Suggested guidelines for Listed company fundraisings, to protect Private Investors interests

1st Apr '14 by Paul Scott

13 comments 13862 reads

Hi,

I'm becoming increasingly hacked off with the structure of smaller company fundraisings, where Private Investors ("PIs") are often frozen out completely, and heavily diluted, when companies raise fresh funding through a Placing to favoured Institutions and individuals.

Therefore I've asked ShareSoc to look into this issue, and to come up with some guidelines which could then be promoted in the City, so that companies and brokers can demonstrate that they take their PI shareholder base seriously, by complying with the new ShareSoc guidelines on fundraisings.

To start the discussion going, I've created this new thread, and have set out below my own suggestions for what these new guidelines could contain. Share Soc and individual PIs could then monitor all company fundraisings, and using a scorecard report on how every fundraising ranks in compliance with our guidelines.

So here are my suggested guidelines on listed company fundraisings;

1. The principle of pre-emption rights should be given the priority that company law intended - i.e. existing shareholders should always be offered new shares in preference to new shareholders - therefore an Open Offer to existing shareholders should be the default method of fundraising.

2. Where a Placing is used (e.g. for speed, and to underpin a larger offer of new shares), it should always be matched by an Open Offer for AT LEAST the same number of shares being made available at the same price to existing shareholders.

3. The maximum discount to average market price (in the preceding x number of days) with a Placing should be 10%. If the price discount is more than 10%, then an equal-sized (or larger) Open Offer must be made to existing shareholders.

4. A small Placing (under 10% dilution) at close to the current market price (less than 10% discount) should be permissible, but no more than once per annum.

5. Adviser fees should be minimised, and may not be necessary at all, as small Placings could be arranged privately. A 50:50 Firm Placing:Open Offer should not need underwriting at all.

6. Companies should maintain a list of existing shareholders who are able and willing to take up new shares (with a minimum of say £10k), and contact them first in the event of a Placing being decided upon.

7. Shares should be immediately suspended when a company decides to raise new funds, to stop…

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About the Author

Paul Scott

Premium Member

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

13 comments

marben100

1st Apr '14

Whilst I am very supportive of this concept and particularly like the idea of suspending shares whilst a fundraising takes place (standard practice in some other markets, e.g. ASX), some of the suggestions (e.g. maintaining & contacting a list of potential placees) might conflict with FSMA rules (stock promotion/marketing), unless the potential placees are professional investors. To comply, probably needs to be done via private client brokers.

Cheers,

Mark

emptyend

1st Apr '14

Hi Paul,

I instinctively empathise with your frustrations. However, as one with some very recent experience of these issues from the corporate standpoint, I should point out that there are massive practical issues in this area and, in fact, a number of your suggestions are either unworkable, or against shareholders' interests in that they could imperil the company concerned. I comment below:

I'm becoming increasingly hacked off with the structure of smaller company fundraisings, where Private Investors ("PIs") are often frozen out completely, and heavily diluted, when companies raise fresh funding through a Placing to favoured Institutions and individuals.

I understand that. However, the absolute priority for a company is usually to raise a specified minimum amount of cash - and a firm placing can achieve that, but a rights issue (unless fully underwritten) or an open offer cannot! You need look no further than some recent open offers for proof - in the E&P sector ....12% take-up and 33% take-up in an open offer. Without the placing funds providing the minimum requirement in such circumstances, the outcome could be disastrous.

1. The principle of pre-emption rights should be given the priority that company law intended - i.e. existing shareholders should always be offered new shares in preference to new shareholders - therefore an Open Offer to existing shareholders should be the default method of fundraising.

I explain above why this idea is just flat-out wrong and potentially extremely dangerous for all existing shareholders, unless the company is raising funds in an extremely strong market. Furthermore, (pre-placing) shareholders have the ability to vote down resolutions relating to the placing in an EGM (and in many cases - depending on the specific company mem&arts - this vote demands more than a simple majority)

2. Where a Placing is used (e.g. for speed, and to underpin a larger offer of new shares), it should always be matched by an Open Offer for AT LEAST the same number of shares being made available at the same price to existing shareholders.

