Section 1 - Capital Raisings

FUNDAMENTALS OF CORPORATE LAW
MSc in Corporate Finance

ANNE SCOLAIRE / ACADEMIC YEAR 2013-2014
Intervenant/Lecturer: Me Bastien BERNARD
Section 1
CAPITAL RAISINGS
Fundamentals of Corporate Law
1. Capital raisings
1.1. 1.2. 1.3.
Definitions Corporate law Financial law
1.1.1. Fund raisings 1.1.2. Financial securities
FINANCING
Can be achieved through debt (creditors) or equity (shareholders)
Debt can be provided as - (i) loan by suppliers (abuse of mass market retailers), banks (also Zopa in 2005 in UK or Lending Club in the US), shareholders accounts (above 5% of share capital), cash pooling agreements between companies of a same group or ; - (ii) debt instruments
Equity is provided by investors through share capital subscriptions
1. Capital raisings
1.1. 1.2. 1.3.
FINANCIAL SECURITIES The financial instruments include the financial securities and the financial contracts. Financial contracts are options, forwards and futures.
The financial securities include the equity securities, the debt instruments, and trust units : - Equity securities include shares and other instruments granting or which could grant access to the share capital or voting rights, such as warrants. They represent financial rights (proportionate or not, leonine clause) and political rights (with or without voting rights, or multiple voting rights). Example of preferred shares with no voting rights which recover it in case no dividend is paid, no PSR
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1. Capital raisings
1.1. 1.2. 1.3.
FINANCIAL SECURITIES
- Debt instruments are liens against the company, but can be converted into equity such as convertible bonds, exchangeable bonds (equity cannot be converted into debt because the ranking or reimbursement is superior); - Trust units issued by collective placement vehicles, securitizations vehicles. Securities are also financial securities and membership shares granting the same type of rights per category.
1. Capital raisings
1.1. 1.2. 1.3.
Financial Instruments
Financial securities
Financial contracts
Equity securities
Membership shares
Trust units
Debt instruments Single note
Securities
Multiple notes
1. Capital raisings
1.1. 1.2. 1.3.
CHARACTERISTICS OF FINANCIAL INSTRUMENTS

Dematerialization: Financial securities are submitted to applicable law of the registered office. They must be registered in a registry held by the issuer or an intermediary duly authorized
Ownership of the financial securities: The register is opened to the name of one or several owners, holding the property of the registered financial securities; Presumption of property: the owner is holding the property of the shares and not a debt against the intermediary holding the register (difference between US and Europe); Protection of the property: no one can contest the property of a financial security acquired in good faith by the owner of the financial securities held in the register Negotiability: financial securities are negotiable: Negotiation is simplified compared to the transmission pursuant to the civil Code for example; The financial securities can be transmitted through registration in the accounts of the register. Note Carbone certificate follows the same regime but are not financial instruments
Fundamentals of Corporate Law 7
1. Capital raisings
BOND ISSUES
1.1. 1.2. 1.3.
1.2.1. Bond issues 1.2.2. Equity issues
Bond issue is decided by BOD, management board, manager. Delegation is possible for 1 year. Nominal value, interest rate, duration of the bonds, subordination.
More and more complex (minimum information to be provided by financial advisors) Junk Bonds MTF NYSE Bondmatch
Bond holders are gathered in a group represented by 1 person (cannot be manager of the company). Bond holders can gather in BGM to rule upon the application of the bond contract and the protection of the bondholders.
1. Capital raisings
EQUITY ISSUES

1.1. 1.2. 1.3.
Equity issue is decided by the extraordinary SGM. Delegation is possible to the BOD (more flexible issues), the management board, President, manager. Competence (yes or no), Power (characteristics). Contribution can be in cash, in kind, or sweat equity (can be a way to have equal participation). In France, when there is a contribution in cash, a share capital increase in favor of the employees must be proposed to the ESGM (enhance employees participation). It is possible to provide for a variable capital: minimum share capital and a maximum one and to allow a variation within those limits without any additional decision from the SGM or amendment of the articles of association (allows shareholder to come in and out). The issue of new shares can occur upon: Contributions from shareholders or third parties Incorporations of reserves, premium (can also lead to increase the par value of the shares) Conversion or reimbursement of bonds Exercise of rights granting access to share capital Merger Conversion of preferred shares into ordinary shares Issue can take different forms: To all shareholders To a category of persons To identified persons To the public
1. Capital raisings
1.1. 1.2. 1.3.
ISSUE TO ALL SHAREHOLDERS
The issue is decided by the ESGM upon a management report.

