Financial Analysis of Capital Structure at Plug & Play Company

This assignment provides a financial analysis of Plug & Play's capital structure, focusing on share allocation, pre-emption rights, and voting rights. It calculates ownership percentages for new investors and analyzes the impact of pre-emption rights on existing shareholders. The assignment also proposes a capital structure strategy that balances the interests of founders, existing shareholders, and new investors, including the allocation of voting power. It considers the legal and practical aspects of implementing such a strategy, including obtaining shareholder consent and amending company articles. The analysis addresses potential concerns from shareholders regarding voting rights and recommends strategies for mitigating these concerns through effective communication and negotiation. The goal is to optimize the capital structure to attract investment while protecting the interests and control of existing stakeholders. Desklib offers more resources for students.

Transaction Exercise

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.