Aviva and General Accident preference shares

[stockton]

I would look for a way to throw away the spade....

It could prove very difficult to throw away this spade without a clear declaration that they have got it wrong.
And if that happens there may be people looking for compensation, so much so that Aviva may well prefer to go to court and lose, rather than clear up matters immediately.

[johnhemming]

It could prove very difficult to throw away this spade without a clear declaration that they have got it wrong.

Actually they don't have to admit that they got it wrong they can say something like.

"We have listened to what our investors have said about the potential use of S641. We have, therefore, decided that we will not go down that route. We still wish to return some capital to investors and restructure our capital to satisfy future regulatory requirements and will come forward with proposals in the future. However, we will not be using S641 of the Companies Act to do this."

Or something like that. That does not put them in the position of accepting that they were wrong in their analysis and any potential claim for damages or dispute like that.

[Alaric]

The Preference Shares would continue in existence and receive their dividends after receiving such payments.
There is no mention of the word "cancellation" relating to the holding of preference shares.

That does seem to be the key point. Aviva can pay the Preference Shareholders £ 100 per £ 100 nominal as part of a general return of capital. As that isn't a redemption it doesn't cancel the shares and therefore they continue to pay around £ 8.50 per £ 100 nominal. That's a nice little present for Pref holders and presents a poison pill to management intentions to return capital to ordinary shareholders. It does seem a roundabout route of ensuring that the only way to cancel the Preference Shares is to buy them at market prices, either directly or as a tender offer.

[ChloesDad]

Great email, shaunm. Let's hope you get some response.

Alaric, Aviva have been at pains to point out that "no decision has yet been taken". I think they have emphasised that on more than one occasion, so I don't think there is any spade to throw away at the moment. They have yet to decide on their course of action - if any.

My personal belief is that there has been too much panic in the markets. The weight of evidence suggests that Avvia will not go ahead with their "threat". I believe the prefs have been oversold and I have topped up accordingly.

[ChloesDad]

The logic behind my 'topping-up' of GACA is as follows:

Even if Aviva took the course of action they threaten, I would say it would take around two years in the courts to come to a final result.

Aviva have underpinned the GACA price at 100.885p. Another two years of dividends is 2 x 8.875p = 17.75p. Therefore in total you would get 118.635p per share, even if the worst came to the worst. For info, the next GACA ex-dividend date is early June.

I know inflation is on the rise, however buying in at 121p (Thursday's price) doesn't seem a massive risk. Downside - a loss of < 3p per share. Upside could be far greater. Any thoughts ?

Also posted this logic on other boards.

[GoSeigen]

I now wish I’d paid a bit more attention to the detail when overseeing capital returns and redemptions! Maybe GS and John Hemming will be abel to shed light on this. The relevance to Aviva’s powers under the AV.A and AV.B terms is obvious.

I have cited an accounting manual and a tax manual that calls S641 cancellations a redemption.

Here is a link to a legal web page on the interpretation of contracts
https://www.ashurst.com/en/news-and-ins ... glish-law/

Okay, but I'm really struggling to see the relevance of these, even the Ashurst which I have read and with whose principles I am already somewhat familar. Does it matter what some accounting manual and tax manual say? We are trying to understand the Articles of a company!

So, if you can tell me specifically what is bugging you that these links address that would be helpful. In the meantime I have tried to set out initial points that we might agree on. Do we need to alter them? If we don't discuss the substance it'll take all year!!


Re: the word egregious I am likewise bemused. I certainly wasn't aiming it at any particular individual least of all you if that is what concerns you. And I have no hesitation in withdrawing it if you took it personally.

GS

[johnhemming]

Okay, but I'm really struggling to see the relevance of these, even the Ashurst which I have read and with whose principles I am already somewhat familar. Does it matter what some accounting manual and tax manual say? We are trying to understand the Articles of a company!

Preference Shareholders have a contract with the company. That contract is detailed in the [listing particulars/prospectus].

What we are discussing is what the meaning of that contract is. The question is whether a S641 capital return is a redemption or not for the purposes of the contract which was published in 1992.

Hence we need to look at how to interpret the contract:
https://www.ashurst.com/en/news-and-ins ... glish-law/

I am not going to quote from a lot of the Ashurst page and I do recommend that people read it as it is quite a good analysis of the situation.

