Corporate finance law principles and policy

10.2.1 Advantages of Going Public 10.2.1.1 Opportunity to Raise Equity Finance from a Broader Range of Investors 10.2.1.2 Providing an Exit for Existing Shareholders 10.2.1.3 Increased F

CORPORATE FINANCE LAW

The second edition of this acclaimed book continues to provide a discussion

of key theoretical and policy issues in corporate finance law Fully updated itreflects developments in the law and the markets in the continuing aftermath

of the Global Financial Crisis One of its distinctive features is that it givesequal coverage to both the equity and debt sides of corporate finance law, andseeks, where possible, to compare the two This book covers a broad range oftopics regarding the debt and equity-raising choices of companies of all sizes,from SMEs to the largest publicly traded enterprises, and the mechanisms bywhich those providing capital are protected Each chapter analyses thepresent law critically so as to enable the reader to understand the difficulties,risks and tensions in this area of law, and the attempts made by the legislatureand the courts, as well as the parties involved, to deal with them This bookwill be of interest to practitioners, academics and students engaged in thepractice and study of corporate finance law

Corporate Finance Law

Principles and Policy

Second Edition

Louise Gullifer

and Jennifer Payne

OXFORD AND PORTLAND, OREGON

2015

PREFACE AND ACKNOWLEDGEMENTS

There have been a great many changes in corporate finance law since the firstedition of this book was published in 2011 At that time the global financialcrisis had obviously had significant effects on the markets, especially themarket for debt, and the increase in regulation which has been a feature of thepost-crisis period was beginning to be seen Since 2011 the legal andregulatory changes designed to deal with the aftermath of the crisis havegathered pace Within the EU there has been a slew of new directives andregulations aimed at tackling systemic risk and advancing the goal of a singlefinancial market Many of these have been focused on banks and financialinstitutions and impact on the material discussed in this book only indirectlybut others have impacted very directly on ordinary commercial companies.Obvious examples include the 2014 Market Abuse Regulation and MarketAbuse Directive, MIFIR/MiFID, the Short Selling Regulation, the AlternativeInvestment Fund Managers Directive and the Capital Requirements Directiveand Regulation

There have also been legislative changes at a domestic level that haveimportant effects in this area, such as the Small Business, Enterprise andEmployment Act 2015, the Financial Services Act 2012 and the amendments

to Part 25 of the Companies Act 2006 concerning the registration of charges.There have also been many case law developments, of which some of themost significant have come from the Lehman insolvency, including the

Supreme Court decision on the anti-deprivation principle, Belmont Park

Investments Pty Ltd v BNY Trustee Services Ltd, the ‘client money’ case and

the ‘extended lien’ case Among other cases on debt financing, two on

bondholder voting (Assenagon Asset Management SA v Irish Bank Resolution

Corporation Ltd and Azevedo v IMCOPA) are particularly significant, as well

as Fons HF (In Liquidation) v Corporal Ltd on the meaning of the word

‘debenture’ The aftermath of the crisis has also led to an increase in

regulatory enforcement actions and private lawsuits, including the launch ofthe first ever collective action under section 90 FSMA Market practice hasinevitably evolved too, with new forms of financing emerging, such ascrowdfunding and peer-to-peer lending, as well as adaptations to existingstructures as a result of economic conditions and these legal and regulatorydevelopments It has been an exciting time to be thinking about, researchingand teaching corporate finance law.

In this second edition we have thoroughly updated the text to deal withthese myriad, often very significant, developments and to reflectdevelopments both in our own thinking and that of other academics Thereare new sections to deal with material which has increased in importance (onsubjects as diverse as the interpretation of commercial contracts, anti-assignment clauses and Islamic finance) or which has been brought into theregulatory spotlight in this period, such as the regulation of gatekeepers(particularly securities analysts and Credit Rating Agencies), short selling,crowdfunding, credit default derivatives and securitisation The book has alsobeen reorganised somewhat and contains two new chapters: chapter four

which covers equity financing issues generally and brings together materialwhich has been located in a number of different chapters in the first edition;and chapter twelve which deals with market misconduct and covers marketabuse (previously covered in the chapter on secondary market regulation) aswell as the new material on short selling regulation and a new section on highfrequency and algorithmic trading Other chapters, particularly seven andnine, have been internally reorganised to enable there to be greater focus onspecific issues such as financial collateral, and the application of transfertechniques to loans and receivables This book aims to state the law andmajor policy developments as at 1 May 2015

As with the first edition, many of the issues discussed here have beenshaped and developed by the Corporate Finance Law course which we teach

in Oxford, and we would like to acknowledge and thank those alongsidewhom we have taught the course, and argued these points, especially PaulDavies, Ed Greene, Chris Hare, Jeremias Prassl and Richard Salter and theBCL/MJur/MLF classes who have taken the course Special thanks are due toChris Hale and Emma Watford for continuing to share their knowledge andexpertise on Private Equity with us and with the students

In writing this book we were assisted by a great many people, to whom

we have a continuing debt, namely friends and colleagues in Oxford andbeyond with whom we have continued to discuss corporate law and the issuesarising out of this book, and we would like to acknowledge their advice andassistance Particular thanks are due to Hugh Beale, Michael Bridge, RoyGoode, Niamh Moloney and Kristin van Zwieten In preparing this secondedition we have also been assisted by a number of excellent researchassistants: Natalie Mrockova, Jenifer Varzaly, Elizabeth Howell and, inparticular, Matteo Angelini, whose assistance was particularly invaluable Wewould also like to thank Hart Publishing, and in particular Sinead Moloneyand Ruth Massey (our really excellent copy editor), for overseeing theproduction of this book through its various stages with great care and skill.Finally, we would like to thank our families for their unfailing patienceand support during the writing of this book, and in particular to thank Robertand Nick (respectively) who have been sources of inspiration andencouragement and without whom this project could not have beencompleted This second edition, like the first edition, is dedicated to them.Louise Gullifer and Jennifer Payne