The share capital increase is possible provided the share capital is fully paid up. All shareholders have a right to subscribe new shares in proportion of their holding in the share capital (anti dilution mechanism) for 5 trading days in France (except some preferential shares). Protection of the equality of shareholders.
Shareholders can sale or acquire additional preferential subscription rights (except if prohibited by ESGM).
Shareholders can abandon their preferential subscription right (also to the benefit of someone). Shareholders can subscribe for a superior number of shares than they are entitled to, which will be fulfilled if shares are not subscribed (if provided by ESGM). Share capital increase is realized provided at least 75% is subscribed (can also offer the shares not subscribed to identified persons if the ESGM did not oppose, or to the public if the ESGM authorized). Possibility to increase or decrease the amount of 15% is provided by ESGM (greenshoe mechanism with new or existing shares). In case there are bearers of securities granting access to share capital, they must be offered to take part in the share capital increase. Also an analysis of the impact on the bearers of preferred shares.
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1. Capital raisings
1.1. 1.2. 1.3.
PREFERENTIAL SUBSCRIPTION RIGHT. EXAMPLE: Company with a share capital of 3 000 000 Euros divided into 300 000 shares with a nominal value of 10 Euros each has reserves for 1 500 000 Euros, the theoretical value of 1 shares is: (3 000 000 + 1 500 000) / 300 000 = 15 Euros It decides to increase its share capital of 2 000 000 Euros through the issue of 200 000 shares of 10 euros. Each shareholder benefits from a preferential subscription right to 2 new shares for 3 old shares. Theoretical value of the share after share capital increase is: (3 000 000 + 1 500 000 + 2 000 000) / (300 000 + 200 000 ) = 13 euros Theoretical value of the preferential subscription right is: 15-13 = 2 Euros
1. Capital raisings
1.1. 1.2. 1.3.
ISSUE WITH SUPPRESSION OF THE PREFERENTIAL SUBSCRIPTION RIGHT (TO THE BENEFIT OF THIRD PARTIES)
ESGM can reserve the share capital increase to a category of persons (must not be too broad), to identified persons (cannot vote if shareholder) or to the public (prospectus to be published). This scheme is used in retail cascade or equity line scheme together with an underwriting agreement. The issue is decided by the ESGM upon a management and statutory auditor report. A premium can be added to the nominal value of the share to reflect the real value of the company and have the new shareholders pay that value. If the company is listed on a regulated market: average price of the past 3 trading days, possible 5% discount in France.
A priority right (3 days at least) to subscribe can be offered to the shareholders, but cannot be sold (not a security, only a right like stock options).
1. Capital raisings
SPECIFIC CASES

1.1. 1.2. 1.3.
Issue of preferred shares or granting of special rights to subscriber: auditor report on the granted rights. Contribution in kind: auditor report on the value. Fractional payment: In SA and SAS: must pay premium in full, but par value only 25% (50% upon incorporation) ; In SARL: must be paid up in full (20% upon incorporation). Payment by compensation: upon certification of the existence of the debt in the accounts of the company by the manager and certified by the statutory auditor as the case may be.
Prospectus to be published in case of public offering or in case of listing on a regulated market

