1. Chapter 9 Raising and Maintaining Capital
Corporate Governance

2. Sources of Finance
Companies finance their operations through the following sources:
Debt, including borrowings and trade finance.
Equity capital (the sale of shares)
Retained earnings – reinvesting profits back into the business.
Companies must make decisions in relation to the optimal capital structure by using a mix of debt, equity and internal financing.
Corporate Governance

3. Debentures
A common form of debt financing is the issue of debentures, also known as bonds. S9 defines debentures as a legally binding undertaking by a company or other body to repay a debt where that debt is money deposited with or lent to the company or other body.
Corporate Governance

4. Debentures For companies to issue debentures to the public it must:
Appoint a trustee for debenture holders, under a complying trust deed.
Comply with Chapter 6D disclosure requirements.
Meet the ASX listing requirements if listing on the ASX.
Debentures can be secured or unsecured, if debentures require a prospectus, they must be secured, S283BH.
Security provides extra protection against the issuer defaulting.
Corporate Governance

5. Security Interests
A security interest is defined by the Personal Property Securities Act 2009 (PPSA) as an interest in personal property provided for by a transaction that in substance secures payment or performance of an obligation. It is a security given by a company over some of all of its assets in favour of a creditor. A loan or other financial accommodation is secured if the company has offered some or all of its assets as collateral to the creditor. If the company defaults, the creditor will have the right to sell the assets and retain the amount of the loan from the proceeds.
Corporate Governance

6. Prospectus
A document required to be prepared, under S710, by a company issuing shares or debentures to the public.
Must contain:
Rights and liabilities attaching to the securities offered,
Financial position, performance and prospects of the company,
Terms and conditions of the offer,
Nature of any interest that a director, advisor or promoter has in the company
Fees paid or agreed to be paid to any director, advisor, promoter or underwriter,
Whether the securities will be traded on a financial market,
The expiry date of the offer.
Corporate Governance

7. Equity Capital
Equity capital represents the funds contributed by members in return for a share in the company.
Only companies limited by share capital can issue shares. The price at which shares are bought and sold is determined by market forces.
Each share has certain rights in respect of:
Control (receiving information and voting rights).
Right to dividends and distributions in the event of winding up.
Any legal person can own a share including companies.
Corporate Governance

8. Equity Capital Ordinary shareholders typically have:
An equal right to share in dividends worth other ordinary shareholders.
The right to vote at general meetings.
A right to be repaid capital contributed in winding up, after all other claimants are repaid.
A right to share in surplus assets pro rate in winding up.
Corporate Governance

9. Equity Capital Preference Shareholders typically have:
A fixed right to dividends, if declared, and if profits are available.
A right to be repaid capital contributed in a winding up, after creditors are repaid and in priority to ordinary shareholders.
Limited voting rights.
Preference shares are known as hybrid securities as they characteristics of both debt and equity finance.
Corporate Governance

10. Maintenance of Capital
Creditors lend money to a company in good faith and on the assumption the company will maintain adequate levels of paid up capital to fund its operations and repay the debt. Under common law this principle states that creditors have the right to rely on the capital remaining undiminished by any expenditure other than that from the achievement of the company’s specified objectives.
Corporate Governance

11. Prohibited Self-Acquisition
Reasons for the prohibition:
Prevent officers entrenching their control through a block of voting shares.
Prevent manipulation of share prices
Prevent a false appearance of substance where a company’s assets consist of shares in itself.
Avoid potential unfair treatment between shareholders.
Corporate Governance

12. Dividends
Dividends are payments made by a company to its shareholders in respect of shares they own. Under S254T, companies must pay dividends only out of profits. Profits are not defined in the Corporations Act and the court’s interpretation has not always coincided with accounting standards.
Corporate Governance

13. Prohibited Financial Assistance
A company is only permitted to give financial assistance to a person to acquire shares in itself in limited circumstances including:
If it does not materially prejudice interests of the company or its shareholders or the company’s ability to pay its creditors.
If it is approved by shareholders and the acquirers and associates do not vote.
If it is exempted under S260C and in respect of partly paid shares. including employee share schemes
Corporate Governance