Real-Life Communication
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.