1. Capital raisings
1.1. 1.2. 1.3.
THE MANDATORY INFORMATION: THE PROSPECTUS

Without prejudice to the other provisions applicable thereto, persons or entities making a public offering or admission to trading of a regulated market of financial securities shall, prior to doing so, publish and make available to any interested party a document designed to inform the public concerning the content and terms and conditions of the process which is the subject thereof and the issuer's organization, financial situation and business prospects and those of any guarantor of the financial instruments included in that process, as determined in the General Regulations of the Financial Markets Authority.
1. Capital raisings
1.1. 1.2. 1.3.
1.2.1. Public offerings 1.2.2. Admission to trading 1.3.3. Prospectus 1.4.4. Other regulations
PUBLIC OFFERING:
Pursuant to the Prospectus Directive 2003/71/EC on the Prospectus to be published when securities are offered to the public or admitted to trading, the offer of Financial securities to the public is triggered by one of the following operations:
1. A communication addressed to persons under any form and by any mean, presenting sufficient information on the terms of the offer and of the securities to be offered, to enable an investor to decide to purchase or subscribe these securities (internet, selling restrictions, information, purpose,).
2. The placing of securities through financial intermediaries.
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1. Capital raisings
1.1. 1.2. 1.3.
EXEPTIONS TO PUBLIC OFFERINGS:

Prospectus Directive provides for a list of operations which do not constitute a public offer. Some exceptions are based:
- (i) on the quality of the investors and the fact that they do not need to be protected; - (ii) on the amount of the offer; - (iii) on the number of investors; - (iv) exclusion based on individual thresholds.
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1. Capital raisings
1.1. 1.2. 1.3.
(i) The quality of the investors

Qualified investors (professional client) is a person or entity possessing the expertise and facilities required to apprehend the risks inherent in transactions relating to financial instruments.
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1. Capital raisings
1.1. 1.2. 1.3.
(ii) The amount of the offer

1 The total amount is less than EUR 100,000 or the foreign currency equivalent thereof; 2 The total amount is between EUR 100,000 and EUR 5,000,000 or the foreign currency equivalent thereof and the transaction concerns financial securities accounting for no more than 50% of the share capital of the issuer. The total amount of the transaction referred to in Points 1 or 2 shall be calculated over a twelve-month period from the date of the first transaction. When the issuer is listed, press releases are necessary to inform the market,
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1. Capital raisings
1.1. 1.2. 1.3.
(iii) The number of investors A restricted circle of investors has a number of members below a threshold of 150 persons.
(iv) Individual thresholds

The transaction is intended for investors acquiring at least EUR 100,000 worth, or the foreign currency equivalent thereof, per investor and per transaction, of the relevant financial securities; The transaction concerns financial securities with a minimum denomination of at least EUR 100,000 or the foreign currency equivalent thereof.
1. Capital raisings
1.1. 1.2. 1.3.
ADMISSION TO TRADING ON A REGULATED MARKET

Regulated markets are multilateral trading facility which enable multiple sellers and buyers interests on financial instruments expressed by third parties, to meet on this basis pursuant to non discriminatory rules, in order to enter into agreements on financial instruments which were admitted to trading in accordance with the rules and market systems, which functions in accordance with applicable regulation (2004/109/CE Transparency and 2003/6/CE Market Abuse Directives). There are basically three main types of markets in France: Regulated markets (rules approved by the regulators, protection, market operator,); Free markets (multi trading facility); Organized markets (submit their rules to the regulator,).
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1. Capital raisings
REGULATED MARKETS
1.1. 1.2. 1.3.
The identification of regulated market is no issue since they are officially recognized by the Member State competent authorities and published in the official Journal of the EU:
Euronext Paris market formerly Eurolist, regarding financial instruments Compartment A: Capitalizations above 1 billion Euros; Compartment B: Capitalizations between150 million and 1 billion Euros; Compartment C: Less than 150 M Euros. Professional compartment for QI, including a fast path with US listings
March Terme international de France (MATIF) and the March des Options Ngociables de Paris (MONEP) regarding options and forward markets.
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1. Capital raisings
1.1. 1.2. 1.3.
IN FRANCE, THERE ARE 2 FREE MARKETS MANAGED BY EURONEXT PARIS:

