Equity Financing in Funding Shipping Activities- A Focus On Private Placements (1)
By Foluke Akinmoladun
Equity by definition refers to the interest holding in monetary terms, of an investor in a company’s net assets. It also refers to the residue of the Assets of a company after liabilities have been accounted for, giving rise to the term, “Net Assets.” This interest could be in the form of preference shares or ordinary shares and could be acquired through private placements or public offerings. The equity of a company also refers to the “ownership” of the company and its assets after liabilities or debt have been defined or identified. There are advantages and disadvantages to each which will be considered in more detail with particular reference to the shipping industry.
Preference shares: There is a preference right to claim dividend during the lifetime of the company on these shares. The percentage of dividend is fixed in the preference shares. The holders of the preference shares get a fixed dividend payout before any dividend is paid to other classes of shareholders. At the time of winding up of the company, the preference shareholders can claim their capital before any other classes of shareholders are paid. In other words, preference shareholders get priority in the hierarchy of creditors and are paid first during the liquidation process of a company.
Preference shares come with no voting rights but they do provide an advantage over ordinary shareholders when it comes to receiving dividends. Preference shareholders are first in line for dividend payments, both when the business is operating, and in the event of the company entering liquidation in the future. Dividend payments for preference shareholders are often at an agreed level and are made at defined points throughout the year. Due to this, preference shares are often seen as a less risky investment, although payment amounts may be lower in light of this. Should the company experience a period of growth with profits to match, preference shareholders will not see the benefit in this when it comes to receiving their dividend payment. There is the flip side, which is the element of certainty that comes with it.
Ordinary shares: These are also referred to as ‘common stock’ and give holders the right to vote at meetings as well as take dividends from the company’s profits. Voting rights means the ordinary shareholder has a say in the operations of the company such as salaries and the strategic direction/vision of the company.
Ordinary shareholders have the right to receive a share of the profits generated by a company that they hold ordinary shares in. The weight of a shareholder’s vote is typically dependent on the ownership percentage that they control. In most cases, one ordinary share in a company is equivalent to one vote.
Whether or not a company provides shareholders with the right to dividends is dependent on the discretion of the issuing company.
Participating preference stock: This is also known as participating preference shares. The holders of this type of stock or share receive stipulated rate of dividend and participate in the additional earnings of the company along with the equity/ordinary shareholders.
During the lifetime of the company, in addition to the fixed dividend, the shareholders of this kind of shares have a right to participate in the surplus of profits, which remains after the payment to the equity shareholders. At the time of winding up, in addition to their shares, such shareholders have a right to participate in the surplus of assets, which remains after payment to the equity shareholders. The surplus will be distributed between the participating preference shareholders and the ordinary shareholders in an agreed ratio.
Private placements: Shares are offered up for sale in two major ways. This is either through a private placement or a public offering. Private placement is a common method of raising business capital by offering equity shares. Private placements can be done by either private companies wishing to acquire a few select investors or by publicly traded companies as a secondary stock offering.
Private placement could be long-term, fixed-rate senior debt, convertible bonds, ordinary shares or preference shares, but there is an endless array of structuring alternatives. One of the key advantages of a private placement is its flexibility. Private placement debt securities are similar to bonds or bank loans and can either be secured or unsecured.
A private placement issuance is a way for institutional investors to lend to companies in a similar fashion as banks, with a “buy-and-hold” approach, and with no required trading or public disclosures. Historically, insurance companies refer to investments as purchasing “notes,” while banks make “loans.”
Private placements provide longer maturities than typical bank financing, at a fixed-interest rate. This is ideal for when a business is presented with a growth opportunity where they would not see the return on their investment right away; a business would have more time to pay back the private placement while having certainty of financing cost over the life of that investment.
Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. She is also a Chartered Secretary and Business Rescue & Insolvency Practitioner.
She belongs to the panel of neutrals of numerous arbitral institutions.She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector. She can be reached at: Foluke.A@trizonlawchambers.com
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