Aviva and General Accident preference shares

[swill453]

And of course bearing in mind that some ordinary shareholders may also be preference shareholders.

Scott.

[Midsmartin]

Are all prefs (thinking NWBD, LLPC/D) susceptible to this sneaky ruse? While I've always been aware there were risks, I'd always understood that NWBD for example was fairly safe. I think the NWBD T&Cs has a flat unqualified statement that they are not redeemable, which I naively accepted at face value!

[GoSeigen]

Are all prefs (thinking NWBD, LLPC/D) susceptible to this sneaky ruse? While I've always been aware there were risks, I'd always understood that NWBD for example was fairly safe. I think the NWBD T&Cs has a flat unqualified statement that they are not redeemable, which I naively accepted at face value!

Midsmartin, it would be a good idea to read Mark Taber's comments on the discussion boards at his site. (Google for the link). This is not a sneaky ruse or a risk. Preference shares by their very nature have the right to have their capital returned in advance of the ordinary shareholders, The company is simply proposing to afford you this right which you always had.

Imagine if they did it and the next week suffered a huge insurance claim that destroyed the business. You would be pleased to have been able to exercise your right. If on the other hand you think the company is in great shape and would prefer your shares to still be in issue, well, why not sell your prefs and buy the ordinary shares? They are going to benefit both from the capital reorganisation and the strong trading position of the company.

As for whether other prefs have this right: of course they all do. Anyone in doubt should go and read the Companies Act 6006 and other related company law.

Returning to the issue of irredeamability: this is not an advantage of prefs but a disadvantage: in compensation you receive a higher coupon rate than dated debt. The idea that irredeamability is good is a myth/wishful thinking that has been perpetuated (including on these boards) quite likely by the investors who are complaining now.

As I say if you welcome the risk of a perpetual investment then there are the ordinary shares...

GS

[swill453]

As I say if you welcome the risk of a perpetual investment then there are the ordinary shares...

As I pointed out earlier, until Wednesday of this week Aviva themselves, on their own web site, described the preference shares as "perpetual".

Scott.

[swill453]

Apparently Aviva's own Monthly Income Plus fund is a large holder of preference shares. Holders of that might get a nasty shock next time they look at a valuation...

Scott.

[GoSeigen]

As I say if you welcome the risk of a perpetual investment then there are the ordinary shares...

As I pointed out earlier, until Wednesday of this week Aviva themselves, on their own web site, described the preference shares as "perpetual".

Scott.

I don't think anyone is disputing this Scott, but the reminder is welcome I'm sure!

GS

[swill453]

it would be a good idea to read Mark Taber's comments on the discussion boards at his site. (Google for the link). This is not a sneaky ruse or a risk.

I've been reading Mark's comments, and he does say it's "aggressive" behaviour on the part of Aviva, it's "investor unfriendly" and has "caused a disorderly market". He also says "there should be a concerted pushback by all cohorts of investors to encourage them to moderate their behaviour".

So his stance is very far from the spirit of your comments on this board.

Scott.

[GoSeigen]

it would be a good idea to read Mark Taber's comments on the discussion boards at his site. (Google for the link). This is not a sneaky ruse or a risk.

I've been reading Mark's comments, and he does say it's "aggressive" behaviour on the part of Aviva, it's "investor unfriendly" and has "caused a disorderly market". He also says "there should be a concerted pushback by all cohorts of investors to encourage them to moderate their behaviour".

So his stance is very far from the spirit of your comments on this board.

Scott.

Scott, read between Mark's lines. Maybe even speak to him. But he has twice posted the House of Fraser decision. To me that speaks volumes about his thoughts.

Personally, I'll be very surprised if Mark gets anything out of his action. However he is a man of exceptional integrity and ability, and he may be able to make a moral case, that a return of capital, albeit justified in law, will cause hardship for widows and orphans which would negatively affect the industry's image etc etc and pursuade some issuers to offer a sweetener. I think this is the angle he is working on, not necessarily to challenge the correctness of the action. But what do I know eh? I'm just the smug dude referred to on his site, not by him I hasten to add!

