Evaluating share issue proposals Flashcards
Evaluating Share Issue Proposals - Overview
- Consider the authorities passed:
1. Is the number of shares within the authority to allot?
2. Is the number of shares within the maximum disapplication amount?
If not, then a further GM will be required, and therefore need to consider:
i) Whether SHs are likely to approve – considering IA principles and the level of discount.
LR 9.5.10R(1), the maximum discount for a placing is usually 10% unless shareholder approval has been obtained (LR 9.5.10R(3)
But Paragraph 5 of Part 2B of the PEG Statement of Principles which recommends a discount of no more than 5% to market price
ii) Impact on timing
iii) What is the total amount of money the issue would raise?
Calculate as follows: £ = (total # shares) x (proposed price)
Placing of 5% discount where sufficient authority to allot but insufficient disapplication rights
- Is a GM required?
- Are the company’s shareholders likely to approve the resolutions required?
- What is the proposed level of discount? Is it likely to be acceptable?
- If a GM is required, what impact does this have on the timetable?
A GM is needed to disapply pre-emption rights because the current disapplication obtained at AGM (refer to relevant resolutions) would be exceeded (state what percentage of ISC the placing would amount to).
To
determine whether the shareholders are likely to approve the resolutions, the Pre-Emption Group Statement of Principles should be considered.
The Principles stipulate an extension to the disapplication of 5% for any purpose (refer to resolution) plus a further 5% which can only be used for specified capital investments or acquisitions (refer to resolution).
Where the extension exceeds the disapplication, institutions are unlikely to consent to it without consultation.
Part 3 of the Principles sets out some general considerations which institutional shareholders should bear in mind in response to a request for a specific disapplication (e.g. the strength of the business case). If the company consuls with the main shareholders and the voting advisory services and convinced them of the merits of the issue, the shareholders may vote in favour.
The level of discount would be acceptable to institutional shareholders, as at 5% it is deemed to be at a ‘routine’ level.
Impact on Timetable
Company will have to give 14 clear days’ notice of the GM plus, in the absence of a contrary provision in the company’s articles, 48 working hours for posting: s.1147(2), (5) and (6) CA
Traded companies are required to give 21 clear days’ notice of a GM (s.307A(1)(b) & s.360 CA 06) unless the conditions of s.307A(2)-(5) are met in which case 14 clear days’ notice is required (s.307A(1)(a) & s.360 CA 06). The company would meet the conditions of s.307A(2)-(5) if it offered electronic voting to its shareholders entitled to vote at general meetings and shareholders passed a special resolution at the AGM permitting a notice period of 14 clear days’ notice for general meetings other than the AGM.
Consider also whether a prospectus would be required for this placing and whether any exemptions apply – if not, this would entail an additional cost.
Open offer of 10% discount where sufficient authority to allot/disapplication rights
- Is a GM required?
- Are the company’s shareholders likely to approve the resolutions required?
- What is the proposed level of discount? Is it likely to be acceptable?
- If a GM is required, what impact does this have on the timetable?
No GM required. As the open offer is a pre-emptive issue (i.e. an offer to existing shareholders), the company can allot up to 1/3 ISC without complying with pre-emption rights.
To fall within the definition of a pre-emptive offer for the purposes of their resolution the company must still offer the shares to its existing shareholders in proportion to their current holdings but may:
- deal with fractional entitlements arising from the issue; and
- exclude any overseas shareholders from the issue
The discount is within acceptable levels: LR 9.5.10R).
1:3 rights issue (i.e. SH is entitled to buy a further one share for every three shares already held) 36% discount, sufficient authority to allot/disapplication rights
- Is a GM required?
- Are the company’s shareholders likely to approve the resolutions required?
- What is the proposed level of discount? Is it likely to be acceptable?
- If a GM is required, what impact does this have on the timetable?
No GM required. As the rights issue is a pre-emptive issue (i.e. an offer to existing shareholders), Ritchisons is able to allot up to 2/3 ISC without complying with pre-emption rights.
To fall within the definition of a pre-emptive offer for the purposes of this resolution, Ritchisons must still offer the shares to its existing shareholders in proportion to their current holdings but may:
- deal with fractional entitlements arising from the issue; and
- exclude any overseas shareholders from the issue.
There are no limits placed on the level of discount for rights issues within the Listing Rules or the Pre-Emption Group Statement of Principles.
4:5 rights issue, 73.2% discount, insufficient authority to allot/disapplication of pre-emption rights
- Is a GM required?
- Are the company’s shareholders likely to approve the resolutions required?
- What is the proposed level of discount? Is it likely to be acceptable?
- If a GM is required, what impact does this have on the timetable?
If Ritchisons went ahead with this rights issue, it would need to convene a GM.
In relation to the authority to allot, a s.551 CA 06 ordinary resolution would be required as the current authority obtained at AGM would be exceeded.
In relation to pre-emption rights, a s.570 CA 06 special resolution would be required to disapply preemption rights as the current disapplication obtained at AGM would be exceeded.
[NB: Alternatively (although this is unusual in practice), the company could elect to follow the Gazette route, which would mean that the company would not have to pass a special resolution disapplying pre-emption rights.]
As the company will be seeking an extension to the authority to allot and disapplication of pre-emption rights, it will need to consult with the key institutional shareholders to convince them of the merits of the rights issue and to obtain their support before proceeding. Shareholders may give their support if they approve the commercial basis for the issue and the discount.
Although there are no restrictions on the level of discount for rights issues, offering such a large discount may suggest that the company is in trouble financially.
The company will have to give 14 clear days’ notice of the GM plus, in the absence of a contrary provision in the company’s articles, 48 working hours for posting (see s.1147(2), (5) and (6) CA 06).