The following considerations will be relevant to the court's analysis:

The natural and ordinary meaning of the clause. The courts "do not easily accept that people have made linguistic mistakes, particularly in formal documents". However, the worse the drafting of a particular clause, the more readily a court will depart from its natural meaning.
Any other relevant provisions of the contract.
The overall purpose of the clause and the contract.
The facts and circumstances known or assumed by the parties at the time the contract was executed.
Commercial common sense.

So we are looking for the "natural and ordinary" meaning of the clause. The contract/prospectus does not itself try to define redemption. Hence we have to look for the "natural and ordinary" meaning of "redemption" and "redeem"

We have the dictionary definition: "the action of regaining or gaining possession of something in exchange for payment, or clearing a debt."

That is the obvious starting position.

Aviva argue that S641 transactions are not redemptions. (that is difficult to argue given the dictionary definition)

However, HMRC and ACCA both use redemption to describe what happens when S641 is being used. Hence it is clear that the "natural and ordinary meaning" of the clauses includes S641 as a type of redemption.

The killer argument is that GA were under a duty not to mislead investors in their annual report. Obviously if the shares were subject to a call at par then this is a material attribute of the shares. Hence the fact that they did not highlight that in their annual report (whilst highlighting other key aspects) means that this was not their intention.

If it was not their intention then as it would not be the intention of the people who agreed the contract by trading in the shares. Clearly, therefore, S641 capital returns are redemptions.

QED.

[GoSeigen]

GS and John,

Great minds think alike! I was just about to post the following question: (I'll post it anyway so you can see where I'm coming from, but meantime I'll follow your debate and see if it sheds any light on my question!

My question was:

In what circumstances would a return of capital at par plus accrued, followed by a cancellation of the shares, NOT constitute a redemption under law?

If the answer is anything like Aviva’s it will be “always” because they say that a return of capital is a different mechanism to redemption (their statement yesterday said that return of capital under Companies Act 2006 s.641 (4) (b) (ii) “is a different mechanism to redemption”).

But I’m struggling to understand in what way if differs. Clearly the economic effect on the parties in both cases is identical - where there is a par redemption clause in a pref and it is exercised by the issuer, the shareholder is paid par plus accrued, the shares are cancelled and the issuer’s shareholder capital account is reduced by the par amount paid to the shareholder. On a return of capital followed by cancellation, the shareholder is paid par plus accrued, the shares are cancelled, and the issuer’s shareholder capital account is reduced by the par amount paid to the shareholder.

Although I’ve overseen a number of share buy backs and capital returns in my time, I must confess I’ve usually left the detail of the mechanics to the accountants and lawyers!

As i say, In terms of economic effect and accounting mechanics, the two processes look identical to me. So if there is a difference, is it a question of legal definition? - for example, does redemption take place under a different section of CA 2006 to one that covers return of capital? I’ve looked, but I can’t find anything directly relevant. And in any case is it CA 2006 we should be looking at, given that the prospectus was drafted in 1992 so any legal distinction in the prospectus between redemption and capital return would be based on pre 2006 law?

I now wish I’d paid a bit more attention to the detail when overseeing capital returns and redemptions! Maybe GS and John Hemming will be abel to shed light on this. The relevance to Aviva’s powers under the AV.A and AV.B terms is obvious.

Avidya, I could give an opinion but would quite like to work through the discussion under way with John Hemming. If nothing else it is giving me an insight into the thought processes which would lead someone to a different conclusion to my own -- I always like to get into someone else's shoes a bit.

BTW it would be great if you also weighed in from time to time, and other Fools too. I'm trying to structure the discussion so that individual points can be picked off along the way. Whether that will work I don't know. It would be nice to have an automated system where contributors could vote on each point and then be able to move to the next one when there is unanimity. Maybe an idea for a web developer...


Coming back to your question and an observation on an argument that seems reasonably popular: some posters (not you) are proposing that it doesn't matter whether a process called redemption happens, or another called capital return, even if they are distinct: in each case the effect is the same, namely shareholders "lose out" versus market value.

James secretly removed ten pounds from my wallet and kept it. Tim asked me for ten pounds and feeling generous I gave it to him. Both of these processes had the same effect: I was £10 poorer -- the other fellas £10 richer. Yet few people would argue against the idea that one was criminal and the other wasn't.

To the law, the process by which something is achieved matters very much.

GS

[GoSeigen]

Great email, shaunm. Let's hope you get some response.

Alaric, Aviva have been at pains to point out that "no decision has yet been taken". I think they have emphasised that on more than one occasion, so I don't think there is any spade to throw away at the moment. They have yet to decide on their course of action - if any.

