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#10492 - Secondary Share Issues - Equity Finance

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SECONDARY SHARE ISSUES

Methods of making a secondary share issue

  1. A rights issue

  2. An open offer

  3. Traditional placing

  4. Vendor placing/vendor consideration placing (rare in practice)

  5. 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

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


PLACING RIGHTS ISSUE OPEN OFFER
Brief description of offer structure (LR Appendix I) 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. 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. An invitation to existing securities holders to subscribe or purchase securities in proportion to their holdings, which is not made by means of a renounceable letter.

Offer documentation:

  1. Is a prospectus required?

  2. What documentation will offerees be sent?

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.

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 pre-emptive rights on a non-pre-emptive 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.

A rights issue will constitute an offer to the public under s.85(1) FSMA. Since it is a pre-emptive 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!)

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:

  1. the background and reasons for the rights issue

  2. 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).

An open offer will constitute an offer to the public under s.85(1) FSMA and is unlikely to fall within any of the exemptions for Test 1.

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.

Hence, the company will need to produce a circular in addition to the prospectus (see details under ‘rights issue’). The application form will also be sent with the circular.
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.

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 nil-paid rights are admitted to trading. The period must run for 10 full business days (i.e. will close on the 11th day).

 At least 10 business days starting with the date on which the offer is first open for acceptance (LR 9.5.7AR) Will also close on the 11th day.
Opportunities available to existing shareholders Non pre-emptive: no opportunities available to existing shareholders

The offer is made to existing shareholders in proportion to their holdings and they have several options:

  1. Take up rights

  2. Sell rights (‘nil paid dealings’)

  3. Let rights lapse (but still receive a premium if shares are sold for a premium over the discounted value - LR 9.5.4R)

  4. Carry out a combination

The offer is made to existing shareholders in proportion to their holdings but if they do not take up rights, they will not receive anything (unlike under a rights issue).

Unpaid rights cannot be sold in the market.
Is there a cap on the discount at which shares are issued?

LR 9.5.10R provides that an open offer cannot be made at a discount of over 10% unless:

  1. the terms of the offer at that discount have been specifically approved by the issuer’s shareholders; or

  2. it is an issue of shares for cash under a pre-existing general authority to disapply.

However, para 20 of the PEG Statement of Principles recommends that a discount should not be more than 5% below the shares’ middle market price immediately before the offer is made.

Discounts cannot reduce the price to below the nominal or par value of a share (s.580 CA 2006) [applies to all companies, but most likely to be relevant here due to the other restrictions on discounts for placings and open offers].

As a rule of thumb, the discount is usually between 30-50% of market price. Anything between 40-50% will be regarded as ‘deeply discounted’ and may be cause for worry about the financial condition of the company.

LR 9.5.10R provides that an open offer cannot be made at a discount of over 10% unless:

  1. the terms of the offer at that discount have been specifically approved by the issuer’s shareholders; or

  2. it is an issue of shares for cash under a pre-existing general authority to disapply.

Note that the ABI has verbally indicated that it will prefer rights issues to open offers if the discount under an open offer is greater than 7.5% *** (REMEMBER: NOT IN THE ABI GUIDELINES – MEMORIZE!)
What happens to shares not taken up? In the unlikely event that placees do not take up their allocation, the investment bank placing the shares will purchase them instead (if the issue is underwritten).

The company is obliged to make arrangements with its underwriter to sell the lapsed rights on the shareholder’s behalf (LR 9.5.4R). Any amount of premium achieved will then be sent to the shareholder, and the company will receive the rights issue price in respect of any lapsed rights sold by the underwriter.

If the underwriter cannot sell in the market it will take up the rights itself.

 If there is an underwriting arrangement, the underwriter will take up the rights itself. The shareholder will not receive anything in this event and cannot sell his rights.

The timetable for a rights issue

  • The timetable will depend on:

    • how many shares are being issued; and

    • what approval (if any) from the shareholders needs to be obtained (in a GM).

  • The notice period for a listed company’s GM will be 14 clear days if the conditions in s.307A(1) are met [i.e. special resolution passed at AGM to reduce notice period].

  • Is a GM needed?

    • Review resolutions passed at most recent AGM

    • Check if any shares have been issued since AGM

    • Check if company is under obligation to issue shares under existing agreements

  • Can the company issue the proposed shares?

  1. Is there a cap on the number of shares that may be issued?

  • If it is a CA 85 company, ASC clause will be deemed transferred to the articles (s.28). Can be removed by OR under Transitional Provisions.

  1. Do the company’s directors have authority to allot such shares?

  • If exceeding authority already granted at most recent AGM, will need to pass an OR under s.551 granting further authority to allot.

  1. Do pre-emption rights need to be disapplied in relation to such shares?**

  • When issuing new equity securities for cash, a listed company must comply with pre-emption rights contained in s.561 and pre-emption rights contained in LR 9.3.11R.

  • If pre-emption rights need to be disapplied, the company will need to convene a GM to pass a SR under s.570/571 to disapply both pre-emption rights.

    • If, however, the issue is within the current disapplication available, then the allotment can go ahead without complying with either s.561 or LR 9.3.11R.

    • Consider the likely response of institutional shareholders to a further request for disapplication of pre-emption rights…may need consultation with key SH.

  • However, even though a rights issue is pre-emptive (and thus pre-emption is not strictly necessary), disapplication of the rights may be still be useful in certain circumstances (which should be included in the wording of the disapplication resolution)

    1. Overseas shareholders (can be excluded)

    2. Fractional entitlements (company can combine fractional entitlements and sell the shares)

  • Hence, a company has two alternatives with respect to pre-emption rights:

  1. The Gazette Route (s.562) – but not preferable because of the fractions and the foreigners!

  2. The Disapplication Route (s.570/571 – passing a SR...

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