Innovations In Rights-issues Structures
The scrutiny of established practices by the competition authorities acted as the catalyst for the development of innovative structures designed to reduce underwriting costs. A central feature of the modern underwriting structures is a competitive-tender process to set commission rates rather than the fixedcommission rates that were previously charged. Also, in some cases institutional investors have been asked to indicate in advance whether they will take up their entitlements. An issue does not need to be underwritten to the extent that there are advance commitments to take up entitlements and this will thus reduce underwriting costsWithin certain limits, the Stock Exchange permits a pre-issue placing of those entitlements which investors have indicated in advance that they will not take up.
Entitlements that are preplaced in this way do not need to be underwritten and this, again, can help to trim underwriting costs. The competition authorities have expressed support
for deep-discounted rights issues which dispense altogether with underwriting. To date, however, these have not become popular within the UK practice market although the investment committees of the ABI and the NAPF have issued a paper that signals a willingness to support greater flexibility in the structuring of rights issues including the use of non-underwritten deep-discount issues with an appropriate consequential adjustment to dividend payments and to dividend-per-share analysis.
Detailed items of information which are required to be included in a prospectus for a rights issue of unlisted securities are set out in the Public Offers of Securities Regulations 1995. Under reg 9 there is a general duty of disclosure in relation to a rights-issue prospectus which is to be published by an unlisted company. This is substantially equivalent to the duty of disclosure in the listed regime although there are certain differences in the details.
One difference flows from the fact that offerors of unlisted securities may not be quoted on a market and, so, may not be subject to continuing obligations. This precludes a general qualification permitting regard to the fact that information is already available to investors because it has been disclosed in that way.
However, the Stock Exchange is permitted by the Public Offers of Securities Regulations 1995, reg 8 to authorise the omission of information in a prospectus for a rights issue by a company that is quoted on the Alternative Investment Market provided that equivalent up-to-date information is available as a result of requirements imposed by that market.However, in the 1990s, the Office of Fair Trading began to scrutinise the established underwriting practices in the UK markets on competition grounds. This review first came into prominence in November 1994 when the OFT published a research report which it had commissioned and which concluded that the fees charged by sub-underwriters greatly exceeded the value of the insurance of the success of the issue which they provided. The report made the point that institutional investors were major participants in sub-underwriting activity.
This consideration, combined with the fact that, even if some institutional investors were not themselves direct participants in the subunderwriting of a particular issue, they might well hold shares in other institutions which were, led the author to conclude that:
Over time, and across different issues, the losses suffered by institutional investors from companies overpaying for sub-underwriting may be more than counterbalanced by the profits they earn from sub-underwriting.In this scenario the losers were the issuing company's private investors and smaller institutions which were unable to participate in sub-underwriting.Over the following few years, there were a number of further OFT publications that continued to express dissatisfaction with market processes with regard to underwriting.
This dissatisfaction culminated in November 1997 with the matter of underwriting commissions being referred to the Monopolies and Mergers Commission for investigation.
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