The idea behind this point is perfectly reasonable - and indeed I have argued this broad principle myself. However, the key point here is not that there should be "AT LEAST the same number of shares" - it is that existing shareholders should have ample opportunity to buy as many shares as they wish in order to avoid dilution. A perfectly-sized Open Offer would have 99.9% take-up.

However, there are two practical points:

a) it is very difficult indeed to guess at the likely take-up in an Open Offer. Actually it is completely impossible - and I know (to my chagrin) that it is possible to be massively wrong on this. It is therefore difficult to size it correctly so that the Open Offer is substantially taken-up.

b) it is common for potential Placees to try to demand limits on the Open Offer, so as to minimise their own dilution and to bolster the after-market share price performance (often to enable them to get out with a quick profit!). Clearly managements must try their damnedest to resist such limitations that may restrict the ability of existing shareholders to participate - but this is often a key negotiating point, however unfair it may appear from the outside. And IMO this is a key area of focus, because the placing broker has divided loyalties to his clients on both sides of the trade.

3. The maximum discount to average market price (in the preceding x number of days) with a Placing should be 10%. If the price discount is more than 10%, then an equal-sized (or larger) Open Offer must be made to existing shareholders.

Again the thought behind this is perfectly reasonable. I would argue (and have done so) that the bigger the discount the more crucial it is to ensure that the Open Offer is sufficiently large that no-one suffers unwanted dilution. However, I can also point to a flipside here. If everyone has all the shares they want, then the tendency can be for the shares to then drift below the price of the placing and the open offer in the aftermarket - because giving as many shares to the market as everyone wants usually removes all the price tension from the market by removing all of the buyers who are interested in the shares. Obviously there are some rare cases where even with a massive open offer there remains unsatisfied demand for shares but in general this is not the case.

4. A small Placing (under 10% dilution) at close to the current market price (less than 10% discount) should be permissible, but no more than once per annum.

Virtually all companies can already disapply pre-emption rights and issue shares for dilutions of between 5% and 10%. They obtain this authority annually via a specific resolution at the AGM. There is no discount test but typically the discounts are small (or non-existent - and in rare occasions may even be at a premium).

5. Adviser fees should be minimised, and may not be necessary at all, as small Placings could be arranged privately. A 50:50 Firm Placing:Open Offer should not need underwriting at all.

If there is a placing then by definition it is not underwritten (Placees commit via Placing Letters prior to the announcement). Open Offers also are not usually underwritten. However, fees and expenses can be substantial for even modest placings and open offers. This is because there is a requirement to publish a full prospectus, every word of which is legally verified or specifically signed-off by the advisors and directors. It also has to be written and edited - which itself can be a major task. Similar considerations apply to any written presentation provided to potential investors. The result is that probably 1000-1500 pages of documents have to be prepared and approved by multiple parties, including brokers, listing authorities and lawyers. That does NOT come cheap, unfortunately - and the cost is largely fixed, irrespective of the size of the fund-raising (so large fund raisings should be much cheaper in percentage terms).

6. Companies should maintain a list of existing shareholders who are able and willing to take up new shares (with a minimum of say £10k), and contact them first in the event of a Placing being decided upon.

This is an idea which has great appeal but again there are some practical issues:

a) Reliability of the potential placee. Can an individual be relied upon to behave completely like an insider and not disclose any information? In many cases the answer will be yes - but it only takes ONE person to leak information and the entire fund-raising is potentially jeopardised!

b) Timing. How do you treat someone who expressed an interest two years ago and whose investing focus has long moved on?

c) Amount. A £10k threshold is far too low from a practical standpoint. You need 100 such investors to raise £1mn - and that imposes a huge burden of administration and control ......which somebody (ie shareholders!!!!) would have to pay for!

7. Shares should be immediately suspended when a company decides to raise new funds, to stop the clearly widespread practice of insider dealing which currently occurs.

This is an interesting idea and one that I have previously tossed around in my mind. However, there are some potentially-large risks to existing shareholders:

a) Loss of liquidity. This is obvious really, but you can't buy or sell shares until the situation is resolved. So if you need to sell to buy a house or a car then that is just tough. This is an issue because such fund-raising halts would (or should) be quite unpredictable!

b) The documentation process I refer to (in 5) above doesn't happen overnight! It can and does take months before a fund-raising can be put into the market. At what stage would you want a trading halt?

c) I suspect you are assuming that all proceeds smoothly to a conclusion and can be wrapped up in a couple of weeks? Sadly that isn't always the case. If this proposal was adopted then some investors are likely to suffer many months of lost liquidity - and perhaps will end up with a locked-in loss when that period finishes.

