Corporate Finance (LAWS0102)

The module examines how companies finance their operations: by raising equity or debt capital, using forms of mezzanine financing, or relying on their retained earnings.

We will approach the topic from both a finance and a legal perspective. We will discuss basic concepts of corporate valuation and theories of capital structure, including some of the cornerstones of finance theory, such as discounted cash flow and the capital asset pricing model.

These concepts will inform our analysis of the legal framework governing the capital structure of companies. Our discussion will cover the nature of legal capital, minimum capital rules and the capital maintenance regime pursuant to the UK Companies Act 2006, including the regulation of distributions, capital reductions, share buy-backs and redeemable shares.

The second part of the module will concentrate on issuing debt and equity. We will again consider the legal framework against the backdrop of finance theory, notably questions of market efficiency and the challenge that behavioural finance poses to the efficient capital market hypothesis.

We will consider both the corporate law requirements that apply when a company raises equity or debt capital and the extensive requirements of securities regulation that govern the public offering of equity and debt securities and their listing on regulated markets.

The module focuses on UK law, with references to relevant EU legislation and some other legal systems (particularly US law) where this is helpful to illustrate differences in approaches to regulation and shortcomings of particular regulatory solutions.

Background knowledge in finance is not required, but students should be willing to engage with the finance literature and familiarise themselves with key concepts of finance theory.
By the end of this module students should:

• have a good understanding of the key elements of the legal environment relating to corporate finance;
• have a solid basic understanding of key concepts of corporate finance, such as net present value, the relationship between risk and return, Modigliani-Miller irrelevance, and the efficient capital market hypothesis;
• have a solid basic understanding of the relationship between law and corporate finance and be able to evaluate regulatory mechanisms in light of corporate finance theory;
• have a basic understanding of the interaction of the regulatory environment and current market practice.

Module syllabus

This module is subject to change.

1. Introduction to corporate finance
2. Time value of money and the value of equity
3. Risk, return and the Capital Asset Pricing Model
4. Capital structure
5. Limited liability and legal remedies
6. Initial legal capital and payment for shares
7. Distributions
8. Capital reductions, share buy-backs and redeemable shares
9. Debt corporate finance and secured debt
10. Issuing equity: corporate law requirements
11. Market efficiency and disclosure theory
12. Regulation of the primary market
13. Regulation of the secondary market, including the problems of empty voting and hidden ownership
14. Gatekeeper theory and liability for incorrect disclosures
15. Revision

Recommended materials

We will use the following two books as core textbooks for the module:

• Eilis Ferran and Look Chan Ho, Principles of Corporate Finance Law (2nd edn, Oxford University Press 2014)
• Richard A. Brealey, Stewart C. Myers and Franklin Allen, Principles of Corporate Finance (12th edn, McGraw Hill 2017)

Module reading lists and other module materials will be provided via online module pages, once students have made their module selections upon enrolment. No single book takes the approach envisaged for this module. The convenor is happy to discuss reading if contacted by a student during the module.

Preliminary reading

No prior knowledge of finance or economics is required, nor is it necessary to have studied company law, though this will be helpful. Those with no knowledge of company law will need to do some additional background reading and it is advised to read:

• Paul Davies, Introduction to Company Law (2nd edn, Clarendon Law Series, Oxford University Press 2010), chapters 1-4
• Reinier Kraakman et al., The Anatomy of Corporate Law (3rd edn, Oxford University Press 2017), chapters 1-2

For a non-technical introduction to finance and market efficiency (or the lack thereof), the following two books are excellent choices:

• Robert J. Shiller, Irrational Exuberance (3rd edn, Princeton University Press 2015)
• Robert J. Shiller, Finance and the Good Society (Princeton University Press 2012)

Key information