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Secondary Share Issues Notes

LPC Law Notes > Equity Finance Notes

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SECONDARY SHARE ISSUES Methods of making a secondary share issue A rights issue An open offer Traditional placing Vendor placing/vendor consideration placing (rare in practice) Cash box placing (shares placed with institutional shareholders, but subscription monies paid to a Newco which is owned jointly by issuer and investment bank - pre
emption rights do not apply and will not need to be disapplied)

6. Acquisition or merger issue

1. 2.

3. 4.

5. The first three are the methods concentrated on in the course.

Brief description of offer structure (LR Appendix I)

Offer documentation:

1. Is a prospectus required?

2. What documentation will offerees be sent?

PLACING A marketing of securities already in issue but not listed or not yet in issue, to specified persons or clients of the sponsor or any securities house assisting in the placing, which does not involve an offer to the public or to existing holders of the issuer's securities generally.

RIGHTS ISSUE An offer to existing security holders to subscribe or purchase further securities in proportion to their holdings made by means of the issue of a renounceable letter which may be traded for a period before payment for the securities is due.

A placing will constitute an offer to the public under s.85(1) FSMA, but the placees will normally constitute 'qualified investors', hence falling within the exemption in s.86(1)(a) FSMA.

A rights issue will constitute an offer to the public under s.85(1) FSMA. Since it is a preemptive offer to all shareholders, it is unlikely to fall within any of the exemptions for Test 1 (will be to non
qualified investors and will be more than 150 people!)

As the shares are to be traded on the Main Market of the LSE, a prospectus will be required for a placing under s.85(2) FSMA unless it falls within the exemption set out in PR 1.2.3R(1) [over a period of 12 months, less than 10% of the number of shares] - and a company will always offer less than 10% because of the PEG Statement of Principles which only allows us to disapply preemptive rights on a nonpreemptive offer on up to 5% of shares and otherwise it will offer less than 10% to avoid the need for a prospectus. Remember - no circular needed because circular is defined as a document issued to existing shareholders, and placings are explicitly not offered to existing shareholders. On impact day, placees will be sent a placing letter, which they sign to confirm commitment to purchase shares.

Length of offer period

Depends on the terms of the placing - otherwise, no minimum time for offer period - can be concluded shortly after it is announced on impact day.

Furthermore, as the shares are to be traded on the Main Market of the LSE, a prospectus is also required under s.85(2) FSMA and no exemptions are likely to apply. [The PR 1.2.3R(1) is unlikely to apply as the rights issue will be much larger in size.]
The company will need to produce a circular (that requires FCA approval under LR 13.2.1R) in addition to the prospectus to send to shareholders that sets out: (a) the background and reasons for the rights issue (b) terms and conditions applicable to the rights issue It is also likely to include a notice of a GM if shareholder resolutions are required. (Tradable) PALs will be sent out after the GM (provided consents have been obtained). At least 10 business days1 starting with the date on which the offer is first open for acceptance (LR 9.5.6R). Under Disapplication Route, the 10 day period runs from the date nilpaid rights are admitted to trading. The period must run for 10 full business days (i.e. will close on the 11th day).

1 The 'closing date' for the offer period is notional Day 11 - i.e. it can't shut at 5pm on Day 10 because you need 10 full business days, so closing date will technically be Day 11!

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