Redemption -- some questions for thinking investors

[NealMorris]

Well there in is the problem. Perhaps it is that simple. However what is to stop someone who is motivated and has a very sharp mind, eye for detail and exceptional legal skills from unearthing yet another flaw in the intended or implied detail at a later date and throwing the original intentions into chaos.

It only takes someone looking to make an easy buck or a name for them self with lower standards and morals than what has gone before as we have just witnessed.

[Alaric]

Perhaps it is that simple. However what is to stop someone who is motivated and has a very sharp mind, eye for detail and exceptional legal skills from unearthing yet another flaw in the intended or implied detail at a later date and throwing the original intentions into chaos.

It's been suggested that the FCA demands higher standards from those it regulates on their market conduct. In other words they don't try to break established sets of conventions by employing lawyers searching for unintended wording that white is black, for example that you can redeem an irredeemable security (as in repay it at par) by dressing it up as a return of capital. It would help naturally enough, if the FCA understood the problem.

[GoSeigen]

Please leave this thread to discuss the specifc issue of what the words "Redemption" and "Irredeemble" mean in the context of (preference and other) shares.

It's odd that the other board has been locked.

Moderator Message:
edited to remove comments about MODs.

viewtopic.php?f=52&t=10652



GS

[Raptor]

Moderator Message:
This thread has gone way off topic. Can posters please keep to the OP's original post viewtopic.php?p=127503#p127503 . Posts that do not will either be edited, removed or moved. Raptor.

[BobGe]

Even if it had gone to court, trying to pull a fast one tends to produce poor results...

Maybe, but in law would it be seen as such and who might have been prepared to fund it.

(Sorry Raptor just seen the note; o/t, yes, but the o/p's original topic is dead in the water I'm afraid [GS provided his own answers to his questions].)

[GoSeigen]

but the o/p's original topic is dead in the water I'm afraid [GS provided his own answers to his questions].)

Not dead in the water at all because so-one is compelled to agree with me. Do try your own answers if you like: I have invited JohnHemming to give his version but the task is evidently beyond him! I'd like to see some coherent answers because I myself haven't the foggiest how it can be interpreted any other way.

GS

[Alaric]

Please leave this thread to discuss the specifc issue of what the words "Redemption" and "Irredeemble" mean in the context of (preference and other) shares.

How about Redemption means that there's a fixed date, dates, or well defined option whereby the issuer can pay back the money borrowed at par or a pre-determined fixed price?

Irredeemable (get the spelling right) means that there isn't. It doesn't preclude the borrowing being paid back, but both parties have to agree a price.

Lenders aren't terribly keen on giving borrowers "heads you win, tails you win" options, which is what a unilateral borrower option to repay gives the lender.

[GoSeigen]

Avidya

In looking back at some posts yesterday I noticed that I hadn't replied to this post of yours; I originally said I'd delay replying as johnhemming and I were discussing the issue on the thread, however the thread was locked and discussion moved on.

It's probably a bit late but for completeness I shall answer you questions in that post as linked and quoted below:

viewtopic.php?p=125489#p125489

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 - (A) 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 (B) 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. (C) 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.

[My bold and labels (A-C)]


Looking at your points in bold, then yes, there are many differences between redemption and return of capital. Here's my take:


1. First, a note on terminology. The word redeem/redemption in the CA2006 is used in a narrower sense than that used by many private investors who seem to interpret it in the broad sense of "purchase" or "buy back".

CA2006 does not use redeem/redemption in this way: the generic term used is "acquire" e.g. s.658 "A limited company must not acquire its own shares, [...]". Then the manner of acquiring (and subsequently cancelling) shares is described using a number of more specific words and phrases:

-reduce/reduction of capital s.641ff;
-redeem/redemption s.684ff;
-subscribe/subscription s.8;
-purchase of own shares s.690ff;

Naturally the Act uses these terms very carefully as do Articles on the whole. Private investors of course use the terms without care as laymen. PI's have stated that their understanding of "redemption" is: "the action of regaining or gaining possession of something in exchange for payment"; clearly this could apply to any purchase/repayment of shares by a company, whereas the Act and Articles use the word only to refer to the specific case of redemption in s.684ff.

Henceforth in this reply I aim to used the words in exactly the manner of CA2006; in some cases that may differ from your use in your question.



2. At (B) you refer to capital returns and share buy backs. Neither of these terms is used in the Act. So let's put them in terms of the Act. "Capital returns" would be acquisitions of shares which are effective in decreasing the capital of the company, returning that capital to shareholders. For public companies this may be achieved only by a Reduction of Capital according to the Act. "Share buybacks" on the other hand would fall into two separate categories: Redemption and Purchase of Own Shares, which are two distinct and specific exceptions in the Act to the general prohibition of acquisition by a company of its shares.



3.Quick summary of the three procedures:

Reduction of Capital: Available for all classes of shares. May be carried out "in any way" (s.641) -- for our purposes we are interested in Reduction involving acquiring and cancelling paid-up share capital. Must be authorised by a special resolution confirmed by the court. Company Articles may restrict or prohibit Reduction of Share Capital. May be financed in any way.
Redemption Only available for redeemable classes of fully-paid shares, subject to their redemption terms. Shares must be acquired for valuable consideration and must be cancelled. No authorising resolution is required but notice of the redemption must be given. Shares may only be redeemed out of distributable profits of the company [or a fresh issue].
Purchase of Own Shares: Available for all classes of fully-paid shares. Shares must be acquired for valuable consideration and must be cancelled. Purchase is subject to the strict provisions of Part 18 Chapter 4 of the Act and may be restricted or prohibited by company articles. Must be authorised by shareholder resolution. Shares may only be purchased out of distributable profits of the company [or a fresh issue].