free market created in 1996, ruled by an organizational notice which only has a contractual binding force. The admission to trading on the free market can be initiated by a shareholder or the issuer, but the issuer must not oppose this admission to trading (cannot oppose if already admitted to trading on a regulated market). The compartment of the values delisted from a regulated market, created in 1996 to temporarily welcome, on the demand of the issuer and after appreciation of Euronext, equity securities or title granting access to the share capital of issuers delisted from the regulated markets. The organization notice is the same as for the free market, except when stated.
1. Capital raisings
ORGANIZED MARKETS
1.1. 1.2. 1.3.
This distinction between regulated markets and free markets is blurred in France by the existence of an intermediary category of Organized markets which are characterized by the intervention of a market undertaking slightly on the model of regulated markets. The AMF has created the category of organized multilateral facilities whose rules are approved by the AMF on their demand, and who submit themselves to the rules on market abuse, which daily report to the AMF the order received on the listed instruments, and which provides for a standing market offer as far as shares are concerned.
Alternext is the best example. It was created in May 2005. It is operated by Euronext Paris and aims at permitting to companies to search financial opportunities on the stock market, through a simplified listing process though offering the investors satisfactory transparency.
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1. Capital raisings
1.1. 1.2. 1.3.
THE MANDATORY INFORMATION: THE PROSPECTUS Without prejudice to the other provisions applicable thereto, persons or entities making a public offering or admission to trading of a regulated market of financial securities shall, prior to doing so, publish and make available to any interested party a document designed to inform the public concerning the content and terms and conditions of the process which is the subject thereof and the issuer's organization, financial situation and business prospects and those of any guarantor of the financial instruments included in that process, as determined in the General Regulations of the Financial Markets Authority. Note one can be admitted to trading on a regulated market without making a public offering (Euronext Professional Compartment, Fast-path), or be admitted to trading on a non regulated market and make a public offering (Alternext listing).
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1. Capital raisings
1.1. 1.2. 1.3.
CONTENT OF THE PROSPECTUS
must be published by the initiator of the public offer, except use of retail cascade if authorized.
The prospectus can be established in one single document or several documents: base document, security note and summary. It can also refer to other documents previously published. It includes all the information necessary to enable the investors to evaluate the patrimony, financial situation, the perspectives, and guarantor of the financial instruments offered or to be listed, as well as the rights attached to the financial titles and their conditions of issuance.
This information is organized pursuant to the scheme of EU regulation 809/2004 dated April 29, 2004 (US S-1 equivalent) which can be adapted in case of risk of the public or the issuer or in case of small or medium sized company (less than 250 employees, balance sheet EUR 43M maximum and annual turnover not more than EUR 50M).
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1. Capital raisings
1.1. 1.2. 1.3.
COMPETENCE
The Prospectus Directive (Directive 2003/71/EC) has created the principle of the home member state. Competence may however varies depending of the type of offer:
Equity securities and debt securities with denominations of less than 1000: EU incorporated issuer: Member State where the issuer has its registered office; Non-EU incorporated Issuer: Member State where the issuer's securities have been or are offered to the public or admitted to trading on a regulated market for the first time after 31 December 2003; In principle where a public offer of financial equity securities or debt securities with a denomination below 1.000 Euros is made only in France or in one or more other member States of the European Community or States party to the EEA agreement, including France, the prospectus approved by the AMF shall be drawn up in French Debt securities with denominations of 1,000 or more: Whether EU or non EU incorporated issuer, Member State where the issuer has its registered office or one of the Member States where the securities are to be offered to the public or admitted to trading .
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1. Capital raisings
1.1. 1.2. 1.3.
PROSPECTUS DIRECTIVES ENABLES A TRUE PASSPORTING PROCESS

Only one competent authority in Europe (in the "Home Member State") is required to approve a single prospectus. The approved Prospectus can be used in any Member State. The prospectus approved by the Home Member State and any supplements thereto shall be valid 1 year for the public offer or the admission to trading in any number of Host Member States, provided that the competent authority of each Host Member State is notified.
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1. Capital raisings
1.1. 1.2. 1.3.
SOME SALES OR ISSUES ARE PROSPECTUS EXEMPTED :

