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Switch from Bank Pref to Equity

GoSeigen
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Re: Switch from Bank Pref to Equity

#377369

Postby GoSeigen » January 15th, 2021, 9:56 am

johnhemming wrote:
GoSeigen wrote:The issue of a class vote is not statutory but contractual. Given there are thousands of companies (millions?) with shares I doubt it's practical or in anyone's interest for the FCA to carry out this sort of exercise. As always if you invest in shares DYOFR.

When I last did the research on this there was also EU law that applied which required a class vote.

I am not suggesting that the FCA do that sort of exercise. I am suggesting that if companies have hybrid instruments listed on public exchanges that they should publish a phrase which explains what their understanding of the mixture of statutory (including EU law carried forward notwithstanding Brexit) and contractual law that applies. The FCA should require this.


They are compelled to do this already. It's called their Articles of Association and is available on the Companies House website. The articles only cover this esoteric topic but also all kinds of other situations affecting these hybrid securities. I really highly recommend reading them!

GS
EDIT: Fixed spelling, added URL.

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Re: Switch from Bank Pref to Equity

#377424

Postby johnhemming » January 15th, 2021, 11:24 am

GoSeigen wrote:They are compelled to do this already. It's called their Articles of Association and is available on the Companies House website. The articles only cover this esoteric topic but also all kinds of other situations affecting these hybrid securities. I really highly recommend reading them!

It does not cover the interplay between these and EU law (and I know we have left now).

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Re: Switch from Bank Pref to Equity

#377704

Postby stockton » January 16th, 2021, 9:20 am

johnhemming wrote:It does not cover the interplay between these and EU law (and I know we have left now).

What puzzles me about the whole FCA statement is Para. 4.3 which states that:
Nevertheless (due to the terms under which the shares were issued and section 641 of the Companies Act 2006) Aviva has the ability to cancel the shares at par, subject to a shareholder vote and court approval.


However if we read section 641
641 Circumstances in which a company may reduce its share capital
(1) A limited company having a share capital may reduce its share capital.....…........................

it does not support that thesis at all – it simply says that a company is not prohibited from reducing its share capital in certain circumstances.

I wonder which lawyers the FCA has consulted as it is almost as if a continental understanding of the word “may” has crept into the interpretation of British law.

What is the JohnHemming understanding of the word “may” ? Were you not involved in the passing of this bill ?

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Re: Switch from Bank Pref to Equity

#377710

Postby scrumpyjack » January 16th, 2021, 9:44 am

I have no particular interest in this issue and do not hold any prefs now, though I did have a substantial holding in some several decades ago.

The point I would make is that whatever sharp lawyers may think the law is, the courts can, and often do, rule that the wording should be interpreted in a way that is fair and reasonable and not necessarily as the precise legal interpretation might be argued to be. The latest example was yesterday in the supreme court ruling on the Business Interruption case. I watched Lord Hamblen give his judgement and it is full of that line of thinking.

I can quite understand the FCA not wanting to get involved in a hypothetical argument. The judges may well decide that irredeemable means what it says and that one class of shareholder (ordinary) cannot vote unilaterally to suppress unfairly the rights of another (prefs)

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Re: Switch from Bank Pref to Equity

#377712

Postby johnhemming » January 16th, 2021, 9:51 am

stockton wrote:What is the JohnHemming understanding of the word “may” ? Were you not involved in the passing of this bill ?

We did have an interesting discussion about this in the vires joint select committee on statutory instruments, but it is not really this bill that matters so much as the EU legislation which may or may not have been retained post brexit.

It may be the case that a class vote is required to reduce capital for a class of hybrid securities. I am not inclined to do the legal research on this as it will take a good bit of time and what I think is needed is for the FCA to require companies to give guidance to the market.

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Re: Switch from Bank Pref to Equity

#377741

Postby GoSeigen » January 16th, 2021, 11:31 am

scrumpyjack wrote:I have no particular interest in this issue and do not hold any prefs now, though I did have a substantial holding in some several decades ago.

The point I would make is that whatever sharp lawyers may think the law is, the courts can, and often do, rule that the wording should be interpreted in a way that is fair and reasonable and not necessarily as the precise legal interpretation might be argued to be. The latest example was yesterday in the supreme court ruling on the Business Interruption case. I watched Lord Hamblen give his judgement and it is full of that line of thinking.

I can quite understand the FCA not wanting to get involved in a hypothetical argument. The judges may well decide that irredeemable means what it says and that one class of shareholder (ordinary) cannot vote unilaterally to suppress unfairly the rights of another (prefs)


I'm afraid you are very much mistaken. Courts have already ruled on this very issue and found that far from the rights of the other class being violated, repayment of preference shares is REQUIRED by the rights of those shares because they are entitled to return of their capital in advance of the ordinary shareholders. The price of the payment is explicit in the terms of the shares (usually par); the courts have ruled that this fair and reasonable as it is the price that the parties agreed to and documented in the contract. [Incidentally I don't think that it's hard for anyone intelligent to appreciate that the quid pro quo for being paid first is that you receive a fixed price -- i.e. you do NOT have an equity stake in the earnings of the business. This is such a common situation that it is astonishing to me that some pref holders believe they should have an equity stake, which is what being paid a market price would imply.]

