8 Exit: Introduction
8.1 General Remarks
Returning funds to investors is the third of the four big decisions that can influ-
ence the firm’s finances (investment, funding, exit, and existential decisions). This
chapter will discuss how funds are returned to various kinds of external investors.
Many risks are exit-related.
Investment, funding, exit, existence. To begin with, questions of investment,
funding, exit, and the firm’s existence are interrelated.
The firm’s funding transactions can be someone else’s investment transactions,
and returning funds to investors can influence someone else’s investment deci-
sions.
For this reason, exit affects the firm in three main ways. First, an investor that
has invested capital in the firm may want to release it and make a profit. As the
firm will need funding even in the future, exit can create a risk. Second, the firm
may be the investor looking for an exit. The firm will therefore have to manage
the question of exit in the capacity of an investor. Third, the firm may be an inves-
tor whose risk exposure is influenced by other investors’ exit decisions.
This can be illustrated by investment funds. Many investors in open-ended funds tend to
have a short-term view. They can be affected by market sentiment, and there can be a big
rush of redemptions at the same time. For this reason, the fund’s own investment policy
should be short-term as well. In closed-end funds where investors sign up for a period of,
for example, 10 years, the fund can take a longer-term view in its own investment policy.
The initial choice of the form of funding (investors’ investment) is one of the most
important factors influencing exit, and one of the most important distinctions is
that between: the exit of asset investors; the exit of debt investors; and the exit of
shareholders. There are different legal constraints depending on the form of in-
vestment.
There are different legal constraints also depending on the exit method. Exit can
depend on: whether the company will continue to exist as an independent legal en-
tity or not; whether shares will continue to exist or not; whether payments will be
made by the company or a third party; and other circumstances.
Corporate finance theory. According to the theory of corporate finance, the
firm is expected to return excess cash to its owners according to their preferences
if there are not enough investments that earn the hurdle rate. From a legal perspec-
tive, however, the firm should take into account other circumstances.
P. Mäntysaari, The Law of Corporate Finance: General Principles and EU Law,
DOI 10.1007/ 978-3-642-03058-1_8, © Springer-Verlag Berlin Heidelberg 2010