RE: Motive Television25 May 2014 14:41
[MTV] Falling share prices are more than just an annoyance for the companies so far this year that have been obliged to undertake a capital reconstruction.
That's because under UK company law, it is not possible for a company to allot new shares at less than their nominal (or par) value. A company finding itself in this position needs to reduce the par value of its shares if it intends to undertake an equity fundraising. When the stock market is in freefall, a normal subdivision just will not benefit the company if the margin between the market value of its shares and their par value is thin - the result would be a lowering of the share price, as well as the par value. And any subsequent fall in the market would result in the share price nudging its way ever closer to its par value again, putting the company in the same position from which it started.
More radical surgery is needed - namely, a capital reorganisation that doesn't involve any adjustment to the company's share price - only to its par value, thus widening the gap between the two and clearing the way for an issue of new shares.
Many companies have opted to reorganise their capital and lower their par values by issuing unlisted deferred shares. An example is Aim Investments (AI), which used to be called MedSea Estates. AI’s share price had been languishing below its par value of 1p for over a year. The company decided to subdivide each of its ordinary 1p shares into one ordinary 0.1p share and one unlisted deferred 0.9p share, and the capital reorganisation became effective on 22 May 2009.
The number of shares AI shareholders own remains the same before and after the subdivision only the value of the par value changes from 1p to 0.1p so the inherent value is not affected. But the shareholders also receive additional unlisted deferred shares with a 0.9p par value - the difference between the par values of the old and new ordinary shares.
Unlisted deferred shares generally have no voting rights at general meetings of the company, no dividend entitlement and a very limited capital entitlement. The deferred shares will not be admitted to trading and, accordingly, have little or no economic value. Share certificates are not issued in respect of them. For administrative purposes, the company may register the deferred shares in the name of a nominee for the ordinary shareholders. But at the end of the day, they are as good as worthless to the ordinary shareholders.
However, they can't just be cancelled. The Department of Business, Enterprise and Regulatory Reform states that if the overall effect of the reorganisation is that the company has reduced its share capital - possibly by cancelling the deferred shares - then this will have to be decided by special resolution of the company's shareholders.
There were some 103 companies in the position of having a higher par value than their market price in June, according to information vendor CapitalIQ. The vast majority are traded on Aim, with just 16 on the main market.
Often, companies undertake a capital reorganisation at the same time as a fundraising exercises, especially a rights issue. Inchcape, Segro and Wolseley, for example, all chose to incorporate the process of reducing their par values and raising extra money by way of a rights issue all in one go. Low & Bonar along with Taylor Wimpey and Vernalis incorporated an open offer to raise cash along with a reduction of their par values.
JARGON BUSTER
Par value - this is the notional value of a share, and in normal market conditions is largely meaningless to holders of common, or ordinary shares. Par values are more relevant for preferred shares, but this class of equity is rare in the UK. And for bonds, par values are crucial - they are the price at which the bond is redeemed and on which interest payments are based.
Deferred shares - deferred in this context is usually taken to mean that the shares carry fewer rights than the ordinary shares. Shareholders may not be entitled to vote their deferred shareholdings or receive dividends in respect of them.
EGM - extraordinary general meeting. An EGM is usually required in order for shareholders to approve a capital reorganisation, or to cancel deferred shares. Sometimes, the latter is done immediately after the former.
Companies Act 1985 - the legislation that governs the issue of shares in a company, among other things. It is this law that prevents a company from issuing shares at below par.
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