Originally from:
Advising Minnesota Corporations and Other Business Organizations - 2nd Edition - Hardcover
Advising Minnesota Corporations and Other Business Organizations - 2nd Edition - Electronic
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CHAPTER 15
AN OVERVIEW OF MINNESOTA
CORPORATE CAPITALIZATION: DEBT,
EQUITY, AND OTHER SOURCES
§ 15.01 Introduction
Corporate capitalization is the way in which a corporation obtains the
financing capital necessary to operate. Corporations acquire capital either
by incurring debt or issuing equity in the corporation. Because debt and
equity are related, and because their effects on the operation of a
corporation are wide-ranging, a brief introduction to each is in order,
followed by a summary of the reasons for choosing one over the other.
§ 15.02 --Debt
Debt, when that term is used in the context of a corporation, means
substantially the same as in the consumer context--cash is loaned by a
first party (the creditor) to a second party (the debtor) in exchange for a
promise to repay the debt. For purposes of this discussion, the debtor is
the corporation and the creditors are assumed to be bondholders, as
corporate capitalization through debt typically involves longer term
financing with corporate bonds. For some smaller corporations, a simple
promissory note calling for a specified payment plan or timed
repayments may be used. The terms of bonds vary, but virtually always
include an interest rate,1 repayment schedule, and provisions detailing
how the terms of the agreement can be altered.
Bonds are usually sold pursuant to a trust indenture, which is a
document that contains all of the detailed terms of the agreement
between the bondholder(s) and the corporation that issued the bond. The
bond then incorporates the trust indenture by express reference, and thus
the corporation can issue bonds without rewriting the terms of the
agreement in each bond.
Debt capitalization may be either secured or unsecured. A secured
debt simply means that there is specified collateral for the debt. For
example, a creditor who loans money to a corporation may require that a
piece of property be named as collateral. If the debtor defaults on the
agreement, the creditor may have the right to take the collateral and sell
it to pay off the obligation. An unsecured loan is usually more risky for
the creditor. The creditor must rely entirely on the debtor’s repayment of
the loan for a return of the amount advanced or resort to legal remedies if
repayment is not forthcoming as promised. An unwary creditor may
require that a certain piece of property serve as collateral, only to find
that the debtor was free to sell the property and no longer holds it
because the creditor did not include a term in the agreement to prevent
such a sale.
In general, bonds are an effective corporate capitalization tool
because there is inherent flexibility in structuring the terms of the trust
indenture. An alternative to debt capitalization is equity capitalization.
Roger J. Magnuson is a Partner at Dorsey and Whitney, LLP, where he serves as Head of the National Strategic Litigation Group and has practiced since 1973. He has been recognized as one of the top trial lawyers in the United States by major national and international publications, including Chambers International Guide to American Lawyers, which profiles the top 500 trial lawyers in the United States, Best Lawyers in America, Who's Who in American Law, and Who's Who in America. Mr. Magnuson was also recognized by a Journal of Law and Politics' survey for Judge's Choice "Wins Most Cases."
Some high profile cases that he has litigated include representation of the Florida Senate in the Bush v. Gore election controversy in 2000; and representation of the Plaintiffs in the widely publicized and studied Mall of America case. For several years he has represented, among other persons and entities, the Minnesota Twins and Major League Baseball principals and players in litigation; and has litigated national and local cases in federal and state court venues. He has appealed before the Supreme Court in a number of cases; as well as the Minnesota Supreme Court. He has authored several articles and 7 books.
Richard A. Saliterman is a Principal in Saliternan & Siefferman P.C., a full-service firm in Minneapolis established in 1976. Mr. Saliterman is a leading expert on corporate business matters, and is the author of several publications on business start-ups, franchises, and trademarks. Mr. Saliterman is the former National Judge Advocate for the U.S. Navy League, based in Washington D.C.
Contributing Editor:
Amanda Chang
Contributing Authors:
Alecia Anderson
Seth Back
John Baker
Shannon Berg
Constatin Burachek
Benjamin Carpenter
Ryan Check
Carl Christensen
Peter Fear
Michael Frasier
Aaron Hall
Catherine Hanson
Paul Harman
Amy Ithlan
Michael Kern
Chris Kuhlman
Brett Larson
Joshua Lederman
Karen Lundquist
James Magnuson
Jennifer Mead
Rao Menier
Heidi Miller
Rachael Moxon
Oliver Nelson
Scott Peitzer
Mitchell Skinner
Jonathan Stechmann
Lael Weinberger
Jonathan Wilson
Alex Zumbulyadis
