Tuesday, September 4, 2018

Book Review: Corporate Finance Law - A Guide for the Executive

Corporate Finance Law by Bruce Wasserstein is The Prince of our day. Wasserstein writes it to explain corporate finance and to market himself to executives. I would caution that the book was copyrighted in 1978 and some of the information likely has changed and may be no longer accurate.

Topics of Interest-

  • Why to choose a specific business structure
    • Corporation- Taxed at the corporate level and ownership transferable via stock certificates
    • Partnership- Agreement outlines control and share of profits, individual taxed
    • Limited Liability Partnership- Partners share in profit with limited liability as long as they take role in the management
Tax shelters are typically partnerships due to flow of losses generated by deductions: 1) depreciation or 2) depletion allowances
Subchapter S- corporations with X<100 shareholders benefit from incorporation while being taxed as partnership (section 1244 IRS code-net assets X<500,000 issue stock where my losses to investors will be deducted against income rather than capital loss(great for startups due to tax advantages and extended losses).
  • Directors have a fiduciary responsibility for all stockholders of a company.
    • The business judgment rule protects directors from liability if they used best judgment even if the decision was a mistake... HOWEVER, if any part of prospectus used in connection with public offering contains a misstatement or material omission, every director is personally liable
    • Directors along with officers and beneficial owners of a public company with more than 10% ownership are considered insiders and must file with the SEC their holdings
  • Trustees
    • 1939 Act- limits who can be a trustee for public debt issues
    • Cannnot be trustee under another issue with conflicting rights
    • Cannot control the issue
    • Cannot own X>10% of issuing company 
  • Capital Structure
    • Net Operating Approach: Company valued on capital structure as a whole. No difference between debt/equity (assumes debt there is an explicit cost of interest and as debt/equity increases, common stock perceived riskier which leads to increase in demand payments. This leads to value/share declining
    • Majority Approach: as debt increases, it leads to increased risk, which leads to decline in p/e but not enough to offset the benefit of using debit instead of equity for financing (There is an equilibrium where the marginal cost of selling equity equals selling debt)
  • Off-Balance Sheet Financing
    • Project financing (subsidiary even with a parent guarantee)
    • Municipal pollution bonds
    • ESOPs
    • Leasing
      • There exist tax benefits to leasing over owning the property outright. They typically are shown as footnotes in reporting but if capital lease most but included on balance sheet.
  • Reorganizing a Company
    • Creditors can force a bankruptcy or the company can voluntarily file
      • Ch11-arranging unsecured creditors
      • Ch10- reorganization of securities and unsecured debt
      • Ch12- real estate
      • Section 77- railroad reorganization
    • Indemnity hearing- hearing set up to specifically negotiate under bankruptcy with creditors and potentially reorganize the company
  • Combining Companies
    • 3 Major Merger Movements
      • 1900-1907 (Horizontal Merger)
      • 1920-1929 (Horizontal Merger)
      • 1960-1968 (Conglomerates)
    • Short tendering was used to avoid maximum firm commitment from purchasing a company by arbitragers. Now not allowed because of the disadvantages to the public.
  • Additional Interesting Facts
    • Small Business Investment Corporation- Licensed by SBA to finance small companies
      • They treat losses of sales as loss but gains treated as capital gains
      • SBA will purchase/guarantee debt of SBIC up to 4 times the equity of SBIC
      • MESBICs lend to minorities 
    • Antitrust handled by both 1)Antitrust division of Justice Department 2) Bureau of Competition of the Federal Trade Commission
      • SEC lets accounting community choose the standard of reporting





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