8. A time limit of 2 weeks should be placed on the suspension of shares related to a fundraising.

So......what happens when you get to the end of two weeks and the fundraising hasn't been completed? I'll answer that - the shares plummet and the company is forced out of existence.

9. Where a Placing and Open Offer happen at the same time, then the Open Offer should take priority, and if over-subscribed should claw back shares from the Placing (in situations where there is both a Firm Placing and an additional Placing, in conjunction with an Open Offer).

This is commonly adopted at present in these situations.

So, Paul, in sum I have to say that this whole field is fraught with real and very serious practical problems - and I would very strongly counsel you and ShareSoc to take the most serious account of them. As you might expect, I have given regular and very considerable thought to exactly this range of issues - and I have to say that it is a much more complex issue than I had thought at the outset (even with my market experience). There is almost certainly no "perfect answer" that both ensures that the company gets the money and that all investors are always going to be happy (other than a very very expensive fully-underwritten rights issue - if a smaller company can find anyone prepared to do one in today's world!)

I'm happy to comment on any other suggestions.

cheers

Paul Scott

1st Apr '14

Hi EE,

Many thanks for such a detailed reply (how did you type all that so quickly?!!).

Just to clarify, I'm not suggesting that there is a one-size-fits-all set of rules that could be introduced, but more a set of guiding principles that company fundraisings should at least try to achieve, whilst recognising that there will be some situations (e.g. financial distress, and/or bear markets) where a quick Placing is the only option.

Coming back to you on your specific points (with your comments in quote marks);

I understand that. However, the absolute priority for a company is usually to raise a specified minimum amount of cash - and a firm placing can achieve that, but a rights issue (unless fully underwritten) or an open offer cannot! You need look no further than some recent open offers for proof - in the E&P sector ....12% take-up and 33% take-up in an open offer. Without the placing funds providing the minimum requirement in such circumstances, the outcome could be disastrous.

The E&P sector is a bad example really, as it's so difficult to raise money there, and most are not really proper businesses, they're special situations - i.e. projects that need to keep raising money, and will just stop if investors decide not to continue support. So I don't think you could come up with any meaningful rules or guidelines to deal with the wide range of special situations there.

However, for normal companies - i.e. profitable, which want to raise money for expansion or a takeover deal, then raising funds should not prove particularly difficult in a market like the one we have today.

So my proposals are that a Firm Placing is fine to act as the cornerstone of a fundraising, but that companies should match that with an Open Offer for the same amount (at least), and at the same price.

In some circumstances it might be necessary to just rush through a Placing only, in which case fine - as long as the company & broker explain why, then nobody can complain. What we are seeing at the moment though is a Placing dominating the fundraising (e.g. with £SNTY), and a derisory £0.5m Open Offer tacked on, intended to appease existing shareholders, yet it's only a 1 for 32 entitlement! So it has actually agrgavted existing holders. The costs of doing this Open Offer are probably not far off the funds raised from doing it, so it's surely the worst of both worlds in this case? Far better would have been a Firm Placing of £2.5m, and an Open Offer of £2.5m. Set them both at an attractive price, and people will take up their entitlement, or over-apply (I would have backed up the truck at 250p a share for Synety, but was not given the opportunity).

To my mind it therefore needs a guideline for the ideal route to take, in normal circumstances, with wiggle room for special situations where such a guideline is not practical for whatever reason.

a) it is very difficult indeed to guess at the likely take-up in an Open Offer. Actually it is completely impossible - and I know (to my chagrin) that it is possible to be massively wrong on this. It is therefore difficult to size it correctly so that the Open Offer is substantially taken-up.

