The Mechanics Of Issue
The offer of the new shares is normally made by way of a renounceable letter of allotment known as a provisional allotment letter (or PAL). For listed com panies, it is a requirement of The Listing Rules that rights issues normally be made by renounceable letter or other negotiable document. These requirements do not apply to the new shares offered in respect of existing holdings that are held in uncertificated form in CREST. CREST has been designed to accommodate rights issues and its procedures mimic electronically those that apply to certificated shares.
Where no increase in the authorised share capital or other shareholder approval is required to implement the rights issue, the shareholders will normally receive a PAL simultaneously with the circular letter comprising the prospectus for the issueWhere a general meeting is required, the circular let ters will usually be sent out together with notice of an EGM. The PALs will be sent out after the passing at the EGM of the resolutions increasing the authorised share capital and providing any other shareholder consents that are required for the rights issue.
A PAL is, essentially, an offer document. Each PAL will give details of the number of shares provisionally allotted and the basis on which the provisional allotment has been made. Each shareholder must be given three options:
to take up his rights fully; or
to take up his rights in part only and to renounce the rest; or
to renounce his rights in full.
A shareholder who chooses option must lodge the PAL together with his payment for the shares with the company's registrars by the latest date for acceptance. A shareholder who chooses to split his entitlement must do so by the date and in accordance with the procedure specified in the PAL. The specified procedure will involve the returning of the PAL to the company's registrars, its cancellation and the issue of split letters of allotment.
For the period of the offer, 'nil-paid' dealings in the shares which are provisionally allotted can take place by means of renunciation of whole or partial entitlements by the persons entitled. A person in whose favour a renunciation has been made and who wishes to take up the offer must accept the offer by lodging the PAL together with his payment for the shares with the registrars by the latest date for acceptance.
Once the offer period has expired, the provisional allotment of those shares which have been accepted must be confirmed by the board, or by a committee of the board. The allotment letters will then be returned to the allottees stamped 'fully paid'. There then usually follows a fully-paid renounceable dealing period. During this period the fully-paid allotment letters constitute the transferable documents of title to the new shares. The company will then require them to be submitted for registration when they will be replaced by share certificates; from the close of the renounceable dealing period, dealings in the shares will take place in registered form.If all of the shares offered by way of rights have not been subscribed by the close of the subscription period.
The Listing Rules require them to be disposed of for the benefit of the holders entitled, unless arrangements to the contrary have been approved by the shareholders in general meeting. However, by way of qualification, it is expressly provided that where the proceeds to which a holder would be entitled does not exceed Ј3, those proceeds may be sold for the benefit of the company. The exercise of selling the shares not taken up {commonly referred to as the 'rump' or the 'stick') will be undertaken by brokers acting on behalf of the lead underwriter. If there is no premium available in the market, the shares can be allotted to the underwriters themselves.
Provided this is authorised by the Exchange, other shareholders may be allowed to acquire any rights that have not been taken up by shareholders.The existence or size of a rump could well constitute 'inside information' as defined by the Criminal lustice Act 1993, s 56. However, that Act provides a special 'market information' defence to charges of insider dealing which should cover underwriters who dispose of securities comprised in the rump of an issue without disclosing its existence or size.
It is also conceivable that the failure to announce the result of a rights issue before the rump is placed in the market could in certain circumstances constitute the offence of creating a false market contrary to the Financial Services Act 1986, s 47 (2). In the UK markets it is common practice for this information to be disclosed if the portion of the issue that has not been taken up is material.
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