Overseas Shareholders
Sending rights issue documentation to shareholders in other jurisdictions is problematic because the distribution of such documents may contravene the securities laws of those jurisdictions unless they are in a form which complies with the local law and any requisite approvals under that law have been obtained. Also, even if relevant securities law permits the distribution of rights-issue documentation to overseas shareholders, posting it to them would have the effect of extending the offer period, since the offer would not be made until it had been deemed to be received by the most inaccessible overseas shareholder.
The Companies Act, s 90 provides a procedure which may be used in respect of overseas shareholders who do not have a registered address in the United Kingdom and who have not given the company an address in the United Kingdom for the service of notices. This procedure is known as the Gazette route. The Gazette route involves the publication of the offer, or of a notice specifying where a copy can be obtained or inspected, in the London GazetteThe publication of this notice satisfies the requirement to communicate the offer to the shareholders, although where it would not infringe the domestic securities laws of the countries in which shareholders are resident, letters may also be sent.
The need to avoid an extended offer-period means that, legally, care has to be taken in the drafting of such letters to ensure that the offer is clearly made in the Gazette rather than in the letters.Resolutions dis-applying s 89 commonly permit the directors to make such arrangements as they think fit with regard to overseas shareholders who would, apart from such arrangements, be entitled to participate in a rights issue. In practice this usually means that overseas shareholders in jurisdictions where the relevant securities laws could be infringed by the offer of new shares are excluded from the offer and, instead, new shares representing their entitlements are sold on the market when dealing in the new shares com mence, with the net proceeds of such sales being sent to them.
This practice is sanctioned by The Listing Rules and it has survived a challenge in the courts. In Mutual Life Insurance Co of New York v The Rank Organisation Ltd5G the exclusion of shareholders holding per cent of the company's equity who were resident in the United States and Canada from a rights issue was challenged as a breach of the contract between the company and its members contained in the memorandum and articles. Specifically, it was alleged that the exclusion was contrary to a provision in the articles which required the company to treat all shareholders of the same class equally.
Goulding J rejected the challenge for the following reasons: the directors had acted bona fide in the company's interests in making the allotment; the US and Canadian shareholders had not been treated unfairly since their exclusion from the right to acquire the new shares did not affect the existence of their shares or the rights attached to them; there was no suggestion that the terms of the offer were improvident; no shareholder in the company had the right to expect his interest to remain constant forever; and, the reason for the exclusion of the North American shareholders was because of a difficulty relating to their own personal situation.
The nature of the contract formed by a company's memorandum and articles is somewhat obscure and the extent to which the courts will enforce provisions contained in those documents is uncertain.5" Partly for these reasons,59 contractual actions have tended to be eclipsed in recent years by actions under the Companies Act 1985, s 459 which permits members of a company to seek relief from unfairly prejudicial conduct. However, it seems unlikely that overseas investors who are excluded from a rights issue for the reasons that the court found persuasive in the Mutual Life decision would fare any better if they brought a claim under this section.
In the Mutual Life decision Goulding J said that the exclusion was not unfair and in Re BSB Holdings Ltd (No 2)eo where, in reaching the conclusion that a complex capital reorganisation was not unfairly prejudicial to the petitioner, Arden J expressly adopted as applicable to the case in hand three of the reasons given by Goulding J in the Mutual Life decision as indicating an absence of unfairness: the restructuring did not affect the existence of the petitioner's shares or the rights attaching to them; the terms on which a rights issue which was part of the restructuring was made were not improvident; and the peti tioner did not have any overriding right to obtain shares.
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