Fractions Of Shareholders
Shareholders may have a technical entitlement to fractions of a share (for example a shareholder who holds seven shares will be technically entitled to a fraction of a share where the basis of the rights issue is that there will be one new share for every five shares held). Before the introduction of the Companies Act 1985, s 89, the practice was to aggregate and sell the right to such fractions for the benefit of the company as soon as practicable after com mencement of dealings in the new shares. This practice is not possible under s 89 because it requires the company to make an offer which is as nearly as practicable in proportion to shareholders' existing holdings.
It is practicable for fractions to be rounded up or down to the nearest whole number and it seems that a company must do this in order to comply with s 89. This means that it can be practically impossible for the company to raise a round sum and the company loses the benefit that it would otherwise have had from the sale of the fractions.If the Companies Act 1985, s 89 is dis-applied, provision can be made for fractions to be sold for the company's benefitThe dis-application resolution normally authorises the directors to aggregate them and to sell them in the market for the benefit of the company. This practice is permitted by the Stock Exchange.
CREST is the electronic share dealing system in the UK markets. Although it is designed to deal with rights issues electronically, the statutory requirement for the offer of new shares to be made in writing to the existing shareholders still applies, and the issuer must therefore communicate in writing with those of its shareholders who hold their shares through CREST. If s 89 is dis-applied, the offer of the new shares can be made by crediting CREST holders' stock accounts with their entitlements and without the need for any written communication to the shareholders.A right to subscribe, or convert into, shares is not a relevant share for the purposes of the Companies Act 1985, s 89.
Therefore the holders of warrants or convertible debt securities cannot be included in a s 89 rights issues, subject to one very limited exception provided by the Companies Act 1985, s 96. However, the Stock Exchange requires an issuer of listed convertible debt securities to covenant to include holders of convertible securities in rights issues to shareholders or to make an appropriate adjustment of their conversion rights.64 Before giving a covenant to include the holders of its listed convertible securities or warrants in rights issues, a company must therefore exclude s 89 for that purpose.
In order to ensure that the company will remain able to honour its commitment to the holders of the warrants or convertible securities, the resolution dis-applying s 89 must enable the company to enter into an agreement which would or might require equity securities to be allotted after it has expired and it must reserve shares sufficient to meet the commitment.
Preference shares which are participating with regard to respect to dividends or capital are relevant shares for the purposes of s 89 and the holders of such shares are therefore entitled to be included in a s 89 rights issue. Even if s 89 is dis-applied, the holders of participating preference shares in listed companies can still participate in a rights issue because participating preference shares are equity shares for the purposes of The Listing Rules and holders of equity shares are entitled to share in a rights issue.
Preference shares often have a par value much higher than that of the company's ordinary shares, a point which is relevant because proportional entitlements to the new securities are determined by reference to the par values of existing shareholdings. This can mean that a large proportion of a new offer has to be offered first to participating preference shareholders. However, if the preference shares are convertible into ordinary shares it is possible under The Listing Rules (but not s 89) to calculate proportionate entitlements to the new shares by reference to the par values of the ordinary shares into which the preference share are convertible. This can be a further reason for considering the dis-application of s 89.
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