Preference shares -- keeping it simple

[GoSeigen]

It seems to me that GS is reading a lot into the Compamies act that is not there.

For example s687 specifically permits redemption from capital, and with that, bang goes the most fundamental point in his first post - that redemption means repayment from profits.

Not true stockton, that only applies to private limited companies. We are concerned with PLCs. Have a close read again.


GS

[stockton]

It seems to me that GS is reading a lot into the Compamies act that is not there.

For example s687 specifically permits redemption from capital, and with that, bang goes the most fundamental point in his first post - that redemption means repayment from profits.

Not true stockton, that only applies to private limited companies. We are concerned with PLCs. Have a close read again.


GS

Both irrelevant and incorrect. As you say "Have a close read again."

[GoSeigen]

viewtopic.php?p=133256#p133256

[If an investor were interested in this sort of thing at the time, they would noticed that the exchange involved removal of the HBOS prefs by Capital Reduction subject to a special resolution. They might then have been curious and noticed that the new LBG shares did not require such a resolution...]

This aside in my earlier post was slightly unclear. Correction with edits in bold:

[If an investor were interested in this sort of thing at the time, they might have noticed that the exchange involved removal of the HBOS prefs by Capital Reduction subject to a special resolution. They might then have been curious and noticed that the new LBG shares did not require class approval of a capital reduction resolution ...]

GS

[GoSeigen]

It seems to me that GS is reading a lot into the Compamies act that is not there.

For example s687 specifically permits redemption from capital, and with that, bang goes the most fundamental point in his first post - that redemption means repayment from profits.

Not true stockton, that only applies to private limited companies. We are concerned with PLCs. Have a close read again.


GS

Both irrelevant and incorrect. As you say "Have a close read again."

You're going to have to be a bit less cryptic than that I'm afraid! Please explain what you are getting at. Both the "irrelevant" and the "incorrect" bits please.


GS

[rippleog]

I've been investing in RBS and LLOY ords, both of which I think will have huge excess capital to deal with, and assume shareholders would not want to see them being held hostage by their pref holders.

Have taken a small position in LLPD as a hedge.

I "hedge" against what ?

[GoSeigen]

It seems to me that GS is reading a lot into the Compamies act that is not there.

For example s687 specifically permits redemption from capital, and with that, bang goes the most fundamental point in his first post - that redemption means repayment from profits.

Incidentally, that wasn't the most fundamental point. In fact it wasn't a point at all.

For a start I didn't write "redemption means repayment from profits": that was stockton's adjustment of what I wrote. Here are my exact words in the OP:

-Redemption: repayment out of distributable profits

Further, note that a clause following a colon is generally by way of explanation, expansion or illustration of the word(s) before: it is adding further information.

Inferring the word "means" from that colon is, as I say, stockton's interpretation and not what I intended at all. I intended merely to highlight that reduction of capital is the only mechanism of the three which is effective in reducing the amount of a company's unneeded capital: the other two reduce distributable profits but leave capital unchanged.


GS

[GoSeigen]

Here's a quick cheat sheet to getting your head around this preference share issue.

1. Forget prospectuses. The prospectus simply repeats information found elsewhere, incorporating it by reference or in a reworded form.
2. First read the law. What companies can and cannot do with their shares is prescribed in great detail. Terminology used in describing share rights is derived from the law. It is essential background reading. The Companies Act 2006 is here: https://www.legislation.gov.uk/ukpga/2006/46/contents
3. Next read the Company's Articles -- current articles and articles at the time of issue of the shares. The Companies Acts require certain information to be in the articles. The Articles are where the rights of shareholders are laid out.
GS

Timely illustration of why the above might be needed -- take a look at Chris Nix's posts on this page about Lloyds prefs:

https://www.fixedincomeinvestments.co.u ... s/page/10/

He starts by looking at the prospectus, then goes to the articles, and finally to Company Law. Exactly back to front! No wonder it's confusing at first -- it'll get clearer if he keeps digging.


