Reviewing the Traditional Concepts That Underlie the Workings of Capital Raising
By Peter Lee Siew Choong (Chairman of W G B) and the CLRC Secretariat
Background
It has been reported that the private corporation (the registered company) is the most remarkable institutional innovation of the past two centuries.
One key reason as to why a registered company (hereinafter referred to as company) is the preferred business vehicle is the ability of the registered company to raise capital for its operational needs.
Further, the company’s ability to raise capital at the appropriate time can also rescue the company from being wound up on the grounds of insolvency.
At the same time, it is to be appreciated that unregulated capital raising may result in abuse and can be against the interest of the existing shareholders of the company. An example of such an abuse is the possibility of stock watering.
In respect to a company limited by shares, whose members enjoy the benefits of limited liability, creditors’ interests are protected by the proposition which states that a limited company cannot return it’s paid up share capital to its shareholders otherwise than in the manner prescribed by the law. Any return of the company’s paid up share capital otherwise shall be treated as an illegal reduction of the company’s paid up capital.
The law in regards to capital raising must therefore balance all these conflicting interests in order to ensure its continued effectiveness.
Some of our laws that regulate capital raising are built on concepts that were developed in the early 20th Century.
This article, among other things, seeks to highlight to its readers
- Some of the global corporate law reform trends in capital raising and capital maintenance; and
- Reasons as to why fundamental concepts that underlie the workings of capital raising would have to be reviewed.
A review of the corporate law reform program as implemented and proposed by some commonwealth countries have brought to light the need to review two fundamental concepts that underlie the workings of capital raising.
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