While on the subject, I referred Fools earlier to the discussion on Mark's site, but please be aware that there is still discussion there about "clauses in prospectuses" and so on, which IMO is completely misguided. As I have stated over and over IMO this has nothing to do with contractual rights but is about the statutory right of preference shareholders to have their capital returned. It is a capital reorganisation. So there is no point in looking at any contracts, statements by the company, wording on websites etc. Law trumps all of that. You need to go to statute and case law, as Mark has very very clearly and repeatedly done.


GS

[swill453]

Personally, I'll be very surprised if Mark gets anything out of his action. However he is a man of exceptional integrity and ability, and he may be able to make a moral case, that a return of capital, albeit justified in law, will cause hardship for widows and orphans which would negatively affect the industry's image etc etc and pursuade some issuers to offer a sweetener. I think this is the angle he is working on, not necessarily to challenge the correctness of the action.

Of course it is. One doesn't need to read between the lines to determine that.

When you have a court decision which says "The cancellation of the shares did not constitute a modification, commutation, affecting or dealing with rights attached to them", you know that "going legal" is going to get nowhere.

Scott.

[Rodent12]

What Mark Taber says is as follows:

Based on the market reaction to Aviva’s statement and my straw poll of market participants I think it is fair to say that everyone reading that had understood that any redemption would constitute a ‘variation of rights.’ However, there is a House of Fraser case (see below) where it was held otherwise. It is an odd one because cancelling the preference shares by ‘redemption’ or a ‘reduction in capital’ is the same thing in substance to an investor or potential investor so it is rather hard to see how it was intended that the preference shares could be cancelled at nominal value through a ‘reduction of capital’ without a separate vote of holders to approve it.

4 points:
1. My understanding is that the clause to allow preference shares to be cancelled at par was intended to place preference share holders above ordinary share holders if a company is wound up or subject to a reduction in capital (impacting both ordinaries and prefs) due to some sort of 'financial difficulty'. This potential action rather smacks of financial engineering by one share class (ordinaries) against another (prefs).

2. We only have a snippet from the HoF case - I don't think it is clear yet what the circumstances were surrounding that judgement (from 1987 under Scottish law?) etc.

3. I appreciate that this is described as a 'cancellation' rather than 'redemption'. However just because different terminology is being used does not mean that the proposed cancellation won't be legally defined as a redemption in this case - I think it is too early to say.

4. If Aviva seeks to 'exploit' the 'small print' in such a manner then, for me, it raises a massive trust issue over their products. I suspect it will for others as well.

[AleisterCrowley]

... This is not a sneaky ruse or a risk. Preference shares by their very nature have the right to have their capital returned in advance of the ordinary shareholders, The company is simply proposing to afford you this right which you always had.


GS

That's an odd use of the word 'right'
It's normally understood to mean something which can be exercised by the holder alone
EG I have the right to have a beer. I don't have the 'right' to be arrested for drunk and disorderly, that right belongs to the arresting party.

So Aviva may have the right to redeem at par (that's open to debate) but pref holders don't have the 'right' to have their shares forcibly redeemed at par.

[PeterGray]

4. If Aviva seeks to 'exploit' the 'small print' in such a manner then, for me, it raises a massive trust issue over their products. I suspect it will for others as well.

That may be true - but the number of others in relation to entire current and potential client base is likely to be small or tiny. This is not an issue that is going exercise the vast majority of those who use Aviva as an insurer, it would be a mistake to place too much weight on it as an argument here.

Peter

[Rodent12]

That may be true - but the number of others in relation to entire current and potential client base is likely to be small or tiny. This is not an issue that is going exercise the vast majority of those who use Aviva as an insurer, it would be a mistake to place too much weight on it as an argument here.

Totally agree Peter, and there was little or no effect on Lloyds Bank afaik. However it does all depend on how/if the press run with this.

