Corporate finance, a finance and legal issue

Corporate finance is an area that includes economic and legal issues, this area is one of the most dynamic and complex in a company and it concerns the monetary decisions. These monetary decisions are taken in order to get money. Therefore, corporate finance law is used to regulate the legal requirements in finance operations; and also, corporate and banking law has an important role in these operations.

There are many tools available on a company, but we can divide the options into three different kinds: debt, retained profits and share issues. Moreover, this basic separation can be subdivided in many others. For example, there are many hybrids that combine the elements of two groups (redeemable shares, subordinated debt, etc).

For a lawyer one of the most important matters is the relationship between equity (share issues) and debt. When a company is nearing insolvency the directors have to address the problem, if not, they could be liable for the debts of the company. In Spain the regulation is in the 22/2003 Act and in UK it is in the Insolvency Act 1986.

Share issues are the first way to obtain money, but this source of finance is very limited because the amount paid comes from the partners. Nowadays, the main rights of the shares, which are income rights, capital rights and voting rights, have been separated to create many financial instruments like preferred shares (it is a hybrid).

Debt financing is essential even for companies with liquidity. Without debt it is not possible for companies to grow.

Retained profits are the amount of money earned by the company and not distributed to its shareholders as dividends. Thus, retained earnings is an internal finance instrument for the company, so then, when a company needs money one of the first tools used is this one.