Oxford, July 2015

SUMMARY TABLE OF CONTENTS

Preface and Acknowledgements

Detailed Table of Contents

2 Overview of Financing Options

3 The Relationship Between Equity and Debt

4 Issuing Shares

5 Legal Capital

6 Creditor Protection: Contractual

7 Creditor Protection: Proprietary

8 Multiple Lenders

9 Transferred Debt

10 Public Offers of Shares

11 Ongoing Regulation of the Capital Markets: Mandatory Disclosure

12 Ongoing Regulation of the Capital Markets: Market Misconduct

DETAILED TABLE OF CONTENTS

Preface and Acknowledgements

Summary Table of Contents

2.3 Debt Financing

2.3.1 General

2.3.1.1 Sources of Debt Finance 2.3.1.2 Choice of Debt Financing Transaction 2.3.1.3 Protection of Creditors: Contractual and Proprietary 2.3.1.4 Protection of Creditors: Regulation

2.3.1.5 Multiple Lenders and Transfer of Debt 2.3.2 Loans

2.3.2.1 Bank Loans 2.3.2.2 Multiple Lenders 2.3.2.3 Peer-to-Peer Lending 2.3.3 Debt Securities

2.3.3.1 General 2.3.3.2 Securities versus Loan 2.3.3.3 Who Issues Bonds?

2.3.3.4 Debt Securities versus Equity 2.3.3.5 Varieties of Bonds

2.3.4 Finance Based on Assets

2.3.4.1 Receivables Financing 2.3.4.2 Supply Chain Financing 2.3.4.3 Asset-Based Lending 2.3.4.4 Devices Based on Retention of Title

2.3.4.4.1 Sale and Leaseback 2.3.4.4.2 Asset Finance 2.3.4.4.3 Stock Finance 2.3.4.4.4 Sales on Retention of Title Terms 2.3.5 Specialised Forms of Finance

2.3.5.1 Project Finance 2.3.5.2 Financing of Group Companies 2.3.5.3 Trade Finance

2.3.5.4 Islamic Finance 2.4 Hybrids

3.2 The Relationship Between Equity and Debt in a Solvent Company

3.2.1 Position of Shareholders in a Solvent Company

3.2.1.1 Ordinary Shares

3.2.1.1.1 Rights to Capital 3.2.1.1.2 Rights to Income 3.2.1.1.3 Voting Rights 3.2.1.1.4 Summary 3.2.1.2 Preference Shares

3.2.1.2.1 Rights to Capital 3.2.1.2.2 Rights to Income 3.2.1.2.3 Voting Rights 3.2.1.2.4 Summary 3.2.1.3 Role of Shareholders in a Solvent Company

3.2.1.3.1 Section 172 of the Companies Act 2006 3.2.1.3.2 Explaining the Pre-Eminence of Shareholders 3.2.1.3.3 The Corporate Governance Role of Shareholders 3.2.2 Position of the Creditors in a Solvent Company

3.2.2.1 Non-Adjusting Creditors 3.2.2.2 Risks to Creditors from the Operation of a Solvent Company 3.2.2.3 Restrictions on the Company’s Activities

3.2.2.4 The Corporate Governance Role of Debt

3.2.2.4.1 Debt Covenants 3.2.2.4.2 Monitoring by Lenders

3.2.2.4.3 Lender Influence on Breach 3.2.2.4.4 Lenders as Directors?

3.2.2.4.5 Is Lender Governance Efficient?

3.2.2.4.6 Effect of Transfer of Risk by Lenders 3.2.2.4.7 The Twilight Period before Insolvency 3.3 The Relationship Between Debt and Equity in an Insolvent Company

3.3.1 Order of Payment Out on a Winding Up or Distribution by an Administrator

3.3.1.1 Holders of Proprietary Claims 3.3.1.2 Order of Priority

3.3.1.2.1 Liquidation or Administration Expenses 3.3.1.2.2 Preferential Creditors

3.3.1.2.3 The Prescribed Part 3.3.1.2.4 General Unsecured Creditors 3.3.1.2.5 The Shareholders

3.3.2 Preservation of the Assets for Creditors on and During the Run-up to Insolvency

3.3.2.1 Preventing Reduction of the Asset Pool

3.3.2.1.1 Statutory Provisions 3.3.2.1.2 The Anti-Deprivation Principle 3.3.2.2 Preventing Uneven Distribution of the Assets 3.3.2.3 Potential Overlap Between the Prevention of Reduction of the Asset Pool and

the Prevention of Uneven Distribution of Assets 3.3.2.4 Protection of Creditors

3.3.3 The Balance Between Creditors and Shareholders in an Insolvent Company

3.3.3.1 Directors’ Duties 3.3.3.2 Lifting the Veil Between the Creditors and the Shareholders

3.3.3.2.1 Common Law Mechanisms 3.3.3.2.2 Statutory Mechanisms: Sections 213 and 214 Insolvency Act 1986 3.4 Conclusion

4 Issuing Shares

4.1 Introduction

4.2 Shareholder Protection when Shares are Issued

4.2.1 The Need for Shareholder Protection

4.2.1.1 Dilution of Existing Shareholders’ Interests 4.2.1.2 Misuse by the Directors of the Power to Issue New Shares 4.2.2 Existing Company Law Mechanisms that Operate to Protect Shareholders

