Rights Issue Flashcards
Brief description of offer structure (refer to LR definition)
Similar to open offer - offer of shares to existing SH to subscribe/purchase shares on pro-rata basis, but made by way of renounceable letter which may be traded (as “nil paid” rights)
Defined in LR as:
A rights issue is “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 (or other negotiable document) which may be traded (as “nil paid” rights) for a period before payment for the securities is due.”
Authority to allot
Two-thirds of ISC:
Insitutional Investor Guidelines
- 1.1 – routine to allot
i) One third of company’s ISC for use in any type of share issue; and
ii) A further one third which can only be used for rights issues
Disapplication of pre-emption rights
s. 561 - Existing SHs ordinarily have a right of pre- emption
S. 570(1) CA – Disapplication by SR
A rights issue 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.
Therefore, in principle, a company will not need to disapply statutory pre-emption rights under s. 561 in accordance with s. 570.
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. This is because of two reasons:
a) Overseas SH: - enables the company to exclude overseas SHs from subscribing for shares in a rights issue. This will allow the co to avoid the obligation to comply with onerous securities laws in a variety of jurisdictions.
NB for your understanding: if overseas SHs are excluded from subscribing, co will usually make arrangements for underwriter to sell those shares that would otherwise have been allotted to those SHs, and the overseas SH will receive any premium obtained for shares in excess of the offer price.
b) Fractional entitlements: if pre-emption provisions have been disapplied, a listed co can combine the fractional entitlements and sell the resulting shares in the market and typically retain the entire proceeds. These shares do not have to be offered to co’s SHs before sale.
Both exclusion of overseas SHs and authority to deal with fractional entitlements are achieved by including appropriate wording in the the s.570 CA 2006 or s.571 CA 2006 resolution passed at the AGM (i.e. the disapplication resolution). Typically, this resolution will refer back to the full allotment resolution and thereby allow the board to issue shares in a disapplication route rights issue that comprise up to two-thirds of the existing share capital, as long as those shares are still offered first to existing shareholders in proportion to their holdings (subject to exclusions for fractional entitlements/overseas SHs)
Prospectus required?
- 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 (as referenced in s. 86(1) FSMA).
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?
Circular (if # of shares to be issued exceeds company’s existing authority to allot, the company must send notice to shareholders of a GM to approve the issue. Usually attached to prospectus.
Provisional Allotment Letter (PAL) – renounceable letter. This is a temporary document of title which must comply with LR 9.5.15R.
Length of offer period
LR 9.5.6R - 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 (if GM is needed at all)
Cannot run concurrently with GM notice period
Can choose either disapplication route (s. 570-571) or Gazette route (s. 562)
Opportunities available to existing SH
All shareholders have the following options under a rights issue:
i) take up offer (return PAL);
ii) sell rights/PAL, the investor buyer will pay a proportion of the difference between the discounted price and the market price;
iii) let rights lapse – LR 9.5.4R
co is obliged to make arrangements with underwriter to sell unwanted share entitlement in market on SH’s behalf, if demand high and sold at premium, SH will receive the preium LR 9.5.4R(1) – unless it is £5 or less in total, when it can be retained by the issuer (see LR 9.5.13R, so ‘lazy’ SH compensated
iv) or a combination of the above e.g. take up half their rights and pay for this by letting the remainder lapse.
Is there a cap on the discount at which shares are issued?
Always at discount to encourage shareholders to take up their rights.
Typically, can be anything up to 60% but usually between 30-50%.
s.580 - discount must not reduce the price to below the nominal value
An issue made at a large discount to the market price (over 50%) is known as a deeply discounted issue. A deep discount may indicate that the company is in financial distress.
What happens to shares not taken up?
If shares sold at premium, underwriter must give shareholder amount of premium under LR 9.5.4R (rump)
If shares left over from rump, underwriter purchases remainder (stick)
Sale of the rump: After the rights issue closes, the lead underwriter instructs the broker to attempt to sell in the market any shares not taken up by shareholders (see option 3 above). These shares are known as the “rump”. Underwriting agreements usually provide for the sale of the rump to be completed within two working days of the end of the rights issue acceptance period.
Purchase of the stick: If the broker is unable to sell all of the rump in the market, the lead underwriter is obliged to purchase the shares which remain. (These remaining shares are known as the “stick”.)
Underwriting in Rights Issue
- Rights issues are almost always underwritten.
- Sale of the rump:
• After the rights issue closes, the lead underwriter instructs the broker to attempt to sell in the market any shares not taken up by shareholders.
• These shares are known as the “rump”.
• Underwriting agreements usually provide for the sale of the rump to be completed within two working days of the end of the rights issue acceptance period. - Purchase of the stick:
• If the broker is unable to sell all of the rump in the market, the lead underwriter is obliged to purchase the shares which remain.
• These remaining shares are known as the “stick”.
• Underwriting agreements usually provide for the sale of the stick to be completed within five working days of the end of the rights issue acceptance period.