There is absolutely no sharp practice involved here: what Fools are upset about is that they had decided the shares were worth some 160% of par or more without considering what might happen if the shareholders voted for a return of capital... and then discovered that they would only receive par in that case. Anyone faced with this revelation of their own misapprehension would naturally look for other people to blame or other ways to lessen the sense of loss and discomfort.


GS

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Re: Switch from Bank Pref to Equity

#377742

Postby GoSeigen » January 16th, 2021, 11:36 am

johnhemming wrote:
GoSeigen wrote:They are compelled to do this already. It's called their Articles of Association and is available on the Companies House website. The articles only cover this esoteric topic but also all kinds of other situations affecting these hybrid securities. I really highly recommend reading them!

It does not cover the interplay between these and EU law (and I know we have left now).


Okay you've mentioned this several times, I'm going to call your bluff. Please lay out how you think EU law affects this issue and please quote and link to the specific law you rely on. Otherwise, kindly withdraw the assertion or ask to have your post deleted. This issue has been covered before. I see no reason to bring it up in this context if you cannot explain what you mean.


GS

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Re: Switch from Bank Pref to Equity

#377748

Postby johnhemming » January 16th, 2021, 11:51 am

GoSeigen wrote:Okay you've mentioned this several times, I'm going to call your bluff. Please lay out how you think EU law affects this issue and please quote and link to the specific law you rely on. Otherwise, kindly withdraw the assertion or ask to have your post deleted. This issue has been covered before. I see no reason to bring it up in this context if you cannot explain what you mean.

I can explain it.

I previously found an EU regulation (I think it was) which required a class vote for the return of capital.

Now this has some questions:

a) Has this EU regulation been incorporated into UK law?
b) What happens in court when this issue is argued what precedents are?

As to question a) I don't know and I am not inclined to spend the time looking this up.

I don't think we have an answer to question b).

This, however, falls into the territory of something where
a) I don't mind if you don't agree with me.
b) It may take a material time to hunt down the references.

I think I have posted the references in the forum before and I will spend a few minutes trying to find it in the search on this forum.

However, the simple fact that we disagree means there is some uncertainty.

EDIT: I have tried using various searches. It may be that discussions from the aviva debate have been archived, but I only have 12 results for me as author and "vote" which I think is low. However, I cannot find it and I have promised that I will go out for our state permitted exercise momentarily.

Hence this falls into the category of something where we will have to agree to disagree.

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Re: Switch from Bank Pref to Equity

#377782

Postby stockton » January 16th, 2021, 1:45 pm

johnhemming wrote: it is not really this bill that matters so much as the EU legislation which may or may not have been retained post brexit.

There are a variety of entirely separate arguments as to why the cancellation of these prefs. is not permissible and those arguments need to be kept apart - not confused as you seem to do.
The bill matters because it is repeatedly cited by those in favour of cancellation at par, and the opinions of those who voted for the bill are clearly relevant to determining its meaning. GS obviously sees something in that para.641 that I believe to be absent.
https://www.legislation.gov.uk/ukpga/20 ... chapter/10
The opinions of others would also be interesting.

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Re: Switch from Bank Pref to Equity

#377797

Postby johnhemming » January 16th, 2021, 2:09 pm

stockton wrote:There are a variety of entirely separate arguments as to why the cancellation of these prefs. is not permissible and those arguments need to be kept apart - not confused as you seem to do.

What I am saying is that there remains some uncertainty and I think it would be better to have certainty.

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Re: Switch from Bank Pref to Equity

#377808

Postby 88V8 » January 16th, 2021, 2:43 pm

stockton wrote:..... GS obviously sees something in that para.641 that I believe to be absent.
https://www.legislation.gov.uk/ukpga/20 ... chapter/10
The opinions of others would also be interesting.

Perhaps GS knows what para (2) means.

I suspect that GS is right, it may be possible to conjure Prefs out of existence via a capital reduction. On that basis I sold most of my Prsfs, as I previously remarked, save only AVA/B, BWRA, ELLA, NWBD.

Where I take issuer is in the use of the word Irredeemable in the title. My Monopoly set does not use this word, my Preference Shares Are Due has no such puffery.

And if I think of the offset in entitlement, I think of having prior entitlement to dividends and in return giving up the prospect of long-term capital and dividend growth. I am not motivated by having first dibs if the company goes bust, and I doubt that any other investor is.

