Topic 4

• Corporate Finance Decisions involve what assets are to be acquired and disposed of by a company, how assets under the control of the directors are to be financed, and how assets under the control of the directors are to be invested or utilised
• Sources of Finance for a Company

  • Debt
  • Equity
• Securities


  Defined in section 1 of the Companies Act of 2008 as any shares, debentures, or other instruments issued or authorised to be issued by a profit company
• Methods of raising capital for a company

  • Issuing equity securities
  • Issuing debt instruments (the most common form is a debenture)
• Debt instrument

  Defined in section 43 of the Companies Act of 2008 as any security other than the shares of a company, whether issued in terms of a security document or not, but excluding promissory notes and loans. The holder of a debt security is a creditor and not a member of the company and receives interest instead of dividends
• Debenture

  A document issued by a company acknowledging that it is indebted to the debenture holder in the amount stated therein. It may be secured or unsecured. Debenture holders may have special privileges regarding the allotment of securities unless the Memorandum of Incorporation provides otherwise
• Share


  One of the units into which the proprietary interest in a profit company is divided. It is movable property, transferable in any manner provided for or recognised by the Companies Act of 2008 or other legislation
• Issue of shares

  The power to issue shares is exercisable by the board of directors. Certain issues of shares must be approved by special resolution. A company may not issue shares to itself
• Rights and duties of a shareholder

  • A shareholder enjoys the right to vote, receive information, share in profits, and share in the net surplus capital of a company on its winding-up. A shareholder owes certain duties to the company, the most important of which is to comply with the Memorandum of Incorporation
• A company's property belongs to the company

  Not its shareholders
• A shareholder's general right of participation in the assets of the company is deferred until winding-up, and then only subject to the claims of creditors
• Types of share capital

  • Authorised share capital
  • Issued share capital
• No minimum share capital is prescribed by the Companies Act of 2008, but every company must have at least one authorised and issued share
• Under the Companies Act of 2008, there are no shares of par value or no par value, but simply 'shares'
• Shares must be issued for adequate consideration
• Classes of shares

  • Ordinary shares
  • Preference shares
• A company cannot issue only preference shares, there have to be ordinary shares in order for the prefs to have preference over them
• The dividend on preference shares is usually set via a pre-determined formula
• Main features of shares

  • Ordinary shares: Constitute the equity share capital of the company. The amount of the dividend paid fluctuates in accordance with the profits of the company. Preference shares: Holders enjoy preference over other classes of shares with respect to
• Dividend on preference shares


  Usually set via a pre-determined formula
• Classes of shares

  • Ordinary shares
  • Preference shares
  • Cumulative preference shares
  • Participating preference shares
  • Convertible preference shares
  • Deferred shares (founder’s shares)
  • Treasury shares
  • Capitalisation shares (bonus shares)
• Ordinary shares


  • Constitute the equity share capital of the company
  • The amount of the dividend paid fluctuates in accordance with the profits of the company
• Preference shares


  • Holders enjoy preference over other classes of shares with respect to the payment of their dividends and sometimes to the return of capital on a winding up
  • The preferential dividend is usually fixed as a percentage of the nominal value of the shares
• Cumulative preference shares


  • Holders enjoy a right of priority in respect of both arrear dividends and current dividends
• Participating preference shares

  • Holders have a right to share on a pro rata basis together with ordinary shareholders in the distribution of surplus profits after the payment of their preferential dividend
• Convertible preference shares

  • Holders have the right to convert, usually after a given date, all or part of their preference shares into shares of another class (usually ordinary shares)
• Deferred shares (founder’s shares)


  • Issued to remunerate promoters of companies for their services in the formation and incorporation of companies
  • Qualify for a dividend after a prescribed minimum dividend has been paid to ordinary shareholders
• Treasury shares

  • Fully paid shares of a company that have subsequently been reacquired by the company by way of a share repurchase, and are not cancelled on their reacquisition
• Capitalisation shares (bonus shares)


  • Where a company converts its distributable profits into share capital instead of declaring dividends, the distributable profits are paid in the form of fully paid capitalisation shares. This is often called a ‘scrip dividend’
• Share certificate


  A declaration in which the company affirms that the person to whom it is issued is the registered shareholder and entitled to the shares mentioned therein. The certificate is not the share, in the same way that the title deed is not the house. It is merely evidence of ownership
• Pre-emptive rights


  This is a right usually conferred on shareholders in private companies and personal liability companies to subscribe for new shares issued by the company in proportion to the shareholders’ existing voting power. Pre-emptive rights do not apply to public companies or state-owned companies unless its Memorandum of Incorporation provides otherwise. The Memorandum of Incorporation may limit, restrict or negate such pre-emptive rights
• Retained Income


  Also an important part of the funding of a company. Instead of declaring dividend, directors can choose to retain profits. Retained income used fund operations and expansions
• Capital maintenance


  The capital maintenance concept held that companies must maintain their issued share capital as it is a guarantee fund intended for the payment of creditors. The Companies Act of 2008 abolished the capital maintenance concept in its entirety. Corporate finance is now based largely on the solvency and liquidity test
• The solvency and liquidity test (section 4)


  A company satisfies the solvency and liquidity test if, considering all the reasonably foreseeable financial circumstances of the company at that time: the total assets of the company (or, if the company is a member of a group of companies, the aggregate assets of the company) as fairly valued equal or exceed the liabilities of the company as fairly valued; and it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of twelve months after the date on which the test is considered, or in the case of a distribution, 12 months following that distribution
• The solvency and liquidity test (section 4) (continued)

  Essentially, the directors must ask themselves: Solvency: Do the company’s assets equal or exceed its liabilities? If so, the company is solvent. Liquidity: Will the company be able to pay all its business debts as they fall due over the next 12 months? If so, the company is liquid
• It must be accepted that newly created companies which have financed their start-up costs by incurring debt are often technically insolvent. In practice this point is usually overlooked provided that the company remains liquid, and that it retu
• Company is solvent if

  Will the company be able to pay all its business debts as they fall due over the next 12 months
• Company is liquid if

  The company is able to pay all its business debts as they fall due over the next 12 months
• Newly created companies which have financed their start-up costs by incurring debt are often technically insolvent
• In practice, if a company remains liquid and returns to solvency in a reasonably short period, the technical insolvency of newly created companies is usually overlooked