The obligation to publish a prospectus does not apply to public offers of the following financial securities:
Shares issued in substitution for shares of the same class already issued, if the issuing of such new shares does not involve an increase in the issuer's capital;
Financial securities offered in connection with a public exchange offer and containing information equivalent to that of the prospectus, is made available by the issuer; Financial securities offered, allotted or to be allotted in connection with a merger, demerger or spin-off, provided that a document, subject to AMF scrutiny Offers of non-equity securities issued in a continuous or repeated manner by credit institutions whose total consideration in the EEA is less than 75 million
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1. Capital raisings
1.1. 1.2. 1.3.
Shares offered, allotted or to be allotted free of charge to shareholders, and dividends paid out in the form of shares, and provided that a document containing information on the number and nature of the securities and the reasons for and details of the offer is made available by the issuer.
Financial securities offered, allotted or to be allotted to directors, to company officers (free shares) and current and former employees, and provided that a document containing information on the number and nature of the securities and the reasons for and details of the offer is made available by the issuer.
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1. Capital raisings
1.1. 1.2. 1.3.
Investment services (Directive 2004/39/EC on Market In Financial Instruments)

(1) Reception and transmission of orders in relation to one or more financial instruments. (2) Execution of orders on behalf of clients: acting to conclude agreements to buy or sell one or more financial instruments on behalf of clients; (3) Dealing on own account: trading against proprietary capital resulting in the conclusion of transactions in one or more financial instruments; (4) Portfolio management (AIFM): managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments (5) Investment advice: means the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments; (6) Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis. (7) Placing of financial instruments without a firm commitment basis (8) Operation of Multilateral Trading Facilities.
1. Capital raisings
1.1. 1.2. 1.3.
Banking or financial promotion in France

Banking or financial promotion, or solicitation, consists in contacting a person, by whatever means, in order to offer:
Transactions in financial instruments (Article L.211-1);
Banking or ancillary transactions (Articles L. 311-1 and L.311-2);

Investment services or ancillary services (Articles L. 321-1 and L.321-2); Transactions in miscellaneous assets (Article L.550-1);
Investment advice (I of Article L.541-1).

The person may be contacted by any means (personal visit, mail, telephone), either at home, at his or her place of work, or in any other place not intended for the marketing of financial products or services. For example, if a person is approached at a shopping mall, he or she is being solicited, but this is not the case if he or she is waiting in line at a bank.

Section 1 - Capital Raisings

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FUNDAMENTALS OF CORPORATE LAW

MSc in Corporate Finance

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.1.1. Fund raisings 1.1.2. Financial securities

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.1.1. Fund raisings 1.1.2. Financial securities

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.1.1. Fund raisings 1.1.2. Financial securities

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.1.1. Fund raisings 1.1.2. Financial securities

Debt instruments Single note

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.1.1. Fund raisings 1.1.2. Financial securities

CHARACTERISTICS OF FINANCIAL INSTRUMENTS

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.2.1. Bond issues 1.2.2. Equity issues

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.2.1. Bond issues 1.2.2. Equity issues

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.2.1. Bond issues 1.2.2. Equity issues

ISSUE TO ALL SHAREHOLDERS

The issue is decided by the ESGM upon a management report.

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.2.1. Bond issues 1.2.2. Equity issues

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.2.1. Bond issues 1.2.2. Equity issues

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.2.1. Bond issues 1.2.2. Equity issues

Prospectus to be published in case of public offering or in case of listing on a regulated market

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

1.2.1. Bond issues 1.2.2. Equity issues

THE MANDATORY INFORMATION: THE PROSPECTUS

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

EXEPTIONS TO PUBLIC OFFERINGS:

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

(i) The quality of the investors

Fundamentals of Corporate Law

1.1. 1.2. 1.3.

Definitions Corporate law Financial law

(ii) The amount of the offer