[GoSeigen]

... This is not a sneaky ruse or a risk. Preference shares by their very nature have the right to have their capital returned in advance of the ordinary shareholders, The company is simply proposing to afford you this right which you always had.


GS

That's an odd use of the word 'right'

Not if you don't misconstrue what I wrote. The right that pref holders have is to be repaid their capital in full at par value before shareholders. That is what you sign up for as a preference shareholder. You accept that you have no right to demand your principle back (hence "perpetual": this is a negative, not a positive) but you can stop capital going to ords before it comes to you (hence "preference" and that is a positive for the investor).

I think people here are getting mixed up firstly with subordinated bonds, which preference shares are not, and with call options, which are clauses giving issuers the right to demand payment. The capital here is simply no longer needed. Which is great because holders get their principal back. That's way better than losing it all!

GS

[Rodent12]

I would be grateful for the legal definitions of redeemable and irredeemable.

My understanding is that redeemable refers to redemption at a certain point in time (therefore not at the choice of holder or issuer) as per the Companies Act.

But I can't find a definitive legal definition of irredeemable in relation to preference shares.

[AleisterCrowley]

... This is not a sneaky ruse or a risk. Preference shares by their very nature have the right to have their capital returned in advance of the ordinary shareholders, The company is simply proposing to afford you this right which you always had.


GS

That's an odd use of the word 'right'

Not if you don't misconstrue what I wrote. The right that pref holders have is to be repaid their capital in full at par value before shareholders. That is what you sign up for as a preference shareholder. You accept that you have no right to demand your principle back (hence "perpetual": this is a negative, not a positive) but you can stop capital going to ords before it comes to you (hence "preference" and that is a positive for the investor).

GS

Surely that applies specifically to the winding up of a company?

[TwmSionCati]

definitions of redeemable and irredeemable

There won't be "legal" definitions; but this should help: “Irredeemable debenture, a debenture which does not contain any provision for repayment of the principal money. Even if irredeemable, it falls to be paid upon the company going into liquidation.” [Perry & Ryder Thomson's Dict. Banking (ed. 11, 1965), 317/1]

A redeemable debenture provides for repayment; an irredeemable one doesn't. (The error is to suppose an irredeemable one provides for non-repayment.)

TSC

[Rodent12]

Thanks TSC.

I note that your definition includes provision for payment of irredeemables on liquidation, which isn't the situation we have with Aviva. Aviva does appear to include an open clause refering to payment at par on reduction of capital. However if that reduction in capital is simply limited to the preference shares, I still do do understand why that is not deemed a redemption, as this is a decision by the company not an issue forced upon them by liquidation.

I suspect that if these terms are not defined legally, then there will be scope for a legal challenge, subject to funding.

[johnhemming]

I have hunted up a link to the prospectus.
https://www.aviva.com/content/dam/aviva ... es_140.pdf
https://www.aviva.com/content/dam/aviva ... es_110.pdf

This is the original Memorandum and Articles of Association, but I am not sure what changes have been made to this:
https://s3-eu-west-1.amazonaws.com/docu ... 9ouP1QU%3D

[GoSeigen]

I have hunted up a link to the prospectus.
https://www.aviva.com/content/dam/aviva ... es_140.pdf
https://www.aviva.com/content/dam/aviva ... es_110.pdf

This is the original Memorandum and Articles of Association, but I am not sure what changes have been made to this:
https://s3-eu-west-1.amazonaws.com/ [...]

John, the Amazon link doesn't work for me. It's exceedingly long, BTW.

I've been mugging up on the law. May do a quick post on it. Suffice to say for now, the only relevant documents by my reading are the Articles and/or the authorising resolutions for the Prefs. One needs to look for language referring to protections in the case of a reduction of share capital or return of capital.

The following article is a useful summary, though not authoritative, for those who can be bothered:

https://lawexplores.com/shareholders-sh ... e-capital/


Sorry shooting out to see 2nd half of "England shambles" at our local!!

GS