Holistic Case Study
Debt Finance, Share Capital and Corporate Fundraising
HealthPharm Pty Ltd (‘HealthPharm’) is a start-up company which provides pharmacy services to both public and private hospitals. It is expanding due to increased automation, but it needs further capital to invest in research and development in the areas of robotics and automated systems. Infinity Venture Capital (‘Infinity’) is a firm which provides early expansion capital to Australian companies which have the potential to become high-growth companies, are competitive in their industries, have transformative technologies and sound management teams. In return for 30% of the shares in HealthPharm, Infinity has agreed to provide HealthPharm with a loan of $20 million with a circulating security interest over all of the property owned and leased by HealthPharm. HealthPharm signs a loan agreement with Infinity providing for the circulating security interest and also signs a separate security agreement covering the collateral. Infinity registers a financing statement within 5 days after entering into the security agreement with HealthPharm.
HealthPharm is very successful, rapidly expands even further, and converts to a public company HealthPharm Limited (‘HealthPharm Ltd’). After the conversion, the founders of HealthPharm Ltd, who are the directors and majority shareholders of the company, propose to pass an ordinary resolution to split the existing shares (which are ordinary shares) into two classes: Class A shares with voting rights attached and Class B shares with a dividend entitlement but no voting rights. Shortly thereafter, HealthPharm Ltd lists on the Australian Securities Exchange (‘ASX’) and intends to raise further capital by issuing shares and debentures to the public on the ASX.
Provide the following advice, giving reasons for the advice provided in each instance:
1. Advise Infinity what priority, if any, Infinity would have in relation to its circulating security interest in HealthPharm in the event of HealthPharm’s insolvency.
2. Advise HealthPharm Ltd on the validity or otherwise of the proposed resolution as a procedure to effect the division of the existing shares into two classes.
3. Advise HealthPharm Ltd what disclosure obligations it would have, if any, in relation to offering its shares for issue on the ASX and advise it on the standard of disclosure required.
1. Advise to infinity venture capital on its investment
Infinity venture capital is the venture capitalist in this set up. As a venture capitalist, it demands 30% of ordinary share capital in health pharm. This is equivalent to the $20 million that the venture capitalist is investing in the business. However, the right in ownership of the company is classified as class A and class B shares. Class A shareholders have a right to vote in the general meetings of the company while class be have restricted right to vote (French, n.d.). The shareholders of health pharm will have to take the class A shares where they have a controlling stake and the rights to vote. On the other hand, infinity venture capital will have to settle for class B shares.
In Insolvency, class B shareholders are entitled to be paid first or ahead of ordinary shareholders. For them to secure their $20 million, the capital ventures will have to secure it in form of debentures or preferential shares if the company issues them. This guarantees Infinity Venture Capital the right to be compensated fully the amount of capital that they invested or its equivalent in form of stocks. The legal regime that governs incorporation and listing of companies is the Australian company law. It guarantees a form of payment in case of insolvency where debt holders, and preferential shareholders are guaranteed their investments back ahead of ordinary shareholders (Listing a company on the ASX/Preparing a prospectus, 2008).
2. A company chooses to have or issue different classes of common stock to board members, founders and investors in order to assign voting rights to one class of common stock than the other. For HealthPharm, the purpose of giving some shares voting rights is to enable some company insiders for example the founders a greater control over the company’s voting rights and corporate actions. The procedure of to effect the division into two classes is valid because it is termed as an active defense against hostile takeovers (WALMSLEY, 2017). This may prevent Infinity Venture Capital from taking over in a hostile manner since key insiders of HealthPharm are able to maintain control of the company with the voting rights without owning more than half of the shares outstanding.
The division of common stock into different classes is advisable because the shares have the same rights to ownership and profits regardless of the share class. Thus other investors still enjoy a proportionally equal claim to the profits of the company. Existence of two classes of shares would only be a problem if investors felt that the voting rights in Class A were allowing inferior management to remain in place without the best interest of shareholder.
3. According to the corporation Act 2001, a company requiring to be listed must issue a disclosure document (Company Law, 2005). A full prospectus is also a requirement and it contains general information on the nature of the securities of the company including the voting rights and the classes of the common stock and any other matter that the investor is reasonably expected to know. There are various disclosures that a company willing to be listed has to make. First is the number of shares that the company is floating in the stock market. Secondly, in its memorandum and articles of association, the company must disclose the type of share that it is listing and the directors and major shareholders in the company (Company Law, 2005). It must also disclose the audited financial reports of the company at least for the last five years.
Company Law. (2005).
French, D. Mayson, French & Ryan on company law.
Listing a company on the ASX/Preparing a prospectus. (2008). Melbourne.
Walmsley, k. (2017). butterworths company law handbook. [s.l.]: lexisnexis uk.
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