4. At (A) you summarise the accounting treatment of redemption and return of capital. I shall do the same adopting your text with alterations but referring to redemption, and capital reduction. Purchase of own shares is similar in accounting to redemption and I assume can be left aside for now. I am not an accountant!

Redemption: Where there is a par redemption clause in a redeemable 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, matched by an increase in the issuer's Capital Redemption Reserve (s733). The issuer's capital is therefore maintained. [The capital redemption reserve may only be used subsequently to make a bonus issue of shares. The following has worked examples showing maintenance of capital: http://www.accaglobal.com/content/dam/ACCA_Global/Technical/fact/technical-factsheet-177.pdf ]

Capital Reduction (acquire/cancel paid-up shares): the shareholder is paid par plus accrued [or other amount specified in the Terms], the shares are cancelled, and the issuer’s shareholder capital account is reduced by the amount paid to the shareholder. No allocation to capital reserves is required -- the issuer's capital decreases. [The above article has a worked example of reduction of capital; however it is for a private company and doesn't involve acquisition of shares.]

Purchase of Own Shares: Similar to redemption.

So the economic effect on the issuer in each case is quite different. In addition, irredeemable shares like the Aviva preference shares cannot be redeemed but they ARE liable to either reduction of capital or purchase, subject to the requirements of the Act and their Articles.



5. Regarding your question at (C) about use of CA2006 vs CA1985, firstly, IMO the two acts are not significantly different in the relevant provisions. I'm pretty sure all the above was the same under CA1985. I'd guess any changes in 2006 would affect the actions available to the parties, subject to the contract that was agreed between them, which would still be interpreted in terms of the 1985 Act. I confess I don't know what happens if something in the contract that was lawful in 1985 becomes unlawful by the passing of the 2005 Act.




I conclude by answering your initial question:

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?

The answer is indeed always, as asserted by Aviva, if redemption is understood in the legal sense used in the Act and Articles. PI's as I noted have their own take on the words redemption, redeemable and irredeemable which naturally leads them to a different conclusion.




GS

[PeterGray]

PI's as I noted have their own take on the words redemption, redeemable and irredeemable which naturally leads them to a different conclusion.

The evidence would suggest that it was not just PIs. Plenty of IIs hold "irredeemable" prefs.

Peter

[ElectronicFur]

PI's as I noted have their own take on the words redemption, redeemable and irredeemable which naturally leads them to a different conclusion.

The evidence would suggest that it was not just PIs. Plenty of IIs hold "irredeemable" prefs.

Peter

The market price of irredeemable prefs before Aviva's actions would indicate everyone holding them did not expect issuers to have the ability to call at par by doing it as a return of capital.

[Holts]

Peter

The market price of irredeemable prefs before Aviva's actions would indicate everyone holding them did not expect issuers to have the ability to call at par by doing it as a return of capital.

This is the oddity because when I looked at the prospectus Aviva were referring to it read , to me at least , that they could do exactly as they suggested , it seemed very clear .

That being so , why were the IIs holding these and others with the risk implied ? My position had gone from initial shock they can't do this these are perpetual and irredeemable (those words giving me comfort ) to actually they can do this , I posted to that point on ADVFN .

Surely it can not be that these investors with their legal departments were simply duped by those words irredeemable/perpetual ?

[Alaric]

This is the oddity because when I looked at the prospectus Aviva were referring to it read , to me at least , that they could do exactly as they suggested , it seemed very clear .

Return of capital required shareholder consent. The unclear issue was whether Prefs had a separate class vote. Provided they did, it was assumed they wouldn't consent unless offered fair value and so the market practice was to treat the securities as paying for ever or until a market price was paid to terminate them. It was Aviva's assertion that they could override the votes of Pref holders by only having a vote of all shareholders that briefly destabilised the market.

It was also the practice that if an issue had explicit call rights, this was made clear at a high level in the description of the security, so that a false market didn't develop.

[Holts]

Return of capital required shareholder consent. The unclear issue was whether Prefs had a separate class vote. Provided they did, it was assumed they wouldn't consent unless offered fair value and so the market practice was to treat the securities as paying for ever or until a market price was paid to terminate them. It was Aviva's assertion that they could override the votes of Pref holders by only having a vote of all shareholders that briefly destabilised the market.

It was also the practice that if an issue had explicit call rights, this was made clear at a high level in the description of the security, so that a false market didn't develop.

Thank you , I had neglected that part of the argument , Turkeys do not vote for Christmas and they were just trying to shoot them instead .

[Wizard]

This is the oddity because when I looked at the prospectus Aviva were referring to it read , to me at least , that they could do exactly as they suggested , it seemed very clear .

Return of capital required shareholder consent. The unclear issue was whether Prefs had a separate class vote. Provided they did, it was assumed they wouldn't consent unless offered fair value and so the market practice was to treat the securities as paying for ever or until a market price was paid to terminate them. It was Aviva's assertion that they could override the votes of Pref holders by only having a vote of all shareholders that briefly destabilised the market.

It was also the practice that if an issue had explicit call rights, this was made clear at a high level in the description of the security, so that a false market didn't develop.

When you say it was clear this was possible do not forget that at the time the Aviva prefs were issued the 4 votes per pref and the ratio of prefs to ords meant that even in a vote of all shareholders the pref holders could out vote the ords on a return of capital at par. Aviva then over time issued many more ords meaning they could out vote the prefs. Questions have been raised (but not answered to the best of my knowledge) as to whether the issuance of the ords should have been notified to pref holders and / or whether it in itself was a change in the prefs terms.

Terry.