In this blog post, Hyndavi Bhardwaj, a student at KLE Society Law College and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the role of lawyers in the field of corporate finance.
In the world of corporate finance, the difference between lawyers and banking investors initially had not been clear. Whether negotiating a merger agreement, acquisition, rendering a fair opinion, preparing for a hearing, litigating securities, issuing new securities, taking a firm LBO in private or IPO in public, corporate lawyers and investment bankers work side-by-side. Lawyers without the basics of corporate finance are at a disadvantage. This provides essential tools for litigators to work with financial experts and calculate damages.
Role Of Lawyers In Corporate Finance
Corporate finance lawyers advise companies on all aspects of the buying and selling of whole businesses or business assets. It requires guidance on how to comply with company law procedures, the raising of funds and, in the case of international transactions, compliance with foreign laws. It is possible to work on mergers and acquisitions (M&A) with public or privately owned companies.
The Companies Act, 2013 along with some amendments have come into force with more bright ideas about financing in companies with the help of lawyers. It has come up with the change in the concept of loans and investments by a company.
The section 186 (1),2013 states that companies before the 2013 Act that is the companies registered under 1956 are not restricted but the rest shall make investments in two layers. The companies outside India are exempted under this amendment.
The exceptions are available from the provisions of 1956 Act of Companies Act to private companies that loans made by a holding out to its subsidiary company is not available anymore under Sec. 372A.
‘Layer’ according to explanation (d) of Section 2(87) of the Act about holding Company means its subsidiary or subsidiaries.
An Investment Company is a Company whose principal business is the acquisition of shares, debentures or other securities as according to the Companies Act 2013.
The Role Of Lawyers In The Corporate
1) To assure the legality of the transaction done by such corporations.
2) Advice the corporations on its legal rights and duties.
3) The responsibilities of such corporations should also be remanded to the corporations. Corporation means the corporate officers involved in such field.
To do the above-mentioned tasks one should possess, intense knowledge of the laws such as contract law, tax law, intellectual property rights, banking law, securities law and the laws which are related to the business corporations for which they work.
In recent cases like Walmart, General Motors, etc., have focused on the corporate lawyers in investigations in which the corporal privileges had been misused. The confidential information of clients had been accessed to the society where the clients are less likely to approach the corporations if the corporate lawyer has not taken proper care of such circumstances.
Corporate lawyers need to draft documents related to the corporation and clients and review the agreement if necessary and have to make any amendments or limit the agreements or add any exceptions or conditions according to the parties, required.
A Corporate lawyer is the one who negotiates the deals between the parties and also negotiates on behalf of the corporation that he is working with being impartial and with a lawful objective.
Corporate lawyer’s presence is necessary for the meetings between the parties to facilitate them, to negotiate and act as a mediator understanding the circumstances of both the sides and help make decisions and suggestions.
Likewise, not all will include the mergers and acquisitions all the time, as there are many divisions made under the umbrella of the corporate law.
A corporate lawyer can also be a partner of the firm and can also be a part of other fields.
A corporate lawyer should have a grip on the subject that he is dealing with and should apply his mind taking decisions or while suggesting with all the pros and cons that are possible to foresee and advice
A Corporate lawyer should have an additional updated knowledge about the laws and should apply them in practicality. Some practical knowledge on the same is discussed below.
Restriction on Investment
A corporate lawyer must restrict from investing more than two-fold in the case of shares, debentures and other securities.
The companies which are outside India can be exempted from such restriction, and the laws of that country shall be applied.
A subsidiary company having subsidiary investment for meeting the requirements under any law.
Restriction On Loans To Directors And Other Persons
The loans made or security or guarantee provided to any of the directors or any company or guarantee is given to any company in which a director is interested in is to be restricted by a lawyer and prevent them from doing so.
This provision from Companies Act, 2013 was first applied to public companies, but now it has been extended to the private companies also.
Corporate lawyers are experts in company and business laws. They understand the minute distinction between legal entities and how to best utilise them for different purposes. They also assist companies in various transactions supporting the business operations and management.
In the field of mergers and acquisitions, corporate lawyers enter into negotiations with the entity, coming up with a memorandum of understanding (MOU). The next step for the corporate lawyers would be conducting a legal due diligence on the target company, assessing what legal liabilities exist.