My personal belief is that there has been too much panic in the markets. The weight of evidence suggests that Avvia will not go ahead with their "threat". I believe the prefs have been oversold and I have topped up accordingly.

Hate to be a spoilsport but I think this is terribly misguided. People are now discussing this as if Aviva execs are absolute fools. It would be far wiser to assume that they took very good legal advice and thoroughtly discussed this action before they took it and are more than a little confident of their legal position.

Do not invest based on the priciple that the board overlooked something obvious that the bulletin-board armchair experts uncovered or are simply bungling. I think the converse is far more likely to be true.


GS

[ChloesDad]

True, GS. I suppose I was being optimistic.

Anyway, talk about rubbing salt in the wounds...!

"Aviva shareholders riled by chief’s BlackRock board role"

https://www.ft.com/content/0ee13454-293 ... 62a39d57a0

[ChloesDad]

Email now sent to that nice Mr Fink.

I have told him that I shall be selling my stake in his Blackrock World Mining Trust first thing on Monday morning. I simply cannot trust his new appointee with my money. I urge all other dual holders of Aviva prefs and any Blackrock funds to do the same.

[ChloesDad]

In case you cannot access that FT article..

"Investors have reacted angrily to news that Aviva chief executive Mark Wilson is to take a seat on the board of BlackRock, the world’s biggest fund manager.

Aviva has its own fund management arm, Aviva Investors, and one of Mr Wilson’s priorities has been to turn it round.

“I’m shocked. If one of the main parts of your business is asset management and you join the board of a rival asset manager, that is a massive conflict of interest,” said one leading investor.

A top 10 shareholder said: “It feels like an unnecessary conflict. It should be a step further away from your own business.”

Shareholders said they were also worried about the time commitment involved in preparing for and attending BlackRock board meetings.

Mr Wilson’s new role adds pressure to the relationship between Aviva and its investors, at the end of a week when the company came under fire for its plan to cancel so-called irredeemable preference shares..."

[GoSeigen]

John, I see, your quibble is with the idea of going first to CA1985. I have read and agree with the first part of your post. Then:

So we are looking for the "natural and ordinary" meaning of the clause. The contract/prospectus does not itself try to define redemption. Hence we have to look for the "natural and ordinary" meaning of "redemption" and "redeem"

This is where we differ. It's too early to seek the natural meaning. The contract (the Articles and Resolutions of the shareholders: these are shares) does not define these terms I agree, but it is crystal clear on page 2:

[Interpretation]
[...] words or expressions defined in the Statutes, if not inconsistent with the subject or context , bear the same meaning in these Articles.

"the Statutes" means the Act and every other Act for the time being in force concerning companies and affecting the Company.
"the Act" means the Companies Act 1985.

To me the plain meaning of these words is that when reading the Articles, we should look to the CA1985 and other relevant company laws for definitions of words and expressions, rejecting those only if inconsistent with the Articles.

I don't see how that allows me to ignore the CA1985. At least I have to look there and see what terms and expressions are derived from those laws, surely?



GS

[GoSeigen]

Hmm, it's interesting that perhaps the entire difference in interpretation of these Preference shares derives from the fact that some feel they are free to interpret terms as they understand them from plain language -- this has been asserted repeatedly in the past few days -- whereas I (and presumably Aviva??) feel bound to look first at the Law, since the Articles themselves point to the law explicitly, both within the text and prominently at the start: declaring that terms defined in relevant laws would have the same meaning within the Articles.

What have I missed? I guess that one could assign a very narrow meaning to "defined in the Statutes", but what else?

GS

[johnhemming]

whereas I (and presumably Aviva??) feel bound to look first at the Law, since the Articles themselves point to the law explicitly

I think Aviva almost certainly disagree with you.

I am looking at how the Courts would interpret the contract. It is, in the end, a question of law. The laws in the UK are enforced by various courts and there is a process of appeals (and second appeals and supranational appeals).

How the courts enforce the law is generally published (although not always and that is a long story) and it is possible to find out how they enforce the law and why. Ashursts have been kind enough (although arguably it is good marketing as well) to publish a good explanation of how the courts do this.

I may disagree with the courts from time to time, but it is always best to start with what the settled position of the courts is.

Law in the UK is a quite complex combination of Common Law, Primary Legislation, Secondary Legislation, International Legislation (The EU, The EEA, The ECHR, The International Criminal Court Rome Convention, The Aarhus Convention* etc etc) and other systems of rules. In the end, however, it is normally interpreted by the Courts.

