Equity and Debt Financing Part I

What are the 2 fundamental ways a company can finance itself?

EQUITY FINANCING (SHARES)

• Company sells a ‘stake’ (shares) in itself

• Shareholders become part-owners

• No fixed repayment obligation

• Return = dividends (discretionary)

• Governed by share capital rules

• Regulated by Companies Act, ss 54 etc

DEBT FINANCING (BORROWING)

• Company borrows money from creditors

• Creditors remain external

• Must repay principal + interest on agreed terms

• Return = interest (contractual obligation)

• Governed by security interest/charge law

• Regulated by Companies Act ss 98, 251-257

Why does the distinction matter?

• In equity financing, if the company fails, shareholders lose their investment - they are paid LAST in liquidation

• In debt financing, creditors are paid FIRST (depending on their security/priority). This is why debt is generally less risky for the lender and why creditors demand security (charges) over company assets

Equity Financing - Key Concepts

Shares: A company can issue shares privately (to known investors) or publicly (on a stock exchange). Each share gives the holder a stake in the company

Dividends: After shares are sold, the company may choose to pay dividends (a portion of profits). They are discretionary — directors choose whether to pay them in any fiscal year UNLESS the memorandum of association / articles say otherwise

S 54 TT — ‘Prohibited Dividend’ — Governs what dividends directors may NOT pay (e.g. if the company is insolvent or if paying would leave it unable to meet its obligations)

Corporate distributions: Dividends distributed to shareholders. Note the taxation dimension — if shareholders are non-resident in TnT, the company must withhold tax and remit to the Board of Inland Revenue (BIR) before shareholders receive payment

Tax types to know: VAT, Corporation Tax, Green Fund Levy, Business Levy

Misrepresentation & Contractual Terms in Debt Financing