Until recently, most people would probably have agreed that (with one or two notable exceptions) there had not been any significant rights issues by UK listed companies since the early 1990s. However, with the ground-breaking 5.9 billion rights issue announced by BT plc in May 2001 and then those undertaken recently by European insurers such as Legal & General and Zurich, there are signs that the rights issue is coming back into vogue as a means of raising fresh capital.
There are a number of commercial reasons why companies are now announcing rights issues. However, a "common thread" is the need to address certain legal issues which arise. This note contains a refresher on some key legal issues and a reminder of the principal stages in a rights issue timetable.
THE BASIC FEATURES OF A RIGHTS ISSUE
A rights issue has four basic elements:
existing shareholders are offered the right to subscribe new shares in proportion (more or less) to their existing shareholdings;
the new shares will be subscribed in cash and are typically offered at a discount to the market price of the shares;
a shareholder can realise value by selling his rights to subscribe new shares "nil paid"; and
a shareholder can also receive cash for taking no action at all, if the shares that he could have subscribed are sold in the market on his behalf at a price which exceeds the subscription price offered to him.
Rights issues are also usually (but not always) underwritten by the investment bank(s) advising the corporate issuer. The underwriter's obligation is to subscribe any new shares which existing shareholders do not take up and which cannot then be sold into the market by the investment bank to third parties. In certain cases, however, a decision is taken not to have the rights issue underwritten because the extent of the discount to the open market price offered is deemed so attractive as effectively to guarantee the success of the new issue.
Clearly, underwriting is an important commercial issue for corporates and financial advisers alike to address. The longer the period between announcing the rights issue and expiry of the period for "nil paid" dealings (see below), the more expensive underwriting can be expected to be.
SOME LEGAL ISSUES
As a rights issue involves the issue of new shares, it is important to check that the issuer has sufficient authorised but unissued share capital and that the directors are authorised under Section 80 Companies Act...