Page 232 - Microsoft Word - 00 P1 IW Prelims.docx

Chapter 14

2.2 Exam questions on corporate reconstruction

Exam questions will never ask you to propose your own reconstruction
scheme. Instead, you’ll be asked to appraise a given scheme.

The interests of all the key stakeholder groups must be taken into
account:

The main burden of any loss should be borne primarily by the ordinary
shareholders (the owners of the company).

They are last in line in repayment of capital on a liquidation. In many cases, the
company is performing so badly that they would receive nothing.

After any reconstruction, they must be left with a stake in the company (even if
control is much diluted from what it was before).

The loss to preference shareholders should be less than that borne by ordinary
shareholders.

They may agree to forgo arrears of dividends in anticipation that the
reconstruction will lead to a resumption of their dividends, or they may require an
increase in the rate of their dividend or a share in the equity (ordinary shares),
which will give them a stake in any future profits.

Lenders may agree to a reduction in their claims against the company if they
anticipate that full repayment would not be received on liquidation. Like
preference shareholders, an incentive may be given in the form of an equity
stake.

Trade creditors may agree to a reduction if they wish to protect a company
which will continue to be a customer to them.

220