4.2.2.1 Directors’ Duties 4.2.2.2 Minority Shareholder Protection 4.2.3 Justification for Additional Protection in Relation to Share Issues

4.3 Directors’ Authority to Allot Shares

4.4 Pre-Emption Rights

4.4.1 Scope of Pre-Emption Rights

4.4.2 Renounceable Letters of Allotment

4.4.3 Waiver of Pre-Emption Rights

4.4.4 Is the Current Balance Correct as Between Shareholder Protection and the Company’s Capital-Raising Needs?

5.2 Function of the Legal Capital Rules

5.2.1 Conflict Between Shareholders and Creditors

5.2.2 Policy Response to the Conflict

5.2.3 The UK’s Legal Capital Regime

5.3 Rules Regulating the Amount of Money Paid In by Shareholders

5.3.1 Entry Price for Limited Liability: Minimum Capital Rules

5.3.2 Measurement of Consideration: Payment for Shares

5.3.2.1 Shares must have a Par Value 5.3.2.2 ‘No Issue at a Discount’ Rule

5.3.2.2.1 Cash Consideration 5.3.2.2.2 Non-Cash Consideration 5.3.2.3 Consequences of a Breach of the Provisions 5.3.2.4 Efficacy of the Rules as a Form of Shareholder Protection 5.3.2.5 Efficacy of the Rules as a Form of Creditor Protection 5.4 Maintenance of Capital

5.4.1 Dividend Payments

5.4.1.1 Potential Benefits of Dividend Payments 5.4.1.2 Constraints on Dividend Payments 5.4.2 Repurchases and Redemptions of Shares

5.4.2.1 Potential Benefits of Repurchases and Redemptions of Shares 5.4.2.2 Repurchases of Shares

5.4.2.2.1 Rules Applicable to All Companies 5.4.2.2.2 Additional Flexibility for Private Companies 5.4.2.3 Redemption of Shares

5.4.3 Reductions of Capital

5.4.3.1 Potential Benefits of a Reduction of Capital 5.4.3.2 Court Approval Route Available to All Companies 5.4.3.3 Solvency Statement Mechanism for Private Companies 5.4.4 Prohibition on Financial Assistance

5.4.5 Efficacy of the Rules as a Form of Creditor Protection

5.5 Alternatives to the Legal Capital Rules

5.5.1 Creditor Protection via Contract

5.5.2 Creditor Protection via Insolvency Law

5.5.3 Solvency Statement Approach

5.5.3.1 The Test of Solvency 5.5.3.2 Liability of the Directors 5.5.3.3 Recovery of Unlawful Payments 5.5.3.4 Potential for Reform

6.3 Contractual Rights Against the Borrower

6.3.1 Restrictions on the Borrower’s Activities

6.3.1.1 Restrictions on Borrowing 6.3.1.2 Restrictions on Asset Disposal 6.3.1.3 Restrictions on Dividend Payments 6.3.1.4 Change of Control Covenants 6.3.1.5 Debt Buybacks

6.3.1.6 Negative Pledge Clause

6.3.1.6.1 Forms of Negative Pledge Clause 6.3.1.6.2 Enforcement of Restrictive Covenants 6.3.2 Rights to Information and Financial Covenants

6.3.2.1 Rights at the Time of Making the Loan 6.3.2.2 Ongoing Rights

6.3.3 Termination and Acceleration Rights

6.3.3.1 Events of Default 6.3.3.2 Effect of Wrongful Acceleration 6.3.3.3 Validity of Acceleration Clauses 6.3.4 Set-Off

6.3.4.1 Use of Set-Off and Flawed Asset Structures in Lending 6.3.4.2 Independent Set-Off

6.3.4.3 Transaction Set-Off 6.3.4.4 Banker’s Right to Combine Accounts 6.3.4.5 Contractual Set-Off and Exclusion of Set-Off 6.3.4.6 Insolvency Set-Off

6.3.4.6.1 The Limits and Operation of Insolvency Set-Off

6.3.4.6.2 The Mandatory and Exclusive Nature of Insolvency Set-Off 6.3.4.6.3 Policy Justifications for Insolvency Set-Off

6.4 Contractual Rights Against Third Parties

6.4.1 Guarantees, Indemnities and Performance Bonds

6.4.1.1 Introduction 6.4.1.2 Important Distinctions 6.4.1.3 Guarantees

6.4.1.3.1 Protection of the Third Party: Construction of the Guarantee 6.4.1.3.2 Protection of the Third Party: Disclosure

6.4.1.3.3 Protection of the Third Party: Discharge of the Third Party 6.4.1.3.4 Protection of the Third Party: Third Party’s Rights Against the

Principal Debtor 6.4.1.4 Indemnity and Performance Bond 6.4.2 Credit Insurance

6.4.3 Derivatives and Credit Default Swaps

6.4.3.1 Management of Risk by the Use of Derivatives 6.4.3.2 Credit Default Swaps

6.4.3.3 Are Credit Default Swaps Insurance?

6.4.3.4 Regulation of CDSs 6.4.4 Subordination

6.4.4.1 Types of Subordination

6.4.4.1.1 Turnover Trust 6.4.4.1.2 Contingent Debt 6.4.4.1.3 Contractual Subordination 6.4.4.1.4 Structural Subordination 6.5 Conclusion

