5.1 The Equity Technique, Different Perspectives 133that has a lower ranking in the insolvency of the company (subordinated claims,
the residual claims of shareholders).
Second, the investor may regard his own investment as an equity investment
compared with other investors’ investments. In this case, equity can mean: (a) a
claim that cannot be paid before other investors’ claims are paid; (b) a claim that
cannot be paid unless the company will remain able to pay other investors’ claims;
or (c) a claim that has a lower ranking than other investors’ claims in the insol-
vency of the company.
Perspective in general. Equity can thus mean different things depending on the
perspective.
Let us assume that an investor buys shares from an existing shareholder. In
Europe, the investor knows that the distribution of funds to shareholders is con-
strained by mandatory provisions of company law and that shares are equity in-
struments. From the subjective perspective of that share investor, the purchase of
those instruments is an equity investment and the investor expects to be remuner-
ated accordingly. However, the balance sheet of the company will not be affected.
The company is paid nothing.
Alternatively, an investor can subscribe for new shares issued by the company
against a payment in cash. Even in this case, the share investor will regard the
shares as equity instruments and his investment as an equity investment. The bal-
ance sheet will be affected. How exactly the balance sheet will be affected de-
pends on the applicable accounting and company law rules.
From the perspective of the company, the latter is a funding transaction which
increases the company’s equity capital in the functional sense (capital whose dis-
tribution to investors is to a large extent in the discretion of the company) and
even in the accounting sense (capital which is recognised as equity according to
IFRS and national accounting rules), whereas the former is not. In both cases, the
instruments held by the investors could be described as equity instruments from
the company’s perspective.
From the perspective of a debt investor, equity capital can mean funds (1)
which are in the possession of the company and (2) which either cannot be distrib-
uted to shareholders or other creditors, or can be distributed to them only on cer-
tain conditions protecting the debt investor. From the perspective of the debt in-
vestor, equity capital can consist of remuneration paid to the company for share
instruments or debt instruments. However, a debt investor would not regard the
price that other investors have paid for their claims as equity for the debt inves-
tor’s own purposes.
Depending on the perspective, equity can thus mean: (a) an instrument which
entitles its holder to payments which are either at the discretion of the company or
effectively constrained by provisions of law or contract that protect competing in-
vestors (equity instrument), the price paid by the investor for such equity instru-
ments, or the value of such instruments; (b) money raised by the company by issu-
ing equity instruments, or assets which are in the possession of the company and
whose distribution to investors is subject to constraints protecting the firm; (c) a
certain category of assets in the company’s balance sheet; (d) or other things de-
pending on the area of law (company law, tax, accounting).