Shareholders with some capital gains tax allowance to spare mayprefer an issuer to spend its cash on share buybacks rather than on a higher dividend (which will be subject to income tax).
Consolidation
A share consolidation is the opposite to a share split or bonus issue, consisting of the replacement of the shares with a smaller number of shares with a higher face value.
There is no change to the issuer’s market capitalisation, so in a one-for-two consolidation a shareholder would receive half the number of shares but the share price (as well as the face value) would be twice as great.
Rights Issues
One of the most important species of corporate action, rights issues are a method of raising more capital by issuing more shares to existing shareholders in proportion to their shareholdings. As with other share issues, rights issues have to be conducted according to the Listing Rules of the UK Listing Authority. The right to buy new shares in proportion to one’s existing shareholding is known as a pre-emption right or subscription right and, in the UK, it normally requires a resolution to waive the right to be supported by 75% of shareholders. [21]
Clearly, only companies that need more cash will undertake such an exercise and rights issues are often interpreted as an important signal in the stock market. A rights issue confers an extra degree of influence to the shareholders as collectively they have power over the success or failure of the event. In the context of a rights issue, failure would be a widespread disinclination on the part of the shareholders to ‘take up their rights’ (pay for more shares in the company). [22] This not only sends an important negative signal to the market about how shareholders feel about their company, but also means that the issuing company has to look to the open market for buyers of the newly issued shares. Big sale of shares naturally tend to have the effect of forcing the share price downwards.
Companies will normally offer the rights issue of shares to the shareholders at a discount to the current share price in order to encourage the level of take-up. A deeply discounted rights issue was at one time taken as an indicator of the management’s lack of confidence and often heralded a decline of the company’s share price. In recent years deeply discounted rights issues have become more frequent and investors tend to see them as no more than a strategy for ensuring that the rights are all taken up.
Shareholders and analysts will look beyond the corporate action to the ‘narrative’ coming from the issuing company. A rights issue to pay for a convincingly explained acquisition, for example, will find more favour than one launched by an insurance company that has just announced its reserves are insufficient to cover recent claims for hurricane damage. For companies with solvency problems a rights issue may be the only alternative to takeover or liquidation. In these circumstances the shareholders collectively hold the power to decide whether the company survives or not.
As with a company being listed on the stock exchange for the first time, an issuer launching a rights issue would normally use the services of an investment bank in a lead manager role. One of the tasks of a lead manager may be to underwrite the issue or arrange for it to be underwritten by other financial institutions, which means that they will buy the new shares of those shareholders who do not wish to take up their rights. Normally substantial fees are charged for underwriting, which accounts for the significant expenses of a rights issue (see the example below). [The role of the lead manager will be looked at in more detail in Chapter 4.]
FIBERNET GROUP PLC
4 FOR 15 RIGHTS ISSUE TO RAISE APPROXIMATELY £77.0 MILLION
INTRODUCTION
The Board announces a 4 for 15 Rights Issue of 12,826,325 New Ordinary Shares to raise approximately £75.7 million, net of expenses. The Rights Issue has been fully underwritten by Old Mutual Securities.
The Rights Issue is conditional upon, inter alia, Shareholders' approval which will be sought at the Extraordinary General Meeting.
The Rights Issue Price represents a 54.8%. discount to the closing middle market quotation of 1328 per Ordinary Share on 22nd November 2000, the last business day before this announcement.
Rights; tricky terminology
The key defining privilege for the existing shareholders in a rights issue is the opportunity to trade in the new rights issue shares when they are nil-paid, that is before having to pay for them.
Where there are no nil-paid rights to trade the issue is called an open offer but the existing shareholders still have subscription rights. Open offers are the norm in the United States. Sometimes the more helpful term entitlement offer is used.
The US and the UK also differ in a small but important variation in phraseology when it comes to these types of share issue. A US open offer might be expressed as a five for four issue, signifying that shareholders will have an entitlement of one extra share for every four already owned, so ending up with five shares. In the UK a rights issue in the same proportions would be expressed as a one for four issue of nil-paid rights. [23]
In some countries (including the UK) shareholders electing not to exercise their rights will receive a cash premium when the rights lapse. An arrangement like this is at the issuer’s discretion. European practice is for the issuer (or lead manager) to tender lapsed rights automatically with the proceeds going to the initial holder of the right. Sometimes shareholders will use the money raised from the selling on of some of the rights to pay for the take up of the remainder.
Takeover bids
Potentially, a takeover bid for a company in which you have a shareholding is the most significant corporate action of all. It can also be one of the most complicated and drawn out of corporate events, especially in instances where the bid is unwelcome to the directors of the prey or where a takeover battle develops with two (or more) predators fighting over the target company.
In the UK the regulating body is the Panel on Takeovers and Mergers, normally referred to as “The Takeover Panel”, and takeovers have to abide by “The City Code on Takeovers and Mergers” (The Code).
‘Triggers’ along the way to a takeover
1 The first hint of a takeover bid could be a stock exchange regulatory announcement that shares in the target company had been acquired by a rival or a private equity firm.
2 Once the predator company (or companies acting ‘in concert’) have acquired 30% or more of the shares of the target company, the code requires them to make a ‘conditional offer’ for all of its shares. This offer is conditional upon enough other shareholders agreeing to sell their shareholdings for the predator to gain a controlling interest. Note that the offer must value the target company’s shares at no less than the price paid by the predator in its most recent purchase of those shares.
3 Once the predator has more than 50% of the shares, they have the power to out-vote any other shareholder. This is the point when, object achieved, their offer can become unconditional. However, the acquirer may postpone making the offer unconditional until they have agreements to sell that would bring their interest to as much as 75% of the voting shares or more. The predator company has a deadline of 60 days after the offer was announced for it to be made unconditional.
4 Once the predator has 90% of the shares the predator can buy up the remaining shareholdings compulsorily. At this point the target company’s stock exchange listing ends.
While takeovers are often an opportunity for investors to make a profit on their investment, there are a number of potential drawbacks. A successful takeover could mean saying goodbye to a company with an excellent record for dividends. Indeed directors sometimes play on just that fact to foster