7 Creditor Protection: Proprietary

7.1 Introduction

7.1.1 Purpose of Obtaining Proprietary Rights

7.1.2 Absolute Interests

7.1.3 Distinctions in Relation to a Company’s Assets

7.2 Absolute and Security Interests

7.2.1 What is a Security Interest?

7.2.2 Characterisation of Interests as Absolute or Security Interests

7.2.3 Reasons for Choosing a Structure Based on an Absolute or a Security Interest 7.2.4 Policy Considerations

7.2.5 Process of Characterisation in Relation to Particular Structures

7.2.5.1 Grant and Grant-Back 7.2.5.2 Grant

7.2.5.3 Retention of Title 7.2.5.4 Quistclose Trusts 7.3 Types of Security Interest

7.3.1 Introduction

7.3.2 Non-Possessory Security Interests

7.3.2.1 Security Over Future Property

7.3.2.2 Mortgage

7.3.2.3 Charge

7.3.2.4 Security Interest Over Lender’s Own Indebtedness

7.3.3 The Floating Charge

7.3.3.1 Introduction

7.3.3.2 Crystallisation

7.3.3.3 Distinction Between Fixed and Floating Charges

7.3.3.3.1 Introduction 7.3.3.3.2 Defining Features of Fixed Charges and Floating Charges 7.3.3.3.3 Methodology of Characterising a Charge as Fixed or Floating 7.3.3.3.4 Should Floating Charges be Treated Differently?

7.3.3.4 The Future of the Floating Charge

7.3.4 Security Financial Collateral Arrangements

7.3.4.1 Introduction

7.3.4.2 Current English Law

7.3.4.3 Registration

7.4 Registration and Priorities

7.4.1 The Requirement of Registration

7.4.2 The Registration Process

7.4.3 The Effect of Registration

7.4.3.1 Consequences of Failure to Register

7.5.1.2 Appropriation of Financial Collateral

7.5.1.3 Possession and Sale

7.5.1.4 Appointment of a Receiver

7.5.2 Methods of Enforcement: Absolute Interests

7.5.2.1 Devices Based on Retention of Title

7.5.2.2 Devices Based on the Grant of an Absolute Interest

7.5.3 The Effect of Administration

7.6 Economic Arguments Concerning Secured Credit

7.6.1 Means of Assessing a System of Secured Credit

7.6.2 The Puzzle of Secured Credit

7.6.2.1 Monitoring

7.6.2.2 Signalling

7.6.2.3 Non-Adjusting Creditors

7.7 Reform

7.7.1 Attributes of an Ideal Law

7.7.2 Unsatisfactory Aspects of English Law

7.7.3 Options for Reform

7.7.4 Outline of Notice Filing Scheme

7.7.4.1 Functional Approach 7.7.4.2 Registration

7.7.4.3 Priorities 7.7.4.4 Enforcement 7.7.5 Assessment of Reform

8.2.1.3.1 Certainty of Intention to Create a trust 8.2.1.3.2 Certainty of Objects

8.2.1.3.3 Certainty of Subject Matter 8.2.1.3.4 Equitable Nature of an Interest Under a Trust 8.2.2 Agency

8.3 Issue of Debt Securities

8.3.1 Attracting Lenders

8.3.2 Structure of Securities Issue

8.3.2.1 Difference Between Bonds and Stock 8.3.2.2 Stock

8.3.2.2.1 Debt Owed to a Trustee 8.3.2.2.2 Debt Contained in a Deed Poll 8.3.2.3 Eurobonds

8.3.2.3.1 Advantages and Disadvantages of the Trustee Structure 8.3.2.3.2 Subject Matter of the Trust

8.3.2.3.3 Bond Issue Without Trustee 8.3.3 Ascertaining the Views of Holders

8.3.3.1 The Decision-Making Process 8.3.3.2 Protection of the Minority 8.3.3.3 Schemes of Arrangement 8.3.4 Trustees’ Obligations

8.3.4.1 Introduction 8.3.4.2 The Functions of a Trustee

8.3.4.2.1 Modifications to the Terms of the Securities or Trust Deed 8.3.4.2.2 Receiving Information from the Issuer

8.3.4.2.3 Taking Action on Event of Default 8.3.5 Excluding Trustees’ Duties

8.3.5.1 Forms of Exclusion Clauses 8.3.5.2 Contractual Construction of Clauses 8.3.5.3 Unfair Contract Terms Act

8.3.5.4 Public Policy: Common Law Constraints 8.3.5.5 Public Policy: Legislative Constraints?

8.3.5.6 Conclusion 8.4 Syndicated Loans

8.4.1 Comparison Between Agency in Syndicated Loans and Trustee Structure in Bond Issues 8.4.2 Finding Lenders

8.4.3 Role of the Arranger

8.4.4 Liability of the Arranger in Relation to False Statements in the Information Memorandum 8.4.5 Position of the Agent Bank

9.2.2.5 Assignment of Equitable Interests 9.2.2.6 Clauses Prohibiting Assignment

9.2.2.6.1 Introduction 9.2.2.6.2 Construction of the Clause 9.2.2.6.3 Where the ‘Assignor’ has been Paid by the Debtor 9.2.2.6.4 Where the ‘Assignor’ has not been Paid by the Debtor 9.2.2.6.5 Declaration of Trust

9.2.3 Negotiable Instruments

9.2.4 Transfer of Loans

9.2.4.1 Introduction 9.2.4.2 The Use of Novation

9.2.4.2.1 Consent in Advance 9.2.4.2.2 Restrictions on Transfer 9.2.4.2.3 Consent not Unreasonably Withheld 9.2.4.2.4 Security for the Loan

