Redemption -- some questions for thinking investors

[GoSeigen]

Quiz: How well do you understand redemption in relation to shares? The Companies Act 1984, sections 159-170.


Abbreviations: CA1985 = Companies Act 1985; CA2006 = Companies Act 2006; GACA = GACA terms; AVA = AV.A terms

1.
-What is the opposite of "Redeemable"? [as used in CA1985 ss159-170]
-What is the opposite of "Irredeemable"? [as used in the GACA prospectus GACA 4(1)]
-What is the opposite of "not Redeemable"? [as used in the AV.A prospectus AVA 4(1)]


2. Disgruntled Aviva pref holders deny "Irredeemable" validity as an expression meaning "not a Redeemable instrument" [or share]**. What is the correct and widely used industry expression with the meaning "not a Redeemable instrument"? Give some examples.


3. All four Aviva preference shares are stated to be "Irredeemable" or "not redeemable" [each clause 4(i)]. If this means they cannot be subject to a capital reduction, why do they each have a "return of capital" clause? [ each clause 4(iii) ]


4. In the linked document starting on page 21, each preference share in the list is either stated to be an "Irredeemable instrument" or alternatively is stated to be "redeemable" with some conditions listed. What does "Irredeemable" signify?

http://www.lloydsbankinggroup.com/globa ... 9.75pc.pdf


5. In the same document, on page 28, Lloyds 8.75% prefs (LLPD) have this entry: "Redemption: The Preference Shares are irredeemable securities and have no maturity date.". Why have the drafters associated the term "Irredeemable" with the phrase "no maturity date" in an entry entitled "Redemption"?

http://www.lloydsbankinggroup.com/globa ... 9.75pc.pdf


That will do for now.

No replies acceptable without implicit or explicit reference to the Articles and/or Companies Acts. No convoluted circular reasoning unapplicable to shares in general please. Keep it short and sweet and thoughtful please. The model answer to all the questions comprises roughly twenty words in aggregate.



GS
[**usually they claim "Irredeemable" means "not subject to repayment and cancellation under any circumstances"; some add convoluted exceptions when pressed]

[GoSeigen]

Could someone at least have a go at question one. It should be relatively easy, with question two as a bonus perhaps?


GS

[johnhemming]

I did explain this to you previously. In any event it appears that the institutions are inclined to vote against any proposal to redeem the prefs through a capital reduction at par.

The threatened prefs are up about 5% today.

[GoSeigen]

Quick Answer:



Shares are "Redeemable" if issued with terms of a right or option to redeem written into the Company Articles, and otherwise "Irredeemable".



It's as simple as that. If you keep the above in mind, all the questions in the OP can be easily and elegantly answered. I answer them in full in the next post.



Now for some details:

Redeemable
The issue of Redeemable Shares in the early 1990s was controlled by the Companies Act 1984, sections 159-161. Briefly, the defining features of these shares are:

-the shares will be redeemed or liable to be redeemed at the option of the company or the shareholder;
-the terms, conditions and manner of their redemption MUST be written into the Company Articles at issue;
-they may not be issued if there is no existing class of shares which are not redeemable;
-their redemption MUST be paid for out of the distributable profits of the company, or out of the proceeds of a fresh issue of shares i.e. NOT out of capital.

https://www.legislation.gov.uk/ukpga/19 ... 59/enacted


Irredeemable
Shares classes are called Irredeemable Shares if they do not have the above redemption rights written into their terms at issue. This does not mean that they have NO means of repayment and cancellation -- only that precise Redemption rights have not been defined in advance in accordance with the Act.


Other means of repayment
There are at least two other ways shares may be repaid during the life of a company: by issuer's Purchase of Own Shares (ibid, sections 162-170), and by a Reduction of Capital (ibid, sections 135-141). Both of these processes may apply to any class of shares including Redeemable or Irredeemable classes.


Contracts
In the issued contract for practically any class of preference shares, there will be a clause which either defines them as redeemable with associated terms of redemption, or alternatively states that they are "irredeemable" (sometimes "not redeemable"). For avoidance of doubt, there is not a third type of shares which fall outside these two groups.



GS

[GoSeigen]

Full Answers


Quiz: How well do you understand redemption in relation to shares? The Companies Act 1984, sections 159-170.


Abbreviations: CA1985 = Companies Act 1985; CA2006 = Companies Act 2006; GACA = GACA terms; AVA = AV.A terms

1.
-What is the opposite of "Redeemable"? [as used in CA1985 ss159-170]
-What is the opposite of "Irredeemable"? [as used in the GACA prospectus GACA 4(1)]
-What is the opposite of "not Redeemable"? [as used in the AV.A prospectus AVA 4(1)]

The opposite of "Redeemable" is "Irredeemable"; likewise the converse.
The opposite of "not Redeemable" is "Redeemable".

Redeemable and Irredeemable classes are mutually exclusive and together describe all share classes.


2. Disgruntled Aviva pref holders deny "Irredeemable" validity as an expression meaning "not a Redeemable instrument" [or share]**. What is the correct and widely used industry expression with the meaning "not a Redeemable instrument"? Give some examples.

"Irredeemable"; examples in the link in Q4.


3. All four Aviva preference shares are stated to be "Irredeemable" or "not redeemable" [each clause 4(i)]. If this means they cannot be subject to a capital reduction, why do they each have a "return of capital" clause? [ each clause 4(iii) ]

Because a Capital Reduction may be paid for out of the company's capital, hence "return of capital"; Captal Reduction is applicable to all shares, either redeemable or irredeemable, subject to terms in the Company Articles. Redemption, if available, may NOT be paid for out of capital, only distributable profits or issue of new shares.


4. In the linked document starting on page 21, each preference share in the list is either stated to be an "Irredeemable instrument" or alternatively is stated to be "redeemable" with some conditions listed. What does "Irredeemable" signify?

http://www.lloydsbankinggroup.com/globa ... 9.75pc.pdf

"Irredeemable" means there were no redemption terms and conditions written into the Articles at issue.


5. In the same document, on page 28, Lloyds 8.75% prefs (LLPD) have this entry: "Redemption: The Preference Shares are irredeemable securities and have no maturity date.". Why have the drafters associated the term "Irredeemable" with the phrase "no maturity date" in an entry entitled "Redemption"?

http://www.lloydsbankinggroup.com/globa ... 9.75pc.pdf

Because if there was possibility of redemption the terms including maturity date would have been specified at issue. No fixed date was set so the shares are described as "irredeemable".


GS

[Alaric]

[ Capital Reduction is applicable to all shares, either redeemable or irredeemable, subject to terms in the Company Articles. Redemption, if available, may NOT be paid for out of capital, only distributable profits or issue of new shares.

A key point though is that you have to persuade the Pref holders aka turkeys to vote for Christmas and their deprivation of value. That is unless small print can be exploited to deprive them of any say in the matter.

[johnhemming]

It is obviously explicitly possible to put in a prospectus phrasing that makes it clear that a class vote is required to redeem shares as a consequence of a capital reduction.

If that is the case then your proposal that prefs are either redeemable or irredeemable is wrong. They are either redeemable explicitly, callable through a capital reduction (House of Fraser) or irredeemable in that they require a class vote to be redeemed. It isn't difficult.

Putting aside the EU law arguments. Then the question is one of interpretation of the contracts as to