Rights issues

Rights Issue

What is it ?

A rights issue in simple terms is the offer of new shares to the current members of a company. It will generally (depending on the terms of the articles of association and any shareholders agreement that is in place) be made to the members pro rata, in direct proportion to their existing shareholding, additionally the new shares under the rights issue are generally to be subscribed for in cash and often with a discount to the current market price.

When to consider a rights issue

Often rights issues take place where the company requires additional finance for example if they need to repay a debt, refinance a loan, make an acquisition or raise finance for a specific reason.

A rights issue is in contrast with a public offering whereby the shares are offered to the general public, although often for the same reasons as a rights issue, such as raising capital for a proposed acquisition etc. If a rights issue does not raise the required funds then if it is a public company the second stage will often be to have a public offering.

Internal formalities

Depending on the terms of the articles of association and the shareholders agreement (if any) a company will need to pass certain resolutions to ensure that they can carry out the proposed rights issue. The company should pass resolutions under s551 and s561 of the Companies Act 2006. s551 provides authority for the proposed allotment and s561 is a disapplication of any pre-emption rights. The company could pass these  on an annual basis or as and when required.

The resolution which the company has to pass authorising the directors to allot shares is an ordinary resolution (unless the Articles of Association or shareholders agreement provide otherwise).  In a private company where there are minority shareholders it can be advisable that the directors are not granted an authority to allot without the express approval of all of the shareholders. This will prevent a situation whereby one party’s shareholding is diluted by a rights issue or under their pre-emption rights they are entitled to purchase further shares but do not have the ready funds or inclination to do so. This protection can be included in both the Articles or more commonly in a shareholders agreement.

The resolution under s 561 of the Companies Act 2006 is a special resolution (under s570 dissaplication of pre-emption rights).The resolution will be conditional on the ordinary resolution under s551 being passed first by the Company and should be expressed to be  so conditional. As it is a special resolution it must be filed at companies house within 15 days of it being passed to ensure compliance with the Companies Act 2006.

A special resolution is passed if 75% of the shareholders entitled to vote, vote in favour of it. 14 days notice is required for a meeting at which a special resolution is to be proposed. A special resolution can also be circulated and passed by way of a written resolution. (s283 Companies Act 2006). It must state that it is proposed as a special resolution and the text of the resolution must be included in the notice sent to the members.

There may be a situation whereby there is a rights issue just in respect of a particular class of shares. The directors will need to ensure that the pre-emption rights of that particular class is dealt with specifically and the resolution is passed by the 75% majority of that class rather than as a whole.