9.2.4.2.5 Novation Subject to Equities?

9.2.4.3 The Use of Assignment

9.2.5 Transfer of Receivables

9.2.5.1 The Use of Assignment in Receivables Financing 9.2.5.2 Anti-Assignment Clauses and Receivables Financing 9.2.5.3 Statutory Override of Anti-Assignment Clauses 9.2.6 Transfer of Securities

9.2.6.1 Transfer of Stock 9.2.6.2 Transfer of Intermediated Securities 9.2.6.3 Transfers via CREST

9.3 Structures which have a Similar Effect to Transfer

10.2 Why do Companies Go Public?

10.2.1 Advantages of Going Public

10.2.1.1 Opportunity to Raise Equity Finance from a Broader Range of Investors 10.2.1.2 Providing an Exit for Existing Shareholders

10.2.1.3 Increased Flexibility and Value Attached to the Shares in a Publicly Traded

Company 10.2.1.4 Corporate Governance Improvements 10.2.1.5 Prestige

10.2.2 Disadvantages of Going Public

10.2.3 Summary

10.3 The Process of Going Public

10.3.1 Only Public Companies Can Offer their Shares to the Public

10.3.2 An Offer to the Public

10.3.2.1 Offer for Sale or Subscription 10.3.2.2 Placing

10.3.3 Admission to Listing or to Trading on a Public Market

10.3.3.1 Choice of UK Markets 10.3.3.2 Choice of International Markets 10.4 The Theory of Regulation of Public Offers

10.4.1 Objectives of Regulation

10.4.2 The Need for Regulation

10.4.3 Regulatory Strategies

10.4.3.1 Governance Strategies 10.4.3.2 Affiliation Strategies 10.4.3.3 Mandatory Disclosure 10.5 Regulation of Public Offers in the UK: Ex Ante Protection via Mandatory Disclosure

10.5.1 Regulatory Structure

10.5.2 Mandatory Disclosure in the UK

10.5.2.1 Meaning of ‘An Offer of Securities to the Public’

10.5.2.2 Form and Content of a Prospectus 10.6 Regulation of Public Offers in the UK: Enforcement of the Mandatory Disclosure Regime 10.6.1 The Aims of Enforcement

10.6.1.1 Encouraging the Accurate and Timely Disclosure of Information 10.6.1.2 Providing Compensation to those who Suffer Loss

10.6.2 Private Enforcement: Liability for Defective Prospectuses

10.6.2.1 Nature of the Claim Under Section 90 FSMA 10.6.2.2 Who can Claim?

10.6.2.3 Who may be Liable?

10.6.2.4 Remedy

10.6.2.4.1 Financial Compensation 10.6.2.4.2 Rescission

10.6.2.5 Summary 10.6.3 Public Enforcement

10.6.3.1 Criminal Sanctions 10.6.3.2 Administrative Sanctions 10.6.4 Intensity of Enforcement

10.6.4.1 Public Enforcement 10.6.4.2 Private Enforcement 10.7 Regulation of Equity Crowdfunding

10.8 Conclusion

11 Ongoing Regulation of the Capital Markets: Mandatory Disclosure

11.1 Introduction

11.2 Objectives of Regulating the Secondary Market

11.2.1 Promoting an Efficient Market Price

11.2.1.1 Efficient Capital Markets Hypothesis 11.2.1.2 Role of Mandatory Disclosure in Promoting Market Efficiency 11.2.2 Promoting Corporate Governance

11.2.2.1 Individual Investors

11.2.2.1.1 Role of Individual Investors 11.2.2.1.2 Effect of Intermediation 11.2.2.2 Institutional Investors

11.2.2.2.1 Role of Institutional Investors 11.2.2.2.2 Encouraging Engagement by Institutional Investors 11.2.2.2.3 UK Stewardship Code

11.2.2.3 Role of Mandatory Disclosure in Promoting Corporate Governance 11.2.2.4 Summary

11.3 Mandatory Disclosure in the Secondary Market

11.3.1 Periodic Disclosures

11.3.1.1 Annual Reports

11.3.1.1.1 Obligation to Produce Annual Reports and Accounts 11.3.1.1.2 Directors’ Report and Strategic Report

11.3.1.1.3 Corporate Governance Statement 11.3.1.2 Half Yearly Reporting

11.3.1.3 Function of Periodic Disclosures 11.3.2 Ad Hoc Disclosures

11.3.2.1 Inside Information 11.3.2.2 Disclosure of Directors’ Shareholdings 11.3.2.3 Disclosure of Major Shareholdings 11.3.2.4 Disclosures Required by the Listing Rules 11.3.2.5 Function of Ad Hoc Disclosures

11.4 Enforcement of Secondary Market Disclosure Obligations

11.4.1 Private Enforcement

11.4.1.1 Enforcement by Shareholders of Misstatements in Governance-Based

Disclosures 11.4.1.2 Enforcement by Shareholders and Other Investors of Misstatements in Investor-

Focused Disclosures 11.4.1.2.1 Background 11.4.1.2.2 Scope of the Section 90A FSMA Provisions 11.4.1.2.3 Comparison of Section 90A FSMA and Section 90 FSMA 11.4.1.2.4 Assessment of Section 90A FSMA

11.4.2 Public Enforcement

11.4.2.1 The FCA 11.4.2.2 The Corporate Reporting Review 11.4.3 Intensity of Enforcement

11.4.3.1 Public Enforcement 11.4.3.2 Private Enforcement 11.5 Regulation of Analysts

11.6 Conclusion

12 Ongoing Regulation of the Capital Markets: Market Misconduct

12.1 Introduction

12.2 The Regulation of Market Abuse

12.2.1 Justifications for Regulating Market Abuse

12.2.1.1 Justifications for Regulating Insider Dealing

12.2.1.1.1 Relationship-Based Justifications vs Market-Based Justifications 12.2.1.1.2 Arguments Against the Regulation of Insider Dealing