I think this comes back to special situations. The vast majority of Open Offers that I have taken part in over the last 15 years have gone according to plan, with a high take up. This can be driven by a deeper discount if necessary, as Costain (LON:COST) recently did for example. It's only really high risk, special situations, or where the Open Offer price has been set too high, that go wrong. If in doubt, just deepen the discount to a point where people will effectively be obliged to take up their entitlement. Again, I'm talking here just for normal companies, not distressed situations.

b) it is common for potential Placees to try to demand limits on the Open Offer, so as to minimise their own dilution and to bolster the after-market share price performance (often to enable them to get out with a quick profit!). Clearly managements must try their damnedest to resist such limitations that may restrict the ability of existing shareholders to participate - but this is often a key negotiating point, however unfair it may appear from the outside. And IMO this is a key area of focus, because the placing broker has divided loyalties to his clients on both sides of the trade.

Anyone behaving in that way should be shown the door. Directors need to fight for their existing shareholders interests above all else, and if they allow potential Placees & the broker to walk all over them, then they are failing in their duties!

Virtually all companies can already disapply pre-emption rights and issue shares for dilutions of between 5% and 10%. They obtain this authority annually via a specific resolution at the AGM. There is no discount test but typically the discounts are small (or non-existent - and in rare occasions may even be at a premium).

Absolutely, it's standard practice to include a provision allowing Directors to issue new shares and disapply pre-emption rights. But I do think this practice should generally be discouraged except where necessary. Indeed, it's noticeable how companies with large Director shareholdings are usually very tight about issuing new shares, because the Directors think like shareholders, and don't want to be diluted! Whereas where management are hired hands, they often throw around new shares like confetti.

Hence why I think that a set of guidelines such as I am proposing would say x% p.a. in dilution for smaller companies is acceptable, to try to put a limit on dilution.

If there is a placing then by definition it is not underwritten (Placees commit via Placing Letters prior to the announcement). Open Offers also are not usually underwritten. However, fees and expenses can be substantial for even modest placings and open offers. This is because there is a requirement to publish a full prospectus, every word of which is legally verified or specifically signed-off by the advisors and directors. It also has to be written and edited - which itself can be a major task. Similar considerations apply to any written presentation provided to potential investors. The result is that probably 1000-1500 pages of documents have to be prepared and approved by multiple parties, including brokers, listing authorities and lawyers. That does NOT come cheap, unfortunately - and the cost is largely fixed, irrespective of the size of the fund-raising (so large fund raisings should be much cheaper in percentage terms).

All agreed. It makes no sense to do an Open Offer below about £5m, or probably higher. So that's why it is so annoying to see token Open Offers being tacked on to Placings (as with SNTY and SEE), which incur a ton of costs, for negligible additional funds raised.

So a set of guidelines in this area might "allow" just a Placing below say £5m funds raised, but suggest an Open Offer is included above that figure, unless there are circumstances which prohibit such a move.

6. Companies should maintain a list of existing shareholders who are able and willing to take up new shares (with a minimum of say £10k), and contact them first in the event of a Placing being decided upon.

This is an idea which has great appeal but again there are some practical issues:

a) Reliability of the potential placee. Can an individual be relied upon to behave completely like an insider and not disclose any information? In many cases the answer will be yes - but it only takes ONE person to leak information and the entire fund-raising is potentially jeopardised!

b) Timing. How do you treat someone who expressed an interest two years ago and whose investing focus has long moved on?

c) Amount. A £10k threshold is far too low from a practical standpoint. You need 100 such investors to raise £1mn - and that imposes a huge burden of administration and control ......which somebody (ie shareholders!!!!) would have to pay for!

Agreed, probably not really practical, so I might drop this one off the list!

7. Shares should be immediately suspended when a company decides to raise new funds, to stop the clearly widespread practice of insider dealing which currently occurs.

This is an interesting idea and one that I have previously tossed around in my mind. However, there are some potentially-large risks to existing shareholders:

a) Loss of liquidity. This is obvious really, but you can't buy or sell shares until the situation is resolved. So if you need to sell to buy a house or a car then that is just tough. This is an issue because such fund-raising halts would (or should) be quite unpredictable!

b) The documentation process I refer to (in 5) above doesn't happen overnight! It can and does take months before a fund-raising can be put into the market. At what stage would you want a trading halt?

c) I suspect you are assuming that all proceeds smoothly to a conclusion and can be wrapped up in a couple of weeks? Sadly that isn't always the case. If this proposal was adopted then some investors are likely to suffer many months of lost liquidity - and perhaps will end up with a locked-in loss when that period finishes.