Contract Law is substantially Common Law as such systems have existed since prior not only to our current constitutional settlement (1688), but also the creation of the UK Parliament (1258) or the first version of Magna Carta (1215) [the version currently in force is 1297].

The roots of English Contract law lie in fact in Lex Mercatoria which is a sort of old independent trade agreement which operated in Europe rather than statute.

* If anyone is interested, I have a live case under the Aarhus Convention the papers for which can be seen on the UN website.

[loglorry]

GS some good posts there nice to have a contrary view.

If I may I'll construct and argument as to why legally Aviva can't cancel.

In order to do so Aviva must rely on CA2006 which allows a return of capital and cancellation if members vote for it. It is not clear from the CA2006 if that requires members from the class effected or all members to vote on this return. Aviva are saying that all members vote in a single vote and it's likely although not certain that ordinary shareholders could outvote prefs at least in the case of GA.

So why are Aviva so confident that it's a non-class vote. If it was a class vote then they'd obviously fail. There is quite a lot of evidence to suggest this interpretation is wrong. E.g. Directive (EU) 2017/1132 Article 74 which states:-

Reduction in the subscribed capital in case of several classes of shares

Where there are several classes of shares, the decision by the general meeting concerning a reduction in the subscribed capital shall be subject to a separate vote, at least for each class of shareholders whose rights are affected by the transaction.

Since UK law is meant to implement these directives we should therefore necessarily assume interpret it that way and assume CA2006 requires a class vote and Aviva are incorrect.

Similarly if we look at what happened with LLPC/D when they were issued back in 2009 we see that in order to replace the existing HBOS prefs Lloyds had to cancel that capital and replace it with the LLPC/D prefs. We see on page 13 of the prospectus (sorry lemonfool doesn't allow me to post links) the mechanism used was a class vote to pass the "Preference Reduction Special Resolutions". Not conclusive but certainly suggests that Lloyds thought a class vote was required or at least it was prudent to ensure it was not challenged.

There isn't a lot of point us all playing lawyers here as we've seen in the past the courts can come to radically different conclusions in these situations. It is unlikely to get tested in my opinion. It's just a softening up for a tender/LME situation IMV.

[GoSeigen]

One has to chuckle and wryly admire the sheer chutzpah of some of the Dear Aviva letters.

https://www.fixedincomeinvestments.co.u ... #post-2167

It seems that everybody has mis-read and mis-understood the important paragraph 4(iii) within the prospectus
[...]
I suggest the necessary authorities are informed, so that on Monday morning the LSE market is fully aware of the situation, and that Preference Shares are priced appropriately at start of trading.


GS
P.S. Read the names carefully, and then the salutation. LOL.

[PinkDalek]

https://www.fixedincomeinvestments.co.uk/discussion/topic/aviva-scheming-to-redeem-preference-shares-at-par/page/31/#post-2167 ...

Also available here:

viewtopic.php?p=125570#p125570

[paulmiller]

I have now written to Claudia Arney explaining how Aviva's recent news has greatly affected me personally, and also to express my deep concerns about how this news has greatly changed my own personal thoughts about Aviva as a company. I have explained to Claudia that I had always previously thought of Aviva as a company that I could associate with trust and transparency and with good ethics, but all of these thoughts that I had before about Aviva have now been broken.

I would also urge all other investors here and all those who are simply very concerned about this situation to also write to Claudia and the other "non-execs" as soon as possible. The CEO and the executive directors will already have heard a lot about this situation from various people and institutions, so it is time now to make sure that the "non-execs" also hear our voices.

The "non-execs" like Claudia will probably have the necessary influence to ensure that this idea is promptly abandoned, but we need to contact them first with our letters and emails to make sure that our voices are heard.

The full address for sending letters to Claudia is as follows:

Claudia Arney,
Governance Committee Chairman,
Aviva plc
St. Helens
1 Undershaft
London
EC3P 3DQ

[paulmiller]

GS - I would be interested to hear your thoughts about the points that Avidya has raised in his earlier posts. I am not a lawyer but it is very interesting to see how the opinion of those who obviously have a very good knowledge of the law is completely different. Some think there is a reasonable case, others think it is less than 50/50, and others think the Aviva case is very weak.

I would be interested to hear your thoughts on all of the points that Avidya has raised, and particularly your thoughts on:

1. The existence of the "Spens clause" in the AV.A and in the AV.B.
2. The EU legislation (2017) requiring a separate class vote in cases of reduction of capital.
3. The UK Companies Act legislation (2006) requiring company directors to "act fairly as between members of the company".