12.2.1.1.3 Justifying the Market-Based Approach: Enhancing Investor

Confidence 12.2.1.2 Justifications for Regulating Market Manipulation 12.2.2 The Offences of Insider Dealing and Market Manipulation

12.2.2.1 The Criminal Offence of Insider Dealing Under the Criminal Justice Act 1993

12.2.2.1.1 Definition of an Insider 12.2.2.1.2 Definition of Inside Information

12.2.2.1.3 The Offence of Actual Dealing in Securities 12.2.2.1.4 The Offence of Encouraging Another Person to Deal 12.2.2.1.5 The Offence of Disclosing Inside Information to Another Person 12.2.2.1.6 Penalties and Enforcement

12.2.2.2 The Criminal Offences of Market Manipulation Under Sections 89–91 Financial

Services Act 2012 12.2.2.2.1 Misleading Statements and Dishonest Concealment: Section 89

Financial Services Act 2012 12.2.2.2.2 Misleading Impressions: Section 90 Financial Services Act 2012 12.2.2.2.3 Misleading Statements etc in Relation to Benchmarks: Section 91

Financial Services Act 2012 12.2.2.2.4 Penalties and Enforcement 12.2.2.3 The Regulatory Offence of Market Abuse Under Section 118 FSMA

12.2.2.3.1 Insider Dealing 12.2.2.3.2 Market Manipulation 12.2.2.3.3 Levels of Enforcement Under Section 118 12.2.2.4 Private Enforcement of Market Abuse

12.2.2.5 Summary 12.3 The Regulation of Short Selling

12.3.1 Justifications for Regulating Short Selling

12.3.1.1 Short Selling Destabilises Orderly Markets 12.3.1.2 The Use of Short Selling to Manipulate Markets 12.3.1.3 Settlement Risk

12.3.2 Constraints Placed on Short Selling

12.3.2.1 Bans on Short Selling 12.3.2.2 Disclosure and Reporting Obligations 12.3.2.3 Circuit Breakers and Uptick Rules 12.3.2.4 Rules Designed to Mitigate Settlement Risk 12.3.2.5 The Role of National Authorities and ESMA 12.3.3 Summary

12.4 Algorithmic and High Frequency Trading

13.1.3 Regulation by Disclosure Requirements

13.2 Regulation of Initial Issue of Debt Securities

13.2.1 Introduction

13.2.2 Factors Affecting the Disclosure Requirements

13.2.2.1 To whom the Securities are Offered 13.2.2.2 Trading on a Market

13.2.2.3 Denomination of Securities

13.2.2.4 Rationale of the Disclosure Regime 13.2.3 Information Required in a Prospectus

13.2.4 Disclosure Required for Listing on the PSM

13.2.5 Disclosure Requirements where Securities are not Listed

13.2.6 Restrictions on Financial Promotion

13.2.7 Enforcement of the Mandatory Disclosure Regime

13.2.7.1 Claims Against the Issuer 13.2.7.2 Claims Against Other Parties 13.2.8 Comparison of Protection by Regulation for Holders of Debt Securities and those Making Loans: Disclosure at the Initial Stage

13.3 Ongoing Regulation by Disclosure

13.3.1 Mandatory Ongoing Disclosure

13.3.2 Enforcement of Ongoing Disclosure Requirements

13.3.3 Comparison of Protection by Regulation for Holders of Debt Securities and those Making Loans: Ongoing Disclosure

13.4 Regulation of Market Misconduct

13.4.1 Application of the Market Abuse Rules to the Debt Securities Markets

13.4.2 Application of the Market Abuse Rules to the Making and Transfer of Loans

13.4.3 The Regulation of Short Selling

13.5 Accepting Deposits

13.6 Convertible Debt Securities

13.7 Regulation of Credit Rating Agencies

13.8 Regulation of Peer-to-Peer Lending

14.2.2 Implementation of the Takeover Directive

14.2.3 Role and Status of the Takeover Panel

14.2.4 Tactical Litigation

14.2.5 Summary

14.3 The Substance of Takeover Regulation in the UK

14.3.1 The Procedure of a Bid

14.3.1.1 Initial Approach 14.3.1.2 Formal Offer 14.3.1.3 Squeeze-Out 14.3.1.4 Sell-Out 14.3.1.5 Further Offers 14.3.2 Relationship Between the Target Directors and the Target Shareholders

14.3.2.1 Pre-Bid Defences

14.3.2.1.1 Directors’ duties 14.3.2.1.2 Share Transfer Restrictions 14.3.2.1.3 Removal of Directors and Staggered Boards 14.3.2.1.4 The Role of Shareholders

14.3.2.1.5 Summary 14.3.2.2 Post-Bid Defences

14.3.2.2.1 The No Frustration Principle 14.3.2.2.2 Consequences of the UK’s Adoption of the No Frustration Principle 14.3.3 Relationship Between the Target Directors and Other Stakeholders in the Target

