When you require a cash injection to increase your business operations, start a new project, or protect your market share, you might require more funds than simply your retained earnings. Your company then has two options – take on debt or raise more capital.
Taking on more debt is simpler, as you simply require a reasonable expectation of a steady cash flow to cover the interest payments. However, if your company is already highly geared (a high debt to shareholders’ equity ratio), increasing the debt will also increase your company’s risk towards the investors and result in a share price drop.
Alternatively, you can choose to issue corporate shares. This involves dividing the company’s ownership into shares and distributing them to new investors, employees or existing shareholders. Whether you own a public or a private company, you can issue any number of shares, provided you issue a share certificate to each new shareholder. You would also need to keep a register containing the details of each shareholder in your company.
When issuing shares, you must ensure that you comply with your company’s Shareholders Agreement, your company’s constitution, and most importantly Corporations Act 2001 (Cth). Further compliance requirements are similar to the requirements for share issuance for private companies. As a public company owner, there are various types of share issues that you can participate in.
Types of Share Issues
Rights Issue is one of the most common ways of issuing shares to existing shareholders. It involves offering existing shareholders the right to buy new shares proportionate to their current holdings, at a specific price. To make the deal worthwhile, you would need to set the buying price lower than the current share price.
For example, say each of your shareholders owns 1000 shares in your company, at $5 per share. If you wanted more capital, you could offer them a 1-for-5 rights issue at $4 per share. They would therefore own an extra share for every 5 shares, or 200 new shares at $800. While this might seem like a loss initially, the issuing of new shares will dilute the market and theoretically bring the share price down to $4.83, compensating for the discounted rights issue. You will therefore be able to gain more capital without harming the company’s market image.
Rights issue can involve a lot of organisation and resources. You can therefore use a Placement as a way of raising capital, by issuing new shares to a specific institution or a small group of people. For example, say there are 100 existing shares in the market. You could issue 10 new shares to an investment bank at the market share price and raise the required capital. While this will theoretically dilute the profit per share to the existing shareholder, the additional capital could potentially increase overall profits, compensating for the dilution.
If you believe that your company’s share price is too high, you can perform a share split. It’s the reason a company such as Telstra is trading at around $3/share, despite being a multi-million dollar company. If your company’s Market Cap is $1 million for example, theoretically your company would be more valuable to investors at 250,000 shares at $4 per share, instead of 4 shares at $250,000. Therefore, when you believe that your company’s share price reaches above a certain threshold, you could perform a 2-for-1 or even 3-for-1 share split to reset the share price to desirable levels.
Issuing new shares can be a long and arduous process. Hiring a good Capital Raising Lawyer will ensure you get the maximum return on capital without losing your company’s ownership.
Don’t know where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.