It would be nice if someone could link to the OP on this thread https://www.lemonfool.co.uk/viewtopic.php?f=52&t=11253 or reply to him on similar lines. I'll be happy to answer any queries he or others may have...


GS

[stockton]

4. Three independent processes for repayment and cancellation of issued shares (including preference shares) are clearly described in Law:
-Redemption: repayment out of distributable profits
-Reduction of Capital: repayment out of capital
-Purchase out of Profits: repayment out of distributable profits

You attempt to make a reasonably logical distinction between redemption and capital reduction but the distinction simply does not stand up to examination. s687 provides two instances where a redemption means a repayment from capital.
The fundamental problem with your argument is that it appears to be impossible to distinguish your "independent" processes, other than arbitrarily.

s687 Financing of redemption
(1)A private limited company may redeem redeemable shares out of capital in accordance with Chapter 5.
(2)Subject to that, redeemable shares in a limited company may only be redeemed out of—
(a)distributable profits of the company, or
(b)the proceeds of a fresh issue of shares made for the purposes of the redemption.

[GoSeigen]

4. Three independent processes for repayment and cancellation of issued shares (including preference shares) are clearly described in Law:
-Redemption: repayment out of distributable profits
-Reduction of Capital: repayment out of capital
-Purchase out of Profits: repayment out of distributable profits

You attempt to make a reasonably logical distinction between redemption and capital reduction but the distinction simply does not stand up to examination. s687 provides two instances where a redemption means a repayment from capital.
The fundamental problem with your argument is that it appears to be impossible to distinguish your "independent" processes, other than arbitrarily.

This may be another misunderstanding then, as I'm not trying to make a logical argument but a semantic one. i.e. I am discussing the meaning of these terms and their distinctiveness. There is no logic involved, just a reading of the 2006 Companies Act. You can point out where I have misread it by all means (as I shall do next!).


s687 provides two instances where a redemption means a repayment from capital.


You use this word "means" again. That is not what s687 in the Act says. It says that the finance for a redemption of a private company's redeemable shares may come from capital. You quoted it below. Every word in my bold is significant and cannot be omitted. You omitted some of them in your above statement in bold.

The section 687 is NOT saying a redemption means a repayment from capital. Even if it did, I was talking about capital reduction not repayment from capital, which you brought up. They are different things.

Here's the wording again:

s687 Financing of redemption
(1)A private limited company may redeem redeemable shares out of capital in accordance with Chapter 5.
(2)Subject to that, redeemable shares in a limited company may only be redeemed out of—
(a)distributable profits of the company, or
(b)the proceeds of a fresh issue of shares made for the purposes of the redemption.

Thanks for your thoughts,

GS

[Wizard]

Here's a quick cheat sheet to getting your head around this preference share issue.

1. Forget prospectuses. The prospectus simply repeats information found elsewhere, incorporating it by reference or in a reworded form.
2. First read the law. What companies can and cannot do with their shares is prescribed in great detail. Terminology used in describing share rights is derived from the law. It is essential background reading. The Companies Act 2006 is here: https://www.legislation.gov.uk/ukpga/2006/46/contents
3. Next read the Company's Articles -- current articles and articles at the time of issue of the shares. The Companies Acts require certain information to be in the articles. The Articles are where the rights of shareholders are laid out.
GS

Timely illustration of why the above might be needed -- take a look at Chris Nix's posts on this page about Lloyds prefs:

https://www.fixedincomeinvestments.co.u ... s/page/10/

He starts by looking at the prospectus, then goes to the articles, and finally to Company Law. Exactly back to front! No wonder it's confusing at first -- it'll get clearer if he keeps digging.


It would be nice if someone could link to the OP on this thread https://www.lemonfool.co.uk/viewtopic.php?f=52&t=11253 or reply to him on similar lines. I'll be happy to answer any queries he or others may have...


GS

My bold.

GS

Why not just register on that site and do it yourself? A little unreasonable to not do that but suggest somebody else do it for you IMHO.

Terry.

[Wizard]

I think he is pushing for the latter...

