The Legal Ownership Structure of Orthocell Limited - Assignment Example

Question 1: Business Activities Orthocell Company is in the regenerative medicine sector (Orthocell Pty Ltd, 2008). Its principal activity is to provide medical needs for injury and chronic regenerative diseases. Orthocell Limited main product is Ortho-ATITM (a specific stem cell therapy) which uses the tendon cells of the same patient. This product has gained manufacturing approval by the Therapeutic Goods Administration and presently, it is being sold in Australia to patients suffering from degenerated or damaged tendons and ligaments. Stratum Metals Limited deals with exploration and extraction of mineral resources (Stratum Metal Limited, 2014). Question 2: Ownership Structure The legal ownership structure of Orthocell Limited at the time prospectus was issued consisted of three main parties. The first category is a group of ordinary shareholders whose capital contribution amounted to $3,162,553, which is equivalent to 52.82%. The second group is series A redeemable preference shares whose capital contribution amounted to $1,325,000 which is equivalent to 22.13%. The third category is series A2 redeemable preference shares whose capital contribution amounted to $1,500,000 which is equivalent to 25.05%. before prospectus was issued Stratum Metals Limited was a private limited business. Original owners of a business prefer a public company because of the need to raise more capital which is hard to get from the existing owners. The additional owners from the public boost the business by providing additional capital which can be invested in the expansion projects of the business (McCrary, 2010). In addition, the original owners will prefer going public as a way of managing their risks. In a company limited by shares, the maximum that an individual shareholder can lose in the event the business goes under is his share investment in the company. as the business grows, so does risk exposure increases hence the need for original owners to reduce risk by inviting others to share in the risk. Question 3 The issue by Orthocell Limited is not underwritten whereas Patersons have partially underwritten the issue by Stratum Metals Limited for $845,000. The offer by Stratum Metals Limited is conditional hence underwriting by Paterson will ensure that it reaches the minimum subscription (Kothari & Barone, 2006). The offer by Orthocell Limited was most likely not underwritten since it has a very low minimum subscription which is just equal to 25% of full subscription. Moreover, the offer price of $0.40 per share is rather small. Generally, such a value is affordable to any serious investor. Therefore, chances are that the offer will be oversubscribed hence no need to be underwritten (Brigham & Herhardt, 2009). Question 4: Signalling Mechanisms Signalling mechanism refers to indications that the company is soon going to take a certain direction or measures. There are many signalling mechanisms that been used in the prospectus, for instance, control signalling, quality signalling and transparency signalling. Issuers use these signalling for different reasons but mainly for sending the company’s intention. the issuer might use control signal to show that they are willing to relinquish their power over the affairs of the company. This has been achieved by inviting applications for ordinary shareholders in the prospectus. Ordinary shareholders are the owners of the company and each share represent a unit of ownership of the company. By issuing these shares the company sends a strong signal that it is giving up its ownership for the sake of growth of the company. This helps to regain confidence among the potential investors to the company. Quality signal is another mechanism that might be used to show that the company has high listing standards than its competitors. The company has been audited by reputable firm. The work of an auditor is to give an opinion on the quality of processes and other financial performance measures of the company. therefore, inviting an external and independent auditor to auditor the company the company sends a strong signal that it is exercising good stewardship to the company. The other signal that the issuer should have provided is premium signal. In this case, the company issues their shares at a price above the par value. This helps to show that the management of the company is being transparent. Transparency is an important factor to shareholders since they want the management to report all material facts that may be relevant in their decision making. Question 5: Definition of small business Both Orthocell Limited and Stratum metals meet the definition of small business before listing. Definition of a small business differs from one country to another and from industry to industry. However, there is a commonality running across all the definitions. These are annual turnover, number of employees and the amount of assets. For instance, ASIC defines a small business as one with any two of the three features namely: annual revenue below $25 million; total assets below $12.5 million, and one with 50 employees and below. However, the Australian Taxation Office takes a different view and identifies a small business based on annual revenue turnover. According to ATO, any business with annual turnover (exclusive of GST) below $2 million falls under the category of a small business. However, the best definition should be based on annual turnover. This is because turnover and profit are the main objectives of why a business is in existence. Therefore, the business will be considered as growing based on how it is showing an increasing trend in growth in revenue. Under this definition, a business can forever be regarded as small as long as it remains stagnant in revenue growth. This is justifiable because the lack of growth in revenue shows that the business is not well known hence has not contributed to the national economy. As much as the owners of the business expect it to make profit for them, it can only achieve this objective through offering its products and services in the community. This means that the community in which the business operates have certain expectation from the business. This is evident from the low annual turnover which is an indication of lack of acceptability in the society. References Brigham, E., & Herhardt, M. (2009). Financial management: Theory and practice, 13th Edition. Ohio: Thompson South-Western. Kothari, J., & Barone, E. (2006). Financial accounting – an international approach. Harlow, England: FT Prentice Hall. McCrary, S. A. (2010). Mastering corporate finance essentials: The critical quantitative methods and tools in finance. New York: John Wiley & Sons, Inc. Orthocell Pty Ltd, (2008). Investor Relations. [Online] Available at: [Accessed 12 August 2014] Stratum Metal Limited, (2014). Stratum Metals Limited. [Online] Available at: [Accessed 12 August 2014] Read More