An Overview of Common Corporate Finance Law Concepts
About 12 million new lawsuits happen every year against small businesses. For this reason, entrepreneurs should know their legal obligations. Understanding these concepts can protect your business interests.
Let’s dive in and explore key aspects of corporate finance law so you can avoid potential legal pitfalls.
The Role of Corporate Finance Law
The purpose of corporate finance law is to protect investors by promoting fair and transparent markets.
Corporate finance regulations are there to ensure investors receive accurate news. Companies must share:
- Financial performance
- Governance structure
- Potential risks associated with its operations.
Investors need this information to protect themselves against shady practices.
In the US, around 10% of adults get ripped off every year, and businesses aren’t safe either. Don’t invest your money without understanding the details of a business according to the rules of corporate finance.
Besides safeguarding investors, corporate finance law promotes stability in the market. The regulations ensure companies play by the rules. If everything works as intended, there will be a durable business environment with high productivity levels.
A well-functioning system attracts investors and increases their confidence in the market. Economic growth, more jobs, and enhanced standards of living are the direct result.
Corporate Governance
Corporate governance outlines the rules by which a company is directed and controlled. It also provides a framework for how a corporation relates to outside entities.
The board of directors handles the corporation based on the framework. Its goal is to act in the best interest of investors. Some shareholders’ opinions are more heavily considered than others due to the size of their shares.
Corporate finance lawyers advise the board of directors. These attorneys ensure compliance with local regulations.
Effective corporate governance is crucial for maintaining transparency. Without transparency, there won’t be ethical practices within a company. When everyone knows what’s going on, investors are confident and contribute to the long-term sustainability of the organization.
Securities Regulation
The Securities and Exchange Commission (SEC) is the main regulatory body in the United States that oversees the securities industry. The SEC’s primary role is to fight against trading schemes.
Mergers and Acquisitions
Mergers and acquisitions can take many forms, but each type of combination has rules. Business owners usually hire a corporate finance attorney to ensure the mixture complies with securities law, antitrust law, and tax law.
Due diligence is critical here. Lawyers must identify potential risks and liabilities associated with the target company. Verifying financial statements, intellectual property, and contractual agreements are all part of the process.
Generally, a company needs to file a registration statement with the SEC before closing a merger. The filing process can take several months. Schedule meetings with corporate finance attorneys and accountants early in the planning process.
Capital Markets and Financing
Understanding the available financing options and their legal requirements is essential for companies to raise capital.
With equity financing, you offer shares to investors. This method brings in partners and splits the risks and rewards of business ownership.
Debt financing involves borrowing funds from banks or institutional investors. You must repay the borrowed amount along with interest. Business proprietors maintain ownership but the lender has a claim against the business’s assets.
You can use both equity and debt financing in a single round of funding.
Public offerings sell securities to a wide range of investors through the capital markets. Companies opting for public offerings must comply with strict legal requirements.
Private offerings involve giving securities to a select group of investors. These sales are exempt from certain SEC requirements. They’re common for unregulated securities, like cryptocurrency.
A securities offering is the sale of stocks and bonds. To do this, companies must show their financial records and the risks associated with the investment.
Having your finances open for view ensures transparency. It also protects investor interests.
Corporate Restructuring
Corporate restructuring aims to improve a company’s finances and operations. It requires significant changes to the organization’s debts. The aim is to improve the company’s brand and make it more profitable.
The restructuring process can include reducing debt, selling off assets, or even filing for bankruptcy. Corporate bankruptcies are also referred to as insolvencies.
Bankruptcy
Bankruptcy is a legal proceeding initiated by a financially distressed company when it’s unable to pay its debts. The three main types of corporate bankruptcy are Chapter 7, Chapter 11, and Chapter 13.
Chapter 7
In a Chapter 7 bankruptcy, the company’s assets are liquidated and the proceeds go to pay off creditors. The business is dissolved and no longer exists when this type of bankruptcy has been completed.
Chapter 11
In Chapter 11 bankruptcy, the company continues to operate and seeks protection from creditors so that it can reorganize its debts. Chapter 11 bankruptcy is for businesses that want a fresh start.
Chapter 13
Chapter 13 is a reorganization of the company’s finances. Debts are restructured and paid off over time. This type of bankruptcy allows the business owner to keep their assets.
The caveat is that there’s a time limit on how long a business can operate under Chapter 13 bankruptcy. If the company isn’t able to clear its debts within the time frame, it must close its doors.
Stay Current With the Laws of Your Industry
Now you know how corporate law helps companies change things internally. It’s super important for businesses to know corporate finance law to manage cash flow the right way.
It’s equally as important for businesses to stay current with their industry overall. If you’d like some help catching up on the latest business trends, feel free to check out our other blog posts. You’ll find tons of resources to help you navigate new business tech and improve market demands.
