This article discusses the transaction exercise for Desklib, an online library for study material with solved assignments, essays, dissertation, etc. It covers topics like ownership percentage, capital structure, allocation of voting power, and more.
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Transaction Exercise
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Question:1 a) % ownership of Company A today by Plug & Play investors = Investment amount / Pre – money valuation + Investment amount = 50, 000, 000 / 100,000,000 + 50, 000, 000 = 33.33% remaining ownership = 1 – 33.33% = 66.67% 66.67 * 70% = 46.67% of existing shareholders 66.67 * 30% = 20% of founders Number of shares purchased = % ownership purchased / 1 - % ownership purchased * Fully diluted shares Pre – investment Fully diluted shares Pre – investment = Pre – money valuation / diluted value per primary share = 100 mm / 0.2 = 500000000 = 33.33% / 1 – 33.33% * 500000000 = 249500000 shares. b) If existing shareholders will exercise their full pre-emption rights = 70000000 + 50000000 / 100000000 + 50000000 = 80% Number of shares = 80 / 1-80 = 4 * 500000000 = 2000000000 shares. c) Number of shares: 110 mm / .200 = 550000000 Ownership percentage: 110 mm / 150 mm * 100 = 73.33% Question 2 a) Aim: To ensure the best suitable capital structure. Objective: To manage the shares of company in a best way possible. To segregate all shares in different class and category for providing a right balance in capital structure of company. To manage the capital requirements within the time spam of 1 financial year. To ensure that there would be less dilution of control if the institutional investors get their share into the company.
Proposal: Capital structure is an essential part of any business house. Especially for the companies that look for secondary market issue this is important to keep a balance of shares that are planning to issue for gaining the most suitable financial advantage. The Plug & Play is planning to segregate the proposal in two parts one include statutory pre-emption rights and the other one is related to no voting or pre-emption rights. This would allow the organisation to sustain a good balance of power in between the shareholder group associated with the organization. Allocation of voting power or right to selected people will favour the business house to maintain a good balance in the capital structure manage and to sustain an operational efficiency. This proposal would support the organisation to maintain a good balance in shareholding and the voting rights existing shareholder contain. As allocation of voting power or right would further reduce the power of existing shareholder. This idea will also favour the rights of existing shareholder of the Plug & Play. The process must begin from obtaining consent of the existing shareholders where it is necessary to have 75% consent before executing this transaction. It is up to the management and founder to ensure appropriate protection of the interest of existing shareholders. Then the term sheet will be signed after deciding which category of share to be issued to the new category of investors. Then accordingly, the articles of the company will be amended. The time required to execute this transaction would be approximately one to two months. Document like mutual agreement that is established between the shareholders and the company. Also, the document related to the number of shares hold by the investor. The value of the share must also be disclosed. The shareholder would be containing the voting power will also disclose and document related to the voting right that will be allocated also require to process further. The documents such as articles and memorandum must be modified according to the changing capital structure and ownership. All such shareholder belong to the B shares might raise the concern about not getting any voting power. As the holder contain a right in involving all the decisions company take. In the normal situation shareholder expect to gain a proper right against investing in the business house. Restricting the holders with the voting right might face the criticism by the company from the investor. This can be resolved by developing a proper communication with the investor. This is to recommend that the Plug & Play can provide a reasonable financial advantage by negotiating term sheet in such a way where interest of existing shareholders should get hurt in terms of dilution of control. They must take support of multiple investors and before giving share to new investor, it is their basic duty to conduct due diligence and then negotiate a term sheet. Also, the existing shareholders must be given chance to exercise their pre-emption rights and then anything that remains should be given to the new shareholders after getting consent from existing investors.