RIBO o Corporate Financing and Valuation Firm value is determined by discounting all future flows with the weighted

d average cost of capital. (rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere.) WACC can be minimized by selecting an optimal capital structure. i.e. mix of debt and equity financing Debt Policy is the firms choice of mix of debt and equity financing, which is referred to as the Firms capital structure. Capital structure theory deals with which combination of the overall sources of financing that maximizes firm value. Does the firms debt policy affect firm value? o NO. According to MM-Theory (Miler and Modiglianis Proposition 1), expected return on assets is independent of the debt policy since it makes no difference whether the firm borrows or individual shareholders borrow. Here, market value of the company does not depend on its capital structure. Closely held companies Characteristics o All the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); o All the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; o The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall not be deemed a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. Control and Voting 1. If SH has control over management: o No call for meeting of SH needed to elect directors o SH deemed to be directors, unless context clearly requires otherwise o SH subject to all liabilities of directors 2. Voting: o Sec. 97 The articles of incorporation of a close corporation may provide: ... 2. For a classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and 3. For a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. How cumulative voting effectively denied in close corporation

RIBO o Sec. 97, Par. 2: AOI may provide for a classification of directors into one or more classes, each of whom may be voted and elected solely by a particular class of stock. Hence, AOI may provide that each class shall have a representation in BOD regardless of the number of shares within each class. But to the extent that each class can elect its own director regardless of the number of shares un such a class, cumulative voting, may in effect be restricted. tender offer to the other stockholders of ABC Corporations to sell their shares to him for the same price terms and conditions What is the rationale of tender offer? Tender offer is in place to protect the interest of minority stockholders of a target company against any scheme that dilutes the share value of the investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms, a chance to sell their shares at the same price as those of the majority stockholders. If the stockholders agreed to the tender offer, then A has no choice but to buy the shares of the agreeing stockholders corresponding from the same number of shares he acquired from 1. If all of the stockholders agreed to sell, then it will be proportionately distributed. If A buys, 51% of ABC Corporation, then he has to buy everybody for the same price, terms and conditions. So, if it is 35%, he is obligated to buy the shares for those who will tender to him for the same proportion If he acquires 51% of the company over a 12 month period, then he is obligated to buy everybody for the same price, terms and conditions. So A must file a tender offer statement with the SEC, it will be published in newspaper of general circulation

Stock ownership and restrictions on transfer of ownership 1. Restrictions on the right to transfer shares must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. 2. Restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares of the transferring stockholder with such reasonable terms, conditions or period stated therein. Tender Offer - occurs if a person or group of persons intends to buy at least 35% of the security of a public company. Example: ABC corporation is owned by various stockholders (1, 2, 3). Lets say A buys the shares of 1 and 1 owns at least 35% of the ABC, then A will have to make a

RIBO inviting the stockholders to tender their shares to the buying stockholder. What is the possible way to avoid tender offer? Lend money instead of buying shares of the stockholders with an option to buy the shares after 1 year TAKE NOTE: the law says 51% percent over a 12 month period but the SEC increase the threshold limit to 35%, so it is now 35% The SC said that the TENDER OFFER RULE applies to direct and indirect acquisition. Illustration: ABC Corporation is owned by Corporation 1 and Corporation 2 Corporation 1 composed of 3 stockholders (A, B, C) Corporation 2 owns 34% of ABC Corporation Lets say that Corporation 2 acquires the shares of A in 34%. Is that covered by the tender offer rule? Take note, Corporation 2 does not own directly ABC Corporation because it has only 34% If the total direct or indirect ownership of a corporation exceeds 35%, it is covered by the tender offer rule. Tender offer rule is applicable to both direct and indirect acquisition for as long as 1 stockholder owns controlling at least 35% of the shares of the public company When is there a valid tender offer? Publicly declared intention to buy securities of public companies given to all stockholders by: 1. Filing with the SEC a declaration to that effect, and paying the filing fee. 2. Furnishing the issuer a statement containing the information required of the issuers as SEC may prescribe, including subsequent or additional materials. 3. Publishing all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such security.