issue of shares for an existing listed company

Hi Jatin,

If I understand your question correctly, you are asking how might a quoted company issue new shares.

A publically listed company (a quoted company) does not always have to raise new capital via a Rights Issue – it can also issue new shares via a Placing or a Public Offer for Sale (either by Tender or Fixed Price).

You should learn the main features of each of these vehicles – see Chapter 11 of the OT lecture notes for details.

Preparation for a THEORY question on this important F9 area (“Sources of Finance”) also requires students to have a basic appreciation of PRE-EMPTION rights. That is, (1) DEFINITION (2) ADVANTAGES, especially from the point of view of the shareholder (3) DISADVANTAGES, especially from the point of view of the company in raising additional equity capital.

Also importantly for the F9 exam, students need to be very efficient in demonstrating their NUMERICAL ability when it comes to calculation questions on TERP’s, Value of Rights, Change in Shareholder Wealth before and after RI, etc.,

So your question really touches on a very important aspect of the F9 syllabus – especially in today’s climate of crisis in the capital markets.

It is also worth pointing out that the whole question of whether shareholders’ pre-emption rights adversely impact on a company’s ability to raise cash through the issuance of new shares is a complex and tricky one. It is the subject of much debate.

Be aware of what is meant by “Pre-emption Rights”

A legal right extended to shareholders which gives them the right to purchase additional shares in the company before the general public has the opportunity to do so.

By getting pre-emptive rights in its shareholder’s agreement, the shareholder can ensure that any additional offerings will not dilute his ownership percentage.

Thus the shareholder is assured he will have as much voting power in the future as he did when he initially invested in the company.

Conclusion:

There are both theoretical and practical reasons why it would be wrong to assume that the standard rights issue is the most effective and efficient way to raise capital for every type of company in every situation.

A shareholder’s right to pre-emption is a valuable one – many commentators see it as a cornerstone of UK company law and of the UK capital markets which should not be removed or eroded.

Existing company law provides flexibility to permit a number of different capital-raising models, subject to shareholder approval. This focus on approval from the owners of a company is fundamental.

Companies understand that they need to ask permission of shareholders before disapplying the pre-emption right that safeguards shareholders against dilution. And equally, shareholders understand that there will be some situations where disapplication will be necessary and acceptable.

Regards, Kevin Kelly

Hi Jatin,

Not necessarily, the Shareholders can agree with the Directors to either forfeit their pre emption rights or to hold onto them …. its up to the shareholders to decide what they think in best, given the circumstances of the proposed new issue and the arguments put forward by the Directors for disapplication.

Regards, Kevin Kelly