Individual assignment by Vladislav Troynin

Mr. X is the largest shareholder of Company B with a 25% holding. He became shareholder and
Executive Chairman of Company B with the support of Bank Z who lended to Mr X the funds
needed to buy his 25% stake. This loan was guaranteed with a pledge over the shares
Does this transaction create any conflicts?
Mr. X might try to convince the board of directors to show somehow that firm is performing
better than it does to emphasize value of collateral or to pay more dividends instead of investing,
so he can repay his debt, then it would have been beneficial for the company to invest in new
projects.
Does the bank have any interest in the price of the stock?
Yes, As I have mentioned in point one, value of collateral depends on that, so if company is
performing terribly, it reduces safety of the loan (e.g. recovery rate).
Is the bank interested in the dividend distribution policy of the company?
Yes, as it directly influences cash flows of one of its lenders.
Do the research analysts of Ban Z have any bias?
Yes, they might be influenced to overprice companys stock in order to improve image of banks
performance (due to higher value of collateral if price goes up).
What happens if the stock price falls?
Collateral loses its value Mr. X might be asked to add something as additional guarantee,
depending on terms of debt issue
Is Mr X. more interested in the stock price of in maximizing firms value?
There is a trade off, as there is some minimum level of price stock Mr X does not want the price
to fall under, however if prices are at relatively high level, he will be more interested in
maximizing firms value as probably this will mean higher cash flows for him, therefore easy
repayment of debt.
Does Mr. X have any conflicts as Manager and main shareholder?
Yes, as there some cases when he might undertake suboptimal decisions, for example if company
is underperforming he might not engage in projects with risk-levels acceptable by the company,
but looking too high for him, due to fear of losing even scrap value of the company.
What could happen to the stock price if the pledge is executed?
Probably nothing, as stocks just exchanged owner, nevertheless it might give signal to market
that company is not performing well, so bank had to take over, as they would not expect Mr X to
repay his debt.
Should the Stock regulator require that this information is publicly reported?
Yes, as such situation stipulates conflicts of interest, thus on practice, there is always specific
statement, disclosing shareholder with power within company.
Example 2 o Company A was bought out 4 years ago by the Private Equity Fund of Investment
Bank Z and the Management of the Company. The acquisition financing facility was provided by
Bank Y. The company has been well managed during these four years, showing some growth and
deleveraging its balance sheet. Likewise, the stock market has been performing very well and
valuations have picked up, with general multiples being 20% higher than 4 years ago. Company
A is preparing for an IPO that entails the sale of most of the shares of the Private Equity and the
Management and an equity increase to amortize the outstanding debt. The Company has given
the mandate as advisor in the IPO to Bank Z and as Director an placing agent to Bank Y.
What kind of conflicts do you see?
The main conflict of interest is that the main underwriter and one of the largest owners is the
same entity, then obviously it is interested to give the highest price possible. In addition to that,
director of placing is also interested in higher prices, as it will probably mean repayment of debt,
or at least better financials of debtors is never a bad thing.