Open Offer Flashcards
Brief description of offer structure (refer to LR definition)
An offer of shares, made to existing shareholders (often combined with a placing) to subscribe or purchase shares in proportion to their holdings that is not made by renounceable letter and therefore cannot be trded
Defined in LR as:
An open offer is “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 (or other negotiable document).”
Authority to allot
One-third of ISC:
Insitutional Investor Guidelines
1.1.1 – routine to allot
one third of company’s ISC for use in any type of share issue
Disapplication of pre-emption rights
When making an open offer, a listed company once again has two options in relation to pre-emption rights:
- to comply with pre-emption rights by making a pre-emptive offer under s.562 CA 2006; or
- to disapply pre-emption rights by passing a special resolution at a GM under s.570 or s.571 CA 20
In principle, does not need to disapply pre-emption rights as an open offer preserves shareholders’ pre-emption rights as it is an offer to all shareholders, in proportion to their existing shareholdings, to buy further shares in the company.
However, it may not always be practical for a listed company to offer shares to all of its SHs on strictly pre-emptive basis and therefore may seek to disapply pre-emption rights, due to overseas SH and fractional entitlements. Therefore, may choose option two, to disapply pre-emption rights, and will be to extent of authority to allot i.e. one-third
Prospectus?
- Prospectus
Likely required.
TEST 1: A rights issue will usually constitute an “offer of transferable securities to the public” and is unlikely to fall within any of the exemptions that apply for Test 1 set out in PRR 1.2.3EU/Art. 1(4), Prospectus Regulation.
TEST 2: As the listed company will be applying for the new shares arising from the rights issue to be traded on the Main Market of the LSE, a prospectus is also required under Test 2, and the relevant exemptions may not apply.
Documentation
- Prospectus
- Circular – usually attached to prospectus
- Application form (no renounceable letter)
Length of offer period
LR 9.5.7AR - open offer must remain open for acceptance for at least 10 business days starting with the date on which the offer is first open for acceptance.
Earliest day to close is 11th business day
Can run concurrently with GM notice period
Can choose either disapplication route (s. 570-571) or Gazette route (s. 562)
Opportunities available to existing SH
Right to take up offer – pre-emptive
Right to let rights lapse
Offer made to SH by means of application form, which is non-renounceable and therefore cannot be traded (unlike PAL in rights issue). SHs have no ability to sell the unpaid rights in the market and so lose their opportunity to benefit from any value attached to the entitlement (i.e. value that arises because the offer price is less than the prevailing market price).
Therefore shareholders who do nothing will not be “compensated” for the dilution of their holdings in the company.
Cap on the discount at which shares are issued?
Shares usually offered at discount to the market price to encourage SH to take up their shares.
Usually discount much smaller than rights issue (between 4-10%).
LR 9.5.10R provides that an open offer cannot be made at a discount of over 10% unless LR 9.5.10R(3) applies:
- Discount approved by SH; or
- it is an issue under a pre-existing disapplication authority
As pre-emption rights are often systematically disapplied in relation to open offers, it is technically permissible for shares issued under an open offer to be issued at a discount of more than 10%, although in practice 10% will usually still be the maximum.
Note s. 580 – discount price must not be below nominal value
What happens to shares not taken up?
No protection/compensation to SH who do not take up the offer/lazy SH
If underwritten, underwriter takes up any unsold shares
