Question

Recall from Chapter 13 that Hincapie Co. (a specialty bike-accessory manufacturer) is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operations. The company is leaning toward participating preferred stock because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and wants you to research the disclosure information related to its capital structure

1. (a) Identify the authoritative literature that addresses disclosure of information about SHAREHOLDERS' EQUITY

2. (b) Find definitions of the following:

   (1) Securities.
   (2) Participation rights (3) Preferred stock.

3. (c) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue.

Answer 1

1. When a company wants to raise capital from public by issuing share capital, it should publish a document called prospectus. In the prospectus, the following information should be disclosed about shareholders’ equity:

1. The existing capital structures
2. Authorized, issued, subscribed and paid-up capital (number of instruments, description, aggregate nominal value)
3. Size of present issue
4. Paid-up capital before the issue, after the issue and share premium account
5. Detailed notes to capital structure
6. Holdings of major shareholders

2. Definition of securities:

Securities include any financial instruments that can be traded, including equity, debt, derivatives, etc.

Definition of participation rights:

Participation rights are shareholders’ and debtholders’ rights to participate in functioning of the company. This participation can be through making the decisions relating to company’s operations or expansion, etc. or participation in sharing of profits, voting decisions, participation in distribution of any proceeds during liquidation, etc.

Definition of Preferred stock:

Preferred stock is the kind of share capital, the holders of which are given preference over common shareholders. This preference is given in matters of distribution of dividends, distribution of proceeds or capital repayment during liquidation, etc.

3. Information about securities:

The company should disclose all the terms of issue, including offer and listing details, plan of distribution, markets, selling shareholders, dilution, expenses of the issue, etc. In addition to this, the company should also disclose the risk factors and management perceptions, market price information, dividends, exchange rates, objects of the proceeds of issue, financial information, management report, details of the company, etc.