Agreed there are practical issues with this, so might be an idea to park to one side for another day.

However, it is pretty appalling that shares remain tradeable whilst companies are fundraising. I can spot the tell-tale signals in share price movements from insider dealing by persons unknown very often in shares that I hold. It's a disgrace, and the only way to stop such insider dealing is to make fundraisings very rapid (they could be done electronically if the law was updated) and suspend the shares whilst they are happening.

In an ideal world you could have a one-week process for fundraisings. Suspend the shares, and electronically send all shareholders a brief offer document, that they have to respond to quickly or not at all. What's left over is for Placees. That would need legislation to make it a standardised process with no haggling. Price could be set by demand & supply even, within preset bands? There must be a better way of doing it than the existing system anyway!

So, Paul, in sum I have to say that this whole field is fraught with real and very serious practical problems - and I would very strongly counsel you and ShareSoc to take the most serious account of them. As you might expect, I have given regular and very considerable thought to exactly this range of issues - and I have to say that it is a much more complex issue than I had thought at the outset (even with my market experience). There is almost certainly no "perfect answer" that both ensures that the company gets the money and that all investors are always going to be happy (other than a very very expensive fully-underwritten rights issue - if a smaller company can find anyone prepared to do one in today's world!)

Sure, I agree. There is no one-size fits all. But we can & should come up with a simple list of general principles & guidelines that should apply to most normal fundraisings.

I'll go away & ponder each point a bit more, and maybe come up with a Mk 2 list of guidelines, tweaking the original list!

Thanks again for your very detailed & helpful response.

Regards, Paul.

emptyend

1st Apr '14

Hi Paul,

I started almost as soon as you posted.... ;-)

I don't think I have much that can usefully be added to my original reply, but I don't think you should regard my comments as E&P-specific. Companies ALWAYS raise money for a defined purpose - and achieving that purpose is a central objective that dominates other considerations. It follows that companies are rightly very cautious about matters which might jeopardise their funding plans. And that applies to smaller companies in particular.

For bigger companies, of course, one might argue that there are a whole raft of comparative shares already in issue and so there is always a price at which more shares can easily be sold. However, even this fact is not proof against being perceived to have screwed up the selling process. Indeed I have just been watching Vince Cable defending himself on precisely these issues in relation to the Royal Mail sell-off, in which shares were sold at 330p but have since traded at nearly £6.

What we are seeing at the moment though is a Placing dominating the fundraising (e.g. with £SNTY), and a derisory £0.5m Open Offer tacked on, intended to appease existing shareholders, yet it's only a 1 for 32 entitlement! So it has actually agrgavted existing holders. The costs of doing this Open Offer are probably not far off the funds raised from doing it, so it's surely the worst of both worlds in this case? Far better would have been a Firm Placing of £2.5m, and an Open Offer of £2.5m. Set them both at an attractive price, and people will take up their entitlement, or over-apply (I would have backed up the truck at 250p a share for Synety, but was not given the opportunity).

As I indicated above in point b) in relation to your point 2, this is a real point of negotiation.

If in doubt, just deepen the discount to a point where people will effectively be obliged to take up their entitlement.

That would have been my firm view until very recently!

However, I am now firmly of the view that there is sometimes no discount large enough to persuade people to take up their entitlement!!! One might have thought that a 25%+ discount would have precisely that effect - but I can now clearly demonstrate empirically (using an example I cited earlier) that, to my surprise, this definitely isn't the case - even when management have backed the terms by taking huge chunks themselves! I suspect that economists would view such share sales as Giffen Goods (lower prices producing lower demand - which is the flipside of the usual Giffen Paradox).

Directors need to fight for their existing shareholders interests above all else, and if they allow potential Placees & the broker to walk all over them, then they are failing in their duties!

I'm sorry but that isn't quite right. The duties of Directors are actually to the Company itself!

In the vast majority of situations, the interests of the company and the interests of its existing shareholders are one and the same thing - but fundraising is one situation where the interests of the company may sometimes mean that the interests of existing shareholders cannot be upheld regardless of cost and risk.

