Corporate Finance Through the Lens of Law: Shares, Bonds, Loans

Legal Nature of Financing Instruments

Attracting financing is always a matter of legal relationships. Understanding the legal nature of the instruments allows for the proper structuring of a deal, protection of interests, and risk management.

Shares: Rights of Shareholders

A share is a security certifying the participant’s right to a portion of the charter capital and the right to receive dividends. Legal features:

Ordinary shares — grant voting rights, the right to dividends (if a decision is made), and the right to the liquidation surplus as the last in line.

Preferred shares — fixed dividend, priority upon liquidation, limited or no voting rights. Popular among venture investors (Preferred Shares with liquidation preference, anti-dilution).

Convertible instruments — SAFE (Simple Agreement for Future Equity), convertible loans — provide the right to convert into shares at the next financing round. Popular at early startup stages.

Bonds: Creditors, Not Owners

A bond is a debt security. The bondholder is a creditor, not a co-owner. Legal features:

Covenants — restrictive conditions in favor of creditors: maintain a certain debt/EBITDA level, refrain from paying dividends above a limit, not sell key assets, maintain a credit rating. Breach of a covenant constitutes a “technical default”, giving creditors the right to demand early repayment.

Secured vs unsecured bonds: secured bonds have a pledge of specific assets; unsecured (unsecured/debentures) — no pledge, higher yield.

Subordinated debt — in the order of creditors in bankruptcy comes after senior debt, before shareholders. A compromise between shareholder and creditor risks.

Loan Agreement: Key Terms

Conditions precedent — documents and confirmations the borrower must provide to receive the funds.

Representations & Warranties — borrower’s assurances regarding financial standing, absence of lawsuits, and the right to execute the transaction.

Covenants — financial and non-financial obligations for the entire loan term.

Collateral — pledge of real estate (mortgage), equipment, accounts receivable, surety.

Events of default — circumstances giving the bank the right to demand early repayment or to foreclose on the collateral.

Practical Assignment

Study the eurobond offering terms of one of the large Russian companies (for example, LUKOIL or Sberbank — prospectuses have been publicly available until 2022). Determine: (1) the coupon rate and payment frequency, (2) major covenants, (3) events of default, (4) collateral (if any).