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CONTROL

Another consideration in planning the types of funds to use is the attitude of the management towards control. Lenders have no direct voice in the management of a company. They may, course, place certain restrictions in the loan agreement on the management’s activities. So on as there is no default in the payment of interest or the repayment of the principal there is link that they can do legally against the company for all practical purposes, they have very the Policy-decisions of the company or in the selection of the board of directors. Likewise preference shareholders do not have the right to vote for the appointment of the hoard, directors. However, if the financial affairs of the company have deteriorated to such an that dividends on preference shares have not been paid for a certain number of years (2-years period in India), they are given the right attend the meetings and participate in the voting. most of the cases, they, like the creditors, do not have any say in the selection of the management. The power to choose the management in most cases rests with the equity-hold Accordingly, if the main object of the management is to entertain control, they will like to have a greater weight age for debt and preference shares in additional capital requirements, since obtaining funds through them the management sacrifices little or no control. However, it should be remembered that if the company borrows more than what it can service or repay, creditors may size the assets of the company to satisfy their claims. In that situation, management would lose all control. It might be better to sacrifice a measure of control by additional equity financing rather than run the risk of losing all control to creditors by too much debt ? The same holds true for preference shares.

In such a situation, equity would a better source of financing, However, if the firm has the ability, as determined by profit and solvency considerations discussed above, and the management wants to maintain con its own hands, the issue of senior securities will be recommended as the issue of addition equity shares would involve the risk of losing control. This will be all the more true if company is closely held. The management of widely-held companies runs little risk of a  continuation of control. The shares of such companies are widely distributed. Most of shareholders are interested simply in the return and have neither the time nor the Cincinnati participate in management, If they are not satisfied, they will switch over to other companies.

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