Wrong. Mark is not pushing to prevent them being bought back in any circumstances. He is not seeking to prevent a fairly priced tender offer. He is trying to prevent a purchase at par pushed through by the holders of the ord's to the disadvantage of the holders of the pref's.

Terry.

Terry there is simply a misunderstanding here: Dod's "in any circumstances" was not a good wording and perhaps I should have pulled him up, but I took him to be referring to the topic of Reduction of Capital not other procedures over which (I think) there is no controversy. Also I took him to be referring to the effect of Mark's changes which would be to hand minority holders a veto over any capital reduction thus making them "unable to be bought out" in a capital reduction. I think if you read Dod's earlier paragraph (quoted below) you will understand the context of the discussion.

I think the question of who is be allowed a say in reduction of capital (by way of repayment of the Prefs for example) is fairly obvious. Everyone who is shareholder, whether a holder of the Prefs or the ordinaries, should be given the right if they do not already have it. WE are talking here of the company as a whole and all the shareholders have an interest in that.

GS

Based on Dods' post a couple of minutes before yours it seems he meant just what he said, it was not his wording that was "not good", rather it was your reading of what he said that was incorrect.

Terry.

[GoSeigen]

You attempt to make a reasonably logical distinction between redemption and capital reduction but the distinction simply does not stand up to examination. s687 provides two instances where a redemption means a repayment from capital.
The fundamental problem with your argument is that it appears to be impossible to distinguish your "independent" processes, other than arbitrarily.

Sorry, my earlier post was written in a huge rush, running out of the door earlier. Could have been better written so will try again.

I'm not sure how familiar you are with the CA2006. It's reasonably well laid out. It is simple to divide the really relevant bits to this discussion into two broad sections:

1. Part 17 A company's share capital
2. Part 18 Acquisition by limited company of its own shares

Part 17 deals with the concept of company capital and how it is manipulated. It is in this section that we find the description of Reduction of Capital. Redemption is barely even mentioned in this part.

Part 18 deals with acquiring shares and introduces both Redemption and Purchase of own shares. Shares cannot just be bought at will by a company. That is the point of this section. Why not? Because doing so uses funds which might be needed to repay the more senior creditors. So the section lays out very specific and carefully regulated circumstances in which a company may acquire its shares.
-One way is by creating a class of redeemable shares described in Chapter 3 of Part 18: these must already have the manner of their purchase fully described at issue [at allotment actually]. The word redemption in CA2006 is about the acquisition of these redeemable shares in accordance with their preset redemption terms and the provisions of Chapter 3. That is the only meaning of the word redemption in the entire Act.
-The other way is by Purchase of Own Shares, described in Chapter 4 of Part 18: these purchases must be approved by a shareholder resolution and must be duly notified. Failure to comply with the provisions is a serious offence.

Purchase of own shares and Redemption are not effective to decrease the company's capital [except in the special case of private companies which you identified under the stringent terms of Chapter 5. This exception is frankly of no relevance to the discussion]. The value of any purchased or redeemed shares has to be matched by an increase in Redemption Reserve, which is not available for distribution so remains part of the company's capital.


These are the three procedures identified in the OP: Reduction of Capital from Part 17, Redemption and Purchase of Shares from Part 17. Hopefully this post provides some background to that brief list.


It should be obvious from the above that redemption is only available for share classes which are redeemable. Shares which don't carry any redemption terms are called irredeemable. Irredeemable shares can only be acquired by Purchase or Reduction of Capital. Shares which have no maturity date (compulsory redemption date) are called perpetual (though of course they may be redeemable and are always liable to purchase or capital reduction as far as CA2006 alone is concerned!).

GS

[Alaric]

Irredeemable shares can only be acquired by Purchase or Reduction of Capital.

But what, if anything, does the Act say or imply about the price at which this should take place?

[GoSeigen]

Irredeemable shares can only be acquired by Purchase or Reduction of Capital.

But what, if anything, does the Act say or imply about the price at which this should take place?

There's a searchable pdf version of the Act here:

https://www.legislation.gov.uk/ukpga/20 ... 046_en.pdf

Please share what you find out.

GS

[johnhemming]

I understand Northern Engineering was a court of appeal case where the court said that a separate class vote was required if the terms and conditions explicitly stated that repaying the prefs as a consequence of a reduction of capital was an abrogation of the rights of the shares. I have not been able to find the judgment on this - if anyone can find a link that would be helpful, but notwithstanding the various companies act it is quite clear that there are circumstances in which a class vote is required.

[stockton]

It should be obvious from the above that redemption is only available for share classes which are redeemable. Shares which don't carry any redemption terms are called irredeemable.

No ! You are reading something into the paragraphing of the Act which is not present in the text (and it appears that to do so, you have to ignore part of the text).
And shares without redemption terms are called "undated".

[GoSeigen]

It should be obvious from the above that redemption is only available for share classes which are redeemable. Shares which don't carry any redemption terms are called irredeemable.

No ! You are reading something into the paragraphing of the Act which is not present in the text (and it appears that to do so, you have to ignore part of the text).
And shares without redemption terms are called "undated".

I didn't claim that it was in the text**. The last paragraph, which you quoted from, was my own conclusion ("it should be obvious from the above") and observation on common legal usage of those words. I'd of course defend those usages as compatible with the Act.


Here are usage examples illustrating that paragraph:

http://www.lloydsbankinggroup.com/globa ... pectus.pdf

"irredeemable" vs "redeemable":
[page 21]
Lloyds TSB 9.25% Preference Shares
[...]the Preference Shares will be irredeemable instruments.
cf.
Lloyds TSB 6.475% Preference Shares
[...]all or some only of the Preference Shares are redeemable, at the option of the Company,

"perpetual":
[page 30]
Redemption
The Preference Shares are perpetual securities and have no maturity date. However, all or some only of the Preference Shares are redeemable, at the option of the Company,

Note that these shares are described in the document as perpetual, having no maturity date, yet are also described as redeemable.


Re "undated"; this usage is rare with shares and usually applied to debt. From google:
-"undated preference share": 112 results
-"undated subordinated bond" 1100 results


GS
(** "irredeemable" and "perpetual" actually do appear in the Act but only in the context of Debentures so I've always ignored those mentions.)

[stockton]

Re "undated"; this usage is rare with shares and usually applied to debt. From google:
-"undated preference share": 112 results
-"undated subordinated bond" 1100 results

Those figures suggest that the usage is normal: there are far more bonds than preference shares.

[GoSeigen]

I understand Northern Engineering was a court of appeal case where the court said that a separate class vote was required if the terms and conditions explicitly stated that repaying the prefs as a consequence of a reduction of capital was an abrogation of the rights of the shares. I have not been able to find the judgment on this - if anyone can find a link that would be helpful, but notwithstanding the various companies act it is quite clear that there are circumstances in which a class vote is required.

John, you linked to details of the case yourself in an earlier post. Maybe try looking back at your posts/internet history?


The use of the word "notwithstanding" above implies a belief that the Companies Acts exclude " circumstances in which a class vote is required". This is not the case. CA2006 explicitly allows companies to define stricter conditions for Reduction of Capital in their Articles:


https://www.legislation.gov.uk/ukpga/20 ... chapter/10

Chapter 10 Reduction of share capital
(6)This Chapter (apart from subsection (5) above) has effect subject to any provision of the company's articles restricting or prohibiting the reduction of the company's share capital.



It was demonstrated earlier in this thread that HBOS plc had such a form of words in their Articles in reference to the predecessor of LLPC/D (LBG prefs).

Those figures suggest that the usage is normal: there are far more bonds than preference shares.

Happily concede the point. Getting off-topic now...

GS

[johnhemming]

John, you linked to details of the case yourself in an earlier post. Maybe try looking back at your posts/internet history?

I have only found a summary. It is one of the butterworths reporting in the court of first instance which is about 5K to get access to. It would take going to a law library probably and I don't have the time for that.