Friday, October 12, 2012

Corporations Law: Capital Structure

-->Capital Structure

A corporation may issue three primary types of financial assets:
  1. Common stock
    1. It is the only financial asset a corporation must issue. This is because control of the corporation is vested in the holders of common stock through their voting rights.
    2. Return and Priority- shareholders are last in line with respect to distributions of income and liquidation.
    3. Control- first in line with respect to control.
    4. Combining voting control and the residual interest in profits and assets ensures that the decisionmakers bear the consequences of their own performance.

  2. Debt
    1. Debt is a contractual obligation issued by the corporation to repay funds provided by the investor with interest subject to the terms of the contract.
    2. Return and Priority- debt is first in line with respect to income and assets.
    3. Control- debt is last in line with respect to control.
    4. A long-term obligation is either a bond (secured) or debenture (unsecured). A short-term obligation is called a note.
    5. The terms of a bond or debenture are contained in a lengthy contract called an indenture.

  3. Preferred Stock
    1. Return and Priority- preferred stocks claim to income and asset is subordinate to that of debt, but superior to that of common stock.
    2. Control- preferred stock is typically nonvoting, except with respect to approval of structural changes to the corporation. However, if dividends are not paid for a certain number of quarters, it becomes voting.
How much of each to use depends on the interests of the parties.

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