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You are a junior partner in a large corporate law firm. Your job requires you to become very familiar with stock market jargon. You can hold your own in a conversation about initial public offerings, dividends, and common shares.

Your client, John Henderson, is president of Elkhound Oil. The company has grown enormously in recent years, and now has offices throughout the world. But if Elkhound Oil is to keep growing, they need a large injection of cash. You suggest that the time has come for the firm to offer shares on the stock market. Henderson agrees, and asks you to draw up a prospectus.

When you've finished the prospectus, one of the law firm's senior partners asks to see it. He wants to check it over before you send it to the client. You send him an email outlining the package you have put together.

Here is what you say in the email:

The initial public offering will be 10 million common shares, divided equally into Class A and Class B shares. Current owners will have Class B shares. There will be a 10:1 ratio of voting rights between Class A and Class B shares. This will allow the original five owners to maintain control of the company.

Employees will be able to purchase up to 100 Class B shares at an initial purchase offer price of $5 per share. The initial public offering of Class A shares is expected to be between $10 and $15 per share.

No preferred shares will be offered at this time. However, a clause is written that could allow up to one million preferred shares to be offered in the future. It is expected that the company will be in a position to offer preferred shares by the end of the year. Shares should pay dividends by the end of next year.

The partner sends back an email approving your prospectus. Now you need to send a memo to the client. This will take a bit of rewriting. The president of the company is a computer whiz, but he knows absolutely nothing about the stock market. You need to explain the prospectus to him in terms he can understand.

Here are some terms you need to explain:

  • Common Shares: Basically, these are just regular shares. They are not preferred shares.
  • Class A and Class B shares: This is a way of distinguishing between types of common shares. Not every company has Class A and Class B shares. In the case of Elkhound Oil, holders of Class B shares will have more voting rights than holders of Class A shares. One hundred Class B shares will be worth 1,000 votes, 100 Class A shares are worth 100 votes. Class B shares are available only to owners and employees of the company.
  • Preferred Shares: A special type of shares. The holders of preferred shares don't normally have voting rights. However, these shares are the first to pay dividends.
  • Dividends: A cash amount paid out to holders of shares from the company's profits.

Now, you need to rewrite the email so that Henderson will understand. You need to be clear, without talking down to him.

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