Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 18:  Equities  How a company is formed  Difference between private and public companies 18cis

Firms in the Financial Services sector Most firms operating in the Financial Services sector are:  Companies, or  Partnerships  Partnerships are becoming increasingly rare in financial services, though some large City law firms are still partnerships o Partners share all profits and all losses, and in some partnerships, have unlimited liability

The Times January 9, 2009 Clifford Chance asks partners for £40 million Clifford Chance, the world's largest law firm, is seeking an average of £100,000 from each of its 400 equity partners to raise more than £40 million for the firm. Stephen Purse, the finance director, said that the capital call was a routine measure to ensure that the firm had enough cash to fund continued growth. It called on partners to inject funds in May “It's a perfectly normal thing to do,” Mr Purse said. “Every business, as it grows, reassesses its level of capital from time to time.” Accountancy firm PricewaterhouseCoopers, said that law firms often issued capital calls when faced with cash-flow problems. Typically slow at chasing debtors, they take an average of about four months to collect unpaid bills, leading to temporary shortages of cash for paying fixed costs, such as salaries and rent. In the past, such shortages have often been funded by an overdraft. Downside of partnerships…

Companies Why form a company?  Companies have limited liability  The owners can lose only what they have invested in the company  Companies issue shares  A key reason to form a company is to raise start-up capital o Companies can sell additional shares to finance expansion but the founding shareholders might be diluted If a firm wishes to issue shares then it must set itself up as a company

Other features of companies Companies have a separate legal identity from their owners  They are a “legal person”  Once created, they can only be dissolved by court order  The owners can’t do anything they want with it – the directors are in charge  A company can enter into contracts and can be sued Companies are owned jointly by their shareholders  For this reason, they are sometimes known as “joint stock” companies  “Stock” is another word for share, or security  In very rare instances, private limited companies can be set up with a single shareholder

How to set up a company in the UK To set up a company in the UK, the following steps must be taken:  Name of company  Whether company is to be a private limited company (Ltd) or a public limited company (Plc)  Statement that declares that the liability of the shareholders will be limited  The registered address of the company  For what purpose the company is being established  What capital the new company hopes to raise  The name and address of at least one director  The name of the company secretary  Register with the Registrar of Companies at Companies House, Cardiff  Draw up a Memorandum of Association, which must include: Companies House JSO Ltd

How to set up a company (cont.) In addition to registration at Companies House and drawing up the Memorandum of Association, the new company must also draw up its Articles of Association  The Articles of Association lay out the company’s internal rules:  Other directors’ names  Voting rights  Rights of shareholders  When and how shareholders are to meet  When and how directors are to meet  How profits are to be divided  The Articles of Association can be changed later, provided that the changes do not conflict with the Memorandum

How to set up a company (cont.) Once this has all been done, the Companies Registrar will issue a Certificate of Incorporation  At this point, the company becomes a legal entity, separate from its owners  The company can now start trading

Private companies and public companies A public limited company must have a minimum of two shareholders  It may issue shares to the general public but it is not obliged to do so A private limited company may not offer its shares to the general public  The shares are issued to the owners upon incorporation, in return for the start-up capital they have injected

Public companies If a company wishes to issue negotiable securities (shares, bonds, etc) then it must set itself up as a public limited company  To sell shares to the public, the Plc must:  Issue a prospectus which details: o The company’s finances o The company’s personnel o The company’s business aim o The shares offered for sale  Issue share certificates to purchasers  Obtain a Certificate of Trading from the Registrar of Companies

Prospectus When issuing shares to the public, the company must publish a comprehensive document called a “prospectus”