The note discusses the main procedures for a private limited company to raise capital through a share issue by way of an offering for the rights issue.
One of the most critical decisions managers make are when raising new capital.
The greatest risk is that the boards of directors often do not consider the many potential conflicts of interest that this may entail.
The directors must have clear answers to the basic questions:
- When the company needs the funds?
- Is this necessary?
- What’s the company’s financial status?
- whether funds will be raised through creating new equity or debt?
Managers must always be able to show that a fund-raising plan has been considered. Managers are encouraged to provide shareholders with as much input as possible as to why shares are the most viable choice.
By making a pro-rated offer of rights, it is easy to infer that all shareholders have the same interests and privileges.
Directors often know that certain shareholders are not in the position to subscribe to new shares. In such situations, the directors must take additional steps to ensure that the issue of the share is equitable and also justified.
Any director participating in the offer as a shareholder must acknowledge the conflict of interest. The director must take the consent of the shareholders who are not participating in the offer.
The directors have one indispensable duty, to act only for the welfare of all the shareholders.