Irredeemable conveys something more akin to the pyramids, not an Ikea wardrobe. If I buy a car I should not need first to read 200 pages of service manual and the Road Traffic Acts to understand what I have bought.

V8

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Re: Switch from Bank Pref to Equity

#377812

Postby johnhemming » January 16th, 2021, 3:05 pm

I thought I would look at my files and I found a submission I wrote a while ago about GACA. That contains quite a bit, but there is:

https://eur-lex.europa.eu/legal-content ... 32017L1132

Article 74

Reduction in the subscribed capital in case of several classes of shares

Where there are several classes of shares, the decision by the general meeting concerning a reduction in the subscribed capital shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction.

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Re: Switch from Bank Pref to Equity

#377842

Postby GoSeigen » January 16th, 2021, 4:39 pm

johnhemming wrote:I thought I would look at my files and I found a submission I wrote a while ago about GACA. That contains quite a bit, but there is:

https://eur-lex.europa.eu/legal-content ... 32017L1132

Article 74

Reduction in the subscribed capital in case of several classes of shares

Where there are several classes of shares, the decision by the general meeting concerning a reduction in the subscribed capital shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction.


Yes, and I explained at the time that it is settled common law that the rights of the preference share class in this case are NOT affected by the transaction. On the contrary their rights to prior payment are being respected. So the hypothetical Aviva capital reduction would be entirely in line with that law.

GS

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Re: Switch from Bank Pref to Equity

#377854

Postby johnhemming » January 16th, 2021, 5:16 pm

GoSeigen wrote:
johnhemming wrote:I thought I would look at my files and I found a submission I wrote a while ago about GACA. That contains quite a bit, but there is:

https://eur-lex.europa.eu/legal-content ... 32017L1132

Article 74

Reduction in the subscribed capital in case of several classes of shares

Where there are several classes of shares, the decision by the general meeting concerning a reduction in the subscribed capital shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction.


Yes, and I explained at the time that it is settled common law that the rights of the preference share class in this case are NOT affected by the transaction. On the contrary their rights to prior payment are being respected. So the hypothetical Aviva capital reduction would be entirely in line with that law.

Its a "reduction in the subscribed capital" and requires a separate vote for each class.

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Re: Switch from Bank Pref to Equity

#377878

Postby GoSeigen » January 16th, 2021, 5:54 pm

johnhemming wrote:
GoSeigen wrote:
johnhemming wrote:I thought I would look at my files and I found a submission I wrote a while ago about GACA. That contains quite a bit, but there is:

https://eur-lex.europa.eu/legal-content ... 32017L1132



Yes, and I explained at the time that it is settled common law that the rights of the preference share class in this case are NOT affected by the transaction. On the contrary their rights to prior payment are being respected. So the hypothetical Aviva capital reduction would be entirely in line with that law.

Its a "reduction in the subscribed capital" and requires a separate vote for each class.


You didn't read the law that you quoted!! [EDIT: I mean you only quoted half of it -- the half that suited your view]

Here it is:

shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction.

GS

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Re: Switch from Bank Pref to Equity

#377883

Postby johnhemming » January 16th, 2021, 6:07 pm

GoSeigen wrote:You didn't read the law that you quoted!! Here it is:
shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction.

I think this is a question of interpretation which obviously has not been considered by the courts because the case which considered this was some time ago. (I don't remember precisely the date) and did not consider this directive.

Putting it this way What is the sense of specifying a separate class vote specifically for reductions of capital if it is not considered that a reduction of capital affects the rights of the shareholders.

I read it as requiring a class vote for the class of shareholders who are subject to the return of capital. You read it differently. That's fair enough. It would have to be tested in court. I cannot myself see the sense of having such a clause specifically for return of capital if it is not intended that return of capital is intended to be subject to a separate vote for each class.

Otherwise it would be a meaningless Article.

In any event all that this does is to confirm that there is no certainty.

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Re: Switch from Bank Pref to Equity

#378159

Postby stockton » January 17th, 2021, 8:12 pm

johnhemming wrote:What I am saying is that there remains some uncertainty and I think it would be better to have certainty.
I am not sure that certainty at any price is a good idea.
At the moment, to judge from current prices, "the market" has decided that it is not having any of this nonsense and that any attempt at par cancellation will be voted down by the institutional holders of ordinary shares.
This is obviously unstable and unsatisfactory but is probably better than having the FCA make a fool of themselves.
For that reason it would seem preferable to ask the FCA about their already-published statements rather trying to push them into some sort of decision.

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Re: Switch from Bank Pref to Equity

#378161

Postby johnhemming » January 17th, 2021, 8:21 pm

stockton wrote:I am not sure that certainty at any price is a good idea.

I understand where you come from on this, but as I see it there remains the opportunity to be blindsided by an institution.

My personal view is that the law is quite clear, but obviously I disagree with GS (who we should respect for giving us a solid argument for a different perspective).


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