Depending upon the nature of the transaction the lawyers will have to file notices in case of mergers and acquisition with TAKE OVER AND REGULATION PANEL (TRP).
The lawyer also draft conditions for such sale agreements and finance related agreements to the transactions.
Once the transaction is finalised, the corporate lawyer will draft the new shareholder agreements and advise regarding the shares to be issued in accordance with their requirements. Furthermore, they will draft the new entities MEMORANDUM OF INCORPORATION (MOI) and lodge it at the (CIPC) COMPANIES AND INTELLECTUAL PROTECTION COMMISSION together with documents effecting the name changes of the target company.
As the transaction size and value increases, so also the complexity and risk, big law firms are often preferred as they have specialists who focus exclusively on these types transactions as opposed to smaller firms.
Corporate lawyers are experts in all facets relating to company law as well as having a solid understanding of how companies operate & function. Along with these factors, corporate lawyers are expected to be excellent contract negotiators and draftsmen. They are expected to work long hours, often being held too tight schedules in their daily life.
Loans And Borrowings Of The Company
The inter-corporate loans shall be limits and give guarantees or securities on behalf of the company shall be restricted to:
1) 60% of ‘ it’s paid up share capital
2) 100% of its free reserves and securities premium account Whichever is more.
By passing a special resolution in a general meeting, such restrictions can be overcome, or changes could be made to such limited conditions.
Changes Made In Such Loans And Borrowings Recently
1) The restriction was there in case of public companies but has now been extended to private companies.
2) Loans to companies are restricted and are extended to individuals and non-corporate entities.
3) Where a loan is guaranteed that security for such loan has been provided, in a case acquisition made by a holding company, where the passing of a particular resolution is not necessary.
A public company can accept deposits from its members and other persons, while private companies can accept deposits only from its members.
The definition of “deposit” as provided under the Companies Act 2013 and the Rules explicitly indicate that loans obtained by a company shall also be considered to be a deposit.
Previously it did not require private companies to elaborate requirements to accept deposits in compliance with the companies. Now it accepts deposits by fulfilling certain details about such deposits like notice to members of the company, filing of a company with the Registrar of a company, separate bank account details, every loan made by any member of the company comes under this provision and should be in knowledge of the corporate lawyer.
However, loans made by the director in personal interest shall not be considered and restricted.
Debt Financing And Equity Financing
1) Starting a business would cost much and needs a sound financial support. Finance is like a pillar of the business. Such loans shall be borrowed or can but invested from savings. When one runs short of finance, debt financing can be an option where the money is borrowed from any commercial finance companies or financial institutions.
2) A lawyer in a corporate field should be aware of all the techniques on how finance can be created and earn profits with a lawful object to fulfil the purpose of the business commenced.
3) Funding a business could require good credit and solid financials which would give collateral support for a longer run.
4) Many businessmen are afraid to borrow money or take debts as they may not be able to repay the loans within the time limit. In case of loss it would be a problem if they are not able to repay.
5) A Lawyer has to foresee such situations and suggest about the current loan systems, banking systems, etc.
6) The financial institutions provide loans to start a business and encourage them by offering loans, but the debt payers are afraid of the interest that is charged by such financial institutions.
7) Some business men do not have enough credit worthiness to get a loan so they cannot even afford to think of debts.
8) Lawyers should apply their mind and take decisions. Banking decisions should be preferably made by the corporate lawyers and with a bona fide intention to earn profits for the company.
9) In the case of debt financing, it is an advantage that the business ownership is in the hands of the management unlike equity financing, and they are the whole and sole managers who control and regulate the business.
10) In case if there is a default, there won’t be a huge loss to the company, but the tangible assets may be at risk.
11) The collateral and contingent funds which are like reserve funds may help in such situations. The creative and strategic control is not loss in this kind of financing.
12) Also , taking on debt can build a business credit, which is good for future borrowing and nsurance rates.
13) It’s also worth bearing in mind that interest paid on loans is tax deductible, somewhat softens the blow of repayment.
The most important aspect is an intermit understanding of company law, this includes but is not limited to the New Company’s Act, the Competition Action, the Consumer Protection Act. The broad, knowledge of business entities, these types of lawyers have excellent drafting skills and can include and delete clauses in contracts for maximum value to the client.