14.3.4 Relationship between the Bidder and the Target Shareholders

14.3.4.1 Undistorted Choice 14.3.4.2 Protection of Minority Shareholders

14.3.4.2.1 Prevention of Oppression 14.3.4.2.2 An Exit Right

14.3.5 Relationship Between the Bidder Directors and Bidder Shareholders

14.4 Conclusion

15 Schemes of Arrangement

15.1 Introduction

15.2 The Mechanics of a Scheme of Arrangement

15.2.1 Application to the Court for Meetings to be Summoned

15.2.2 Meeting(s) of the Members or Creditors

15.2.2.1 Who Needs to Consider the Scheme?

15.2.2.2 Separate Class Meetings: General

15.2.2.2.1 The General Test 15.2.2.2.2 Members’ and Creditors’ Rights 15.2.2.2.3 Selecting the Correct Comparator 15.2.2.3 Separate Meetings for Shareholders

15.2.2.4 Separate Meetings for Creditors 15.2.2.5 Approval at the Class Meetings

15.2.2.5.1 The Majority in Value Requirement 15.2.2.5.2 The Majority in Number Requirement 15.2.3 The Sanction of the Court

15.2.3.1 Have the Statutory Provisions been Complied with?

15.2.3.2 Exercise of the Court’s Discretion 15.2.3.3 Effect of the Scheme

15.3 Uses of Schemes of Arrangement

15.3.1 As an Alternative to a Takeover Offer

15.3.1.1 Advantages and Disadvantages of a Scheme rather than a Takeover Offer to

Effect a Change of Control 15.3.1.2 Minority Protection in a Scheme

15.3.1.2.1 Concerns Regarding the Approval Threshold for Schemes 15.3.1.2.2 Concerns Regarding the Bypassing of Minority Protection in

Takeover Offers

15.3.2 To Reorganise a Corporate Group

15.3.3 To Effect a Merger or Demerger

15.3.4 To Effect an Arrangement Between the Company and its Creditors

15.3.4.1 Restructuring the Debts of Financially Distressed Companies 15.3.4.2 Settling Claims within the Insurance Industry

15.4 Conclusion

16 Private Equity

16.1 Introduction

16.2 Historical Development

16.3 Private Equity Funds

16.3.1 Structure of a Typical Private Equity Fund

16.3.2 Sources of Funding for Private Equity Funds

16.3.3 Why have Investors Wanted to Invest in Private Equity Funds?

16.4 Capital Structure of a Typical Private Equity Transaction

16.4.1 Equity Financing

16.4.2 Quasi-Equity

16.4.3 Debt Financing

16.4.3.1 Senior Debt 16.4.3.2 Second Lien Debt 16.4.3.3 Mezzanine Debt 16.5 Public-to-Private Transactions

16.5.1 Financial Issues

16.5.2 Recommendation by the Directors

16.5.3 Equality Between Bidders

16.5.4 Equality of Treatment of Shareholders

16.5.5 Market Abuse

16.6 A Comparison of Private Equity Backed Companies and Non-Private Equity Backed Companies 16.6.1 Ownership Structures

16.6.2 Board/Management Structures

16.6.3 Disclosure and Transparency

16.6.4 Debt vs Equity Levels

16.6.4.1 Employees 16.6.4.2 Creditors 16.6.5 Summary

16.7 Regulation

16.7.1 The Need for Regulation

16.7.1.1 Increased Transparency 16.7.1.2 Systemic Risk

16.7.2.4 Effect of the AIFMD on the Private Equity Industry 16.8 Conclusion

Index

LIST OF ABBREVIATIONS

ABFA Asset Based Finance Association

ABI Association of British Insurers

AIF Alternative Investment Fund

AIFM Alternative Investment Fund Manager

AIFMD Alternative Investment Fund Managers Directive 2011/61/EU

AIM Alternative Investment Market

ASIC Australian Securities and Investment Commission

BERR Department for Business, Enterprise and Regulatory Reform (predecessor of BIS) BIPRU Prudential sourcebook for Banks, Building Societies and Investment Firms BIS Department for Business, Innovation and Skills

BVCA British Venture Capital Association

CAMAC Corporations and Markets Advisory Committee

CARD Consolidated Admissions Requirements Directive

CASS Client Assets Sourcebook

CJEU Court of Justice of the European Union (previously the ECJ)

CMBOR Centre for Management Buy-Out Research

COBS Conduct of Business Sourcebook

CoCo Contingent Convertible Securities

CRD Capital Requirements Directive

CRR Capital Requirements Regulation

CSD Central Securities Depository

CVL Creditors’ Voluntary Liquidation

D&O Directors and Officers

DISP Dispute Resolution: Complaints Sourcebook

DTI Department of Trade and Industry (predecessor of BIS)

DTR Disclosure and Transparency Rules

EBITDA Earnings Before Interest, Taxes, Depreciation and Amortisation

ECJ European Court of Justice (now the CJEU)

ECMH Efficient Capital Markets Hypothesis

EMIR European Markets Infrastructure Regulation (Regulation (EU) No 648/2012) ESMA European Securities and Market Authority

EUI Euroclear UK and Ireland Ltd

EURIBOR Euro Interbank Offered Rate

EVCA European Venture Capital Association

FCA Financial Conduct Authority

FCARs Financial Collateral Arrangements (No 2) Regulations (SI 2003/3226) as

amended FCD Financial Collateral Directive 2002/47/EC as amended

FINMAR Financial Stability and Market Confidence Sourcebook

FLA Finance and Leasing Association

FRC Financial Reporting Council

FRS Financial Reporting Standard

FSA Financial Services Authority (predecessor of the FCA)