Of course Directors should also fight hard, very hard, for existing shareholders - but you should be in no doubt that the vested interests in the City and elsewhere will sometimes do their level best to stuff everyone concerned....and in those cases the company itself must come first.

Indeed, it's noticeable how companies with large Director shareholdings are usually very tight about issuing new shares, because the Directors think like shareholders, and don't want to be diluted! Whereas where management are hired hands, they often throw around new shares like confetti.

This is true. However, the answer is NOT to fetter management with additional rules on exemption placings - it is to ensure that managements have a bigger stake in the business...and be wary of those which don't.

it is pretty appalling that shares remain tradeable whilst companies are fundraising. I can spot the tell-tale signals in share price movements from insider dealing by persons unknown very often in shares that I hold. It's a disgrace, and the only way to stop such insider dealing is to make fundraisings very rapid (they could be done electronically if the law was updated) and suspend the shares whilst they are happening.

In an ideal world you could have a one-week process for fundraisings. Suspend the shares, and electronically send all shareholders a brief offer document, that they have to respond to quickly or not at all. What's left over is for Placees. That would need legislation to make it a standardised process with no haggling. Price could be set by demand & supply even, within preset bands? There must be a better way of doing it than the existing system anyway!

If only it were that simple!

I agree with the sentiments - but I have known circumstances in which fundraisings have taken 6 months or more to complete - with nothing that management could have done to prevent it. It is a very moot point indeed whether the interests of the initial investors would have been better-served by a suspension

Perhaps technology would offer a better way in the future - but it needs to be a market-wide system and is not something that individual companies can do anything at all about.

Anyway....I look forward to seeing Mark 2 :-)

cheers

Roger Lawson

1st Apr '14

Emptyend has rightly pointed out some of the defects in your proposals. This issue is a lot more complex than most investors appreciate. Note that the principle of "pre-emption" rights is not in company law. If you want more background on this subject Lord Myners did a report on it a few years back - it is here: http://www.berr.gov.uk/files/file28436.pdf

A lot of the problem relates to the requirements of the prospectus directive laid down by the EU. The real stupidity is that any fool can buy "old" shares in the market without reading any documents on the company concerned whatsoever but if someone is being offered "new" shares then they have to be issued with piles of documentation, most of which goes unread.

marben100

1st Apr '14

Regarding the idea of suspending shares whilst a fundraising takes place: I suggest that for the practical reasons given above the suspension should begin when the funding proposals are put before potential funders, NOT when the board takes a decision to raise funds or whilst documentation is prepared. This should shorten the time period of the suspension to a reasonable one, of the order Paul had envisaged. Of course, there is still some risk of insider trading during that preparation period but the pool of potential transgressors is much smaller than once roadshows begin and prospective funders are approached.

As ee and Roger have mentioned, there are lot of practical difficulties with these issues which need to be taken account of in any definitive guidelines.

Mark

cig

1st Apr '14

"I can spot the tell-tale signals in share price movements from insider dealing by persons unknown very often in shares that I hold. It's a disgrace, and the only way to stop such insider dealing is to make fundraisings very rapid".

If you can spot it you can arbitrage a lot of it by just trading against it, so you profit and discipline the baddies all in one! Suspension seems too blunt a tool to deal with those problems in any case, and if you start down that route there's lot of other events that are price sensitive and could justify a suspension. Would there be any day of open trading left in the end? It's also a distraction to bundle that issue with the placing guidelines.

"3. The maximum discount to average market price (in the preceding x number of days) with a Placing should be 10%."

Synety could have fulfilled that rule by setting x to say 90, which I wouldn't find obviously excessive personally. I have the feeling that would still have left you unsatisfied.

Re unread/exhaustive documentation, most of it is probably pro-format and could be computer generated from the rules and the same data that is used to produce annual accounts, so it's just a question of time before someone does that and undercuts the firms that still use expensive legacy human lawyers with word processors doing manual copy paste and editing. I hear some good progress has been made in the US in using software(-assisted) lawyers for routines cases.

emptyend

1st Apr '14

Roger makes a very good point in relation to prospectuses. The burden of the current requirements is much more significant than it was 20 years ago and I can tell you that the whole thing is gone through with a finetooth comb by the directors and their lawyers and brokers. It is therefore an expensive irony that the people who pay the least attention to it are the very people who it is supposed to protect and inform - namely the investors!
Our recent prospectus was over 150 pages long - and I can fully understand that few people find reading such documents in their entirety a useful or helpful activity.....though I note that many seem to "miss out" on important matters by not reading ANY of it.

