March 19 2009
Structuring a rights issue for a UK listed company (PLC) using a Jersey cash box vehicle can make it easier to implement and add to the benefits therefrom. The advantages that a cash box structure offers are flexibility in relation to making the offer and, in relation to the proceeds of the issue of the shares, the availability of merger relief under the UK Companies Act.
The turmoil in the financial markets has reduced the availability of debt financing and simultaneously created a need for banks and other companies to recapitalize their balance sheets. There are various methods of raising equity capital, but for large equity fund raisings, rights issues are probably the preferred mechanism since:
However, rights issues can be slow or cumbersome to implement. Until the beginning of 2009, rights issues for UK PLCs required a minimum of 23 days (or 39 days where a general meeting is required), and could take considerably longer. This had a number of undesirable consequences, which the Financial Services Authority recognized in its recent policy statement reducing the minimum rights issue subscription period in the Listing Rules to 10 business days.
The Association of British Insurers (ABI) has also revised the guidance it issues about the expectations of institutional investors in relation to authorizing the allotment of new shares and disapplying statutory pre-emption rights in respect of allotments. ABI members will now regard as routine requests for authorization to allot new shares in an amount of up to one-third of the existing shared capital and, subject to satisfying certain criteria, will also regard as routine requests to authorize the allotment of a further one-third. The effect is that rights issues have become a quicker and easier way of raising equity capital.
Where a cash box structure is used, it allows flexibility in making the offer because the shares are issued for non-cash consideration and, consequently, the offer is not subject to the pre-emption restrictions that apply where shares are issued in return for cash. The benefit of this flexibility is clear in relation to placings, but it is also valuable in relation to rights issues, particularly where there are shareholders resident outside the United Kingdom, and for the purposes of placing shares which are not taken up under the rights issue.
Cash box structures also enable the rights issue to be structured so that the requirements for merger relief may be met for the shares issued in the rights issue. The advantage of this is that the requirement to account for share premium is relieved and distributable reserves can be created.
This update describes how cash box structures work and some of the reasons why Jersey companies are particularly well suited to cash box structures.
Incorporation of a subsidiary
A UK PLC that wishes to make a rights issue incorporates a new subsidiary which acts as the 'cash box'. The cash box is usually incorporated in Jersey, but in order to avoid the need for Her Majesty's Treasury consent under the UK Income and Corporation Taxes Act, the cash box must be managed and controlled in the United Kingdom for the purposes of UK tax. If merger relief is to be sought, a proportion of the equity share capital of the cash box needs to be held by the institutions acting as underwriters of the rights issue by the UK PLC.
The cash box will also have a class of redeemable preference shares for issue to the underwriters.
Subscription for and transfer of shares in the cash box
The UK PLC, underwriters and cash box enter into a series of agreements under which:
The agreements also contain option arrangements to enable the structure to be unwound if the issue of the UK PLC's shares does not proceed.
Where a cash box structure is used in connection with a rights issue, the agreements will usually provide for the cash box to issue more than one tranche of shares. A first tranche of ordinary and redeemable preference shares are issued to the underwriters in conjunction with the initial take-up of rights of the UK PLC and are transferred by the underwriters to the UK PLC in consideration for the issue by the UK PLC of its ordinary shares under the rights issue.
Further tranches of redeemable preference shares and ordinary shares may also need to be issued to the underwriters in respect of shares that are not taken up in the initial rights issue.
If it is necessary for there to be further issues by the cash box of redeemable preference shares, it will also need to issue further ordinary shares in conjunction with the issue of redeemable preference shares so that the requirements for merger relief are satisfied in relation to each issue of shares by the UK PLC and each transfer by the underwriters of shares in the cash box to the UK PLC in consideration for the issue of those shares.
Payment of cash to UK PLC
As a result of the transfers of the cash box shares, the cash box becomes a wholly owned subsidiary of the UK PLC holding funds equivalent to the net proceeds of the rights issue.
These may be lent by the cash box or paid to the UK PLC by way of redemption of the redeemable preference shares or distributed to the UK PLC in a winding-up of the cash box.
Jersey companies are suited for use in cash box structures for the following corporate and tax reasons:
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