FSB Financial Stability Board

FSMA Financial Services and Markets Act 2000

FUND Investment Funds Sourcebook

GAAP Generally Accepted Accounting Principles

GEFIM Gilt-Edged and Fixed Interest Market

GENPRU General Prudential Sourcebook

IAS International Accounting Standards

ICAEW Institute of Chartered Accountants in England and Wales

ICAS Institute of Chartered Accountants of Scotland

IFPRU Prudential Sourcebook for Investment Firms

IFRS International Financial Reporting Standards

IMA Investment Management Association

INSPRU Prudential Sourcebook for Insurers

IOSCO International Organization of Securities Commissions

IPO Initial Public Offering

ISDA International Swaps and Derivatives Association

ISDX ICAP Securities and Derivatives Exchange

LIBOR London Interbank Offered Rate

MiFID Markets in Financial Instruments Directive 2004/39/EC

MiFID II Markets in Financial Instruments Directive 2014/65/EU

MiFIR Markets in Financial Instruments Regulation (Regulation EU No 600/2014) MTF Multilateral Trading Facility

NAPF National Association of Pension Funds

OTF Organised Trading Facility

PERG Perimeter Guidance Manual

PMSI Purchase Money Security Interest

PPSA Personal Property Security Act

PRA Prudential Regulation Authority

PSM Professional Securities Market

RINGA Relevant Information Not Generally Available

RIS Regulated Information Service

SEC Securities and Exchange Commission

SME Small and Medium-Sized Enterprises

SSAP Statements of Standard Accounting Practice

USR Uncertificated Securities Regulations 2001 (SI 2001/3755) as amended

LIST OF COMMON TEXTS

Andrews and Millett: Guarantees G Andrews and R Millett, Law of Guarantees, 6th edn (London,

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2007) Benjamin: Interests in Securities J Benjamin, Interests in Securities (Oxford, Oxford University

Press, 2000) Chitty H Beale (ed), Chitty on Contracts, 31st edn (London, Sweet &

Maxwell, 2012) Derham: Set-Off R Derham, The Law of Set-Off, 4th edn (Oxford, Oxford

University Press, 2010) Encyclopaedia of Banking Law P Cresswell, W Blair, G Hill and P Wood (eds), Encyclopaedia

of Banking Law (London, LexisNexis Butterworths, 2014)

Fuller: Capital Markets G Fuller, The Law and Practice of International Capital

Markets, 3rd edn (London, LexisNexis Butterworths, 2012)

Fuller: Corporate Borrowing G Fuller, Corporate Borrowing: Law and Practice, 4th edn

(Bristol, Jordan Publishing Ltd, 2009) Goode: Commercial Law E McKendrick (ed), Goode on Commercial Law, 4th edn

(London, LexisNexis UK, 2009) Goode: Corporate Insolvency R Goode, Principles of Corporate Insolvency Law, 4th edn

(London, Sweet & Maxwell, 2011) Goode: Credit and Security L Gullifer (ed), Goode on Legal Problems of Credit and

Security, 5th edn (London, Sweet & Maxwell, 2013)

Gower and Davies P Davies and S Worthington (eds), Gower and Davies:

Principles of Modern Company Law, 9th edn (London, Sweet &

Maxwell, 2012) Hudson: Finance A Hudson, The Law of Finance, 2nd edn (London, Sweet &

Maxwell, 2013) Hughes: Banking M Hughes, Legal Principles in Banking and Structured Finance,

2nd edn (Hayward’s Heath, Tottel Publishing Ltd, 2006) Law of Personal Property M Bridge, L Gullifer, G McMeel and S Worthington, The Law

of Personal Property (London, Sweet & Maxwell, 2013)

Mokal: Insolvency Law R Mokal, Corporate Insolvency Law: Theory and Applications

(Oxford, Oxford University Press, 2005) Moloney: EU Regulation N Moloney, EU Securities and Financial Markets Regulation,

3rd edn (Oxford, Oxford University Press, 2014) Mugasha: Multi-Bank Financing A Mugasha, The Law of Multi-Bank Financing (New York,

Oxford University Press, 2007)

(London, LexisNexis UK, 2014) Security and Title-Based Financing H Beale, M Bridge, L Gullifer and E Lomnicka, The Law of

Security and Title-Based Financing, 2nd edn (Oxford, Oxford

University Press, 2012) Smith and Leslie: Assignment M Smith and N Leslie, The Law of Assignment, 2nd edn

(Oxford, Oxford University Press, 2013) Tennekoon: International Finance R Tennekoon, The Law and Regulation of International Finance

(London, Butterworths, 1991) Tolhurst: Assignment G Tolhurst, The Assignment of Contractual Rights (Oxford, Hart

Publishing, 2006) Treitel E Peel (ed), Treitel on the Law of Contract, 13th edn (London,

Sweet & Maxwell, 2011).

Valdez: Financial Markets S Valdez, An Introduction to Global Financial Markets, 7th edn

(Basingstoke, Palgrave Macmillan, 2013) Wood: Loans and Bonds P Wood, International Loans, Bonds, Guarantees, Legal

Opinions, 2nd edn (London, Sweet & Maxwell, 2007)

Wood: Project Finance P Wood, Project Finance, Securitisations, Subordinated Debt,

2nd edn (London, Sweet & Maxwell, 2007) Wood: Set-Off and Netting P Wood, Set-Off and Netting, Derivatives and Clearing Systems

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Holroyd v Marshall (1862) 10 HL Cas 191 here , here , here , here , here

Hong Kong and Shanghai Banking Corp v Kloeckner & Co AG [1990] 2

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC) here , here , here , here

Hyundai Heavy Industries Co Ltd v Papadopoulous [1980] 1 WLR 1129

(HL)

here

IFE Fund SA v Goldman Sachs International [2007] EWCA Civ 811 here , here