BrianGeee

2nd Apr '14

In the secondary market, you are not buying shares from someone in possession of 'inside information' because, by definition, they cannot trade. In a new issue of shares you are, so I guess that's the reason for full and legally checked disclosure. There is a threshold around €5m I think, below which the documentation is more lightweight.

I, like many others, have participated to purchase newly issued shares in placings and IPOs. That doesn't mean I like them, but it's a bit of a moral dilemma! If you object to the system, do you abstain, or participate to minimise the personal disadvantage? It's not an easy decision, but I guess most participate on the basis that they're very unlikely to change the system.

Protection against disapplication of pre-emption rights is in the Companies Act for very good reason, as those buying (often) discounted shares are being given a very real advantage over existing holders, who in principle should have the right of first refusal. One of the main reasons why such protections are disapplied is because the UKLA and AIM rules define a related party as someone holding over 5% of the equity. So brokers seek the larger holders that are still under 5%, and ensure they have brought sufficient on-side to ensure the vote passes, as the smaller holder, holding through nominee accounts, or for other reasons, generally won't vote to oppose the disapplication resolution.

As EE says, in situations where a standard rights issue might not be optimal, a replacement system needs to be a fairly thorough re-design, and in my opinion should be based upon a transparent electronic book build, in which existing holders' rights are respected. Remember, not all companies actually deserve to be able to raise new funds - some will fail as the business and management may not be worthy of further backing. Consequently I don't feel that such a transparent system is impractical.

GavinT

2nd Apr '14

Another related issue but perhaps of much less importance is the duration a company is allowed to hold surplus funds from Private Investors in an Open Offer which was oversubscribed.

In the recent SEE fundraising, it took them around 6 weeks to return surplus funds to me. From your experience (those of you seasoned investors), is 6 weeks a reasonable time frame for the directors to decide on allocation and perform the necessary administrative duties? I am assuming here that money placed by PI are being held by the company itself and not its broker.

One can argue that the delay in receiving surplus funds is fair game as you get allotted additional shares at a discount, but is this right?

emptyend

2nd Apr '14

As EE says, in situations where a standard rights issue might not be optimal, a replacement system needs to be a fairly thorough re-design, and in my opinion should be based upon a transparent electronic book build, in which existing holders' rights are respected. Remember, not all companies actually deserve to be able to raise new funds - some will fail as the business and management may not be worthy of further backing. Consequently I don't feel that such a transparent system is impractical.

I'd very much agree with that!

However, do not underestimate the inertia caused by the large number of vested interests protecting the present system! They make a great deal of money out of its inefficiency!

As an aside (now 18 years ago - astonishingly to me) I was working for HSBC and tried to find some interest at my employer in distributing corporate bonds to retail investors using its branch network and the emergent internet technology. Not a sniff of interest. And that was just one bank that could have taken a lead.

The City is only likely to pick up these ideas if a disruptive entrant lobbies for the legal changes and then bankrolls the first few years of operation.

cig

2nd Apr '14

It may be your broker partly to blame (it was 24/1 to 3/3 for me, which is less than 6 weeks) and besides it matched the schedule in the prospectus: tendering deadline at the end of January (you could have waited for the last day if you wanted to reduce your exposure) and the final shareholders vote to authorise the placing was at the end of Feb if I remember right. They could hardly return the money any earlier because they couldn't allocate the shares before the placing was (formally) authorised.

Out of curiosity, does anyone know whether the firm really sees the cash or does it stay with an intermediary during the process? (e.g. who is the counterparty during that period?)

Paul Scott

3rd Apr '14

Thanks for the feedback.

I think it's clearly in the too difficult & too much hassle to bother with category.

Nice idea anyway!

PP.

Suggested guidelines for Listed company fundraisings, to protect Private Investors interests

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Paul Scott

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