investors. The company may invite its existing share or debenture holders to subscribe for the further capital that it requires. The company sends a letter of right inviting him to take further shares or debentures in proportion to his existing holding. 2.1 shares a. common shares b. preferred shares c. options 2.2 debt securities (debentures) Common shares What’s common shares The securities representing equity ownership in a corporation, providing voting rights, and entitling the holder to a share of the company's success through dividends and/or capital appreciation. The characteristics of common shares 1) entitled to vote for the election of directors and other matters 2 ) the common shareholder receives the dividend after the preferred shareholder receives the dividend 3) the dividend is discretionary Preferred shares what’s preferred shares Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. characteristics of preferred shares 1) the dividend is fixed 2) the shareholder usually does not have voting right 3) it’s less risky 2.2 Debentures A debenture is a document used by a company to evidence a loan, and the debenture holder, the person who provides the loan, is a creditor of the company. 1) the interest is usually fixed 2) usually the loan is secured by the assets of the corporation 3) If the corporation is insolvent, debt securities are paid before stock Different types of debentures 1. Registered and unregistered 2. Secured and unsecured In the event of the company failing to pay the interest due on the debenture or repaying the loan, an unsecured debenture holder can only reclaim his debt as a general creditor of the company. A secured debenture holder can look to his security for repayment. 3. Convertible (可转债) Debentures may be convertible at the holder’s option into fully paid ordinary shares at a specified price. 2.3 methods of issuing The shares and debentures can be issued through public offering and private placement. For private placement, the corporation can only place its shares to certain qualified investors subject to certain limits. e.g. Hong Kong Companies Ordinance: to institutional investors; to a maximum of 50 persons; where the total amount of consideration does not exceed $5 million- small scale offers where the nominal value or consideration payable for the shares, or the principal amount of the debentures, is a minimum of $0.5 million. For public offering: A corporation may invite offers from persons interested in subscribing for it’s shares or debentures. An invitation may be made to the general public directly by the corporation or by public placing through brokers agents. The corporation makes an invitation to the public to subscribe for its shares needs to publish a prospectus. The corporation will apply to list the shares on the securities exchange and will appoint a bank to receive the applications from the public. The prospectus may provide for the placing of shares through brokers agents who sell the shares to clients at the issue price plus brokerage commission. Underwriting A public company bears the risk that a direct offer to the public, public placing, will be unsuccessful, and therefore arranges for the issue to be underwritten by the merchant bank or other finance house. The underwriter agrees to take up any shares which are not applied for. The underwriter may be paid a commission. 承销 " 指证券经纪或投资机构代表公司或政府 向投资人出售其发行的股票或债券,从而为公 司或政府筹措资金的行为。 2.4 Prospectuses The general aim of the provisions relating to the prospectus is to ensure that the corporation gives to the public a certain amount of information about its financial position when it is first floated and whenever it subsequently offers its shares and debentures to the public. It must fully and fairly disclose the relevant facts so that the risk of investments can be assessed. e.g. the contents of prospectuses prescribed by Hong Kong: the general nature of the business of the corporation, its share capital, and the minimum amount to be raised by the issue. details relating to the directors: their qualification, provisions in the articles as to their remuneration, their interests in the promotion or property to be acquired, and payments for services in promotion and formation. financial information to enable a reasonable person to form a valid and justifiable opinion of the financial condition and profitability of the corporation, including a statement as to the gross trading income or sales turnover during the previous three years. the arrangements for and expenses of the issue, including commission to be paid. the property to be purchased with the proceeds of the issue. material contracts. …… 2.5 liability for misstatement in the prospectus Where a prospectus, or an advertisement concerning a prospectus, invites persons to subscribe for shares or debentures of a company and contains an untrue statement, the persons who subscribe for any shares or debentures on the faith of the prospectus and who suffer loss or damage by reason of that statement may be compensated. The following persons may be liable to compensate the subscribers: ( Hong Kong Companies Ordinance) directors, promoters, persons who have authorized the issue of the prospectus 3. Maintenance of capital( 资本维持) 3.1 The reason for maintenance of capital to protect the creditors and prevent the shareholders to take back the capital All foregoing provisions regarding raising of capital would be pointless if the corporation has complete freedom to reduce it. In the early days, law prohibits the reduction of capital without a court order. While today, the principle of maintenance of capital is not as much important as it used to be. Trevor v. Whitworth A company may not purchase or subscribe for its own shares even though there was an express power to do so in its memorandum. Watson LJ said: one of the main objects of restricting the powers of companies to reduce the amount of their capital as set forth in the memorandum, is to protect the interests of the outside public who may become their creditors. 3.2 how to maintain the capital a. Formal reductions of capital the corporation can only reduce the capital under certain procedures and requirements, and the capital cannot be reduced to below the minimum standard b. corporation cannot distribute the dividend before the the loss is covered. c. corporation can only acquire its own share without the impairment of creditors’ interest d. Other legal assistance 4. Reserve 资本公积金 4.1 statutory common reserve 法定资本公积金 Corporate Act in P.R.China: Where a company distributes its after-tax profits of the current year, it shall draw 10 percent of the profits as the company's statutory common reserve. The company may stop drawing if the accumulative balance of the common reserve has already accounted for over 50 percent of the company's registered capital. 4.2 discretionary common reserve 任 意公积金 After the company draws the statutory common reserve from the after-tax profits, it may, upon a resolution made by the shareholders' meeting, draw a discretionary common reserve from the after-tax profits. 4.3 the functions of common reserve a. making up losses b.expanding the production and business scale or c. increasing the registered capital of the company if the statutory common reserve is changed to capital, the remainder of the common reserve shall not be less than 25 % of the registered capital prior to the increase. ...
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