Preference shares -- keeping it simple
Posted: April 17th, 2018, 5:10 pm
Mark Taber and others repeatedly refer to the "muddle" surrounding preference shares and the methods by which they can be repaid, a muddle which is much of their own making. It was decided at the outset that considering the subtleties of the law was not necessary: Aviva's behaviour was plainly shameful and unprecedented and the entire City was in uproar. Hence the ongoing confusion, IMO -- for the law is long established and pretty clear if only one would study it.
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.
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
5. Details are in the Articles: Each process in 4. is subject to the Law but also to precise terms typically laid out in separate clauses of Company Articles i.e. there will be clauses dealing with each of Purchase, Reduction of Capital and Redemption (if applicable).
6. If there is no Redemption feature a share class might be described as "not redeemable" or "irredeemable". There is no wider meaning to the word: shares labelled irredeemable may still nevertheless be repaid either by Purchase or Capital Reduction. Sadly investors have put too much store by their own overly broad interpretation of the word "irredeemable".
Why did Aviva "suddenly" discover that they could repay their prefs? Well, for long periods it hasn't been relevant or possible; it is only recently that companies are awash with excess capital AND their preference shares have become painfully expensive and/or useless as capital and are trading far above par. Reduction of capital is intrinsically cooperative: the company, its creditors and its shareholders must all agree it is in their respective interests to repay capital. In most instances all these factors do not coincide, so what Aviva hoped to do is only possible quite rarely. There is IMO no loophole to close to prevent sneaky twisting of the law by crooked legal minds!
GS
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.
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
5. Details are in the Articles: Each process in 4. is subject to the Law but also to precise terms typically laid out in separate clauses of Company Articles i.e. there will be clauses dealing with each of Purchase, Reduction of Capital and Redemption (if applicable).
6. If there is no Redemption feature a share class might be described as "not redeemable" or "irredeemable". There is no wider meaning to the word: shares labelled irredeemable may still nevertheless be repaid either by Purchase or Capital Reduction. Sadly investors have put too much store by their own overly broad interpretation of the word "irredeemable".
Why did Aviva "suddenly" discover that they could repay their prefs? Well, for long periods it hasn't been relevant or possible; it is only recently that companies are awash with excess capital AND their preference shares have become painfully expensive and/or useless as capital and are trading far above par. Reduction of capital is intrinsically cooperative: the company, its creditors and its shareholders must all agree it is in their respective interests to repay capital. In most instances all these factors do not coincide, so what Aviva hoped to do is only possible quite rarely. There is IMO no loophole to close to prevent sneaky twisting of the law by crooked legal minds!
GS