Finance and banking law concerns the legal operations of banks and financial institutions, the provision of advice for fundraising activities such as share issues, asset-based loans and equipment leases, and for corporate activities such as restructuring, mergers and acquisitions.
The financial services industry is highly regulated with specific laws governing various types of transactions across domestic and international markets.
Financiers have strict compliance and registration requirements. Activities are supervised and conduct may be investigated by regulatory bodies such as the Australian Prudential Regulatory Authority (APRA), Australian Competition and Consumer Commission (ACCC) and Australian Securities and Investments Commission (ASIC).
It is important for financiers to understand the regulatory issues associated with the offering of financial products and services, and that security agreements are in place to register security interests on the Personal Property Securities Register (PPSR), to facilitate debt recovery action if necessary.
Corporations seek funding to improve cashflow, acquire major assets, to take advantage of market opportunities and achieve growth. Funding may be obtained through a range of sources including securities lending, subscriptions to shares, convertible notes, equipment leases, hire purchase agreements, and asset-based finance.
When considering funding options, company officers must choose a product that is appropriate to the commercial and financial strategies of the organisation and in consideration of all legal, taxation and accounting implications.
Through a securities lending arrangement, a security holder (lender) provides securities to a borrower for a specified time in exchange for the temporary transfer by the borrower to the lender of collateral. The collateral is usually to a value above the loaned securities, in the form of cash or non-cash assets, the most typical being equity securities (shares) and debt securities (bonds).
At the end of the agreed time, the borrower must return equivalent securities to the lender in exchange for the transfer back by the lender of the collateral. A securities agreement sets out the arrangements including the negotiated fees for the loan and protects the interests in ownership of the securities and collateral.
A subscription to shares is an agreement by an investor to purchase a specified number of shares in a company prior to the issue date. Once the share offering is complete, transfer of the shares to the investor takes place. Fundraising through shares is highly regulated – when making a share offering to the public, comprehensive disclosure documentation is required, unless a small-scale offering exemption applies.
Convertible notes constitute a short-term loan by an investor to the company whereby the company agrees to repay the debt, together with interest, at a specified time. The details are documented in a deed which may also provide an option for the investor to convert the debt into equity in the company rather than being repaid.
Most convertible notes are unsecured which is ideal for the borrower which does not need to provide collateral for the loan. If the lender converts the loan to equity in the company, a pre-prepared shareholder agreement is enlivened setting out the shareholder’s rights and responsibilities.
Equipment leasing and hire purchase arrangements are utilised to acquire plant, equipment and machinery without significant financial outlay. These arrangements are documented in a lease or hire purchase agreement setting out the terms and conditions between the lessor / lessee or lender / borrower.
Asset-based finance enables businesses to obtain funding secured against the company’s pool of assets which may include plant and equipment, inventory, stock and receivables. These arrangements can provide much-needed capital to assist in cashflow and allow the business to take advantage of market opportunities.
Company directors are often required to provide guarantees and indemnities under funding agreements. These arrangements can have significant legal implications and carry personal risk for directors. Independent legal advice specific to each director’s position and personal circumstances is always advisable and usually mandatory.
Funding arrangements can be complex and must be managed to mitigate risk, and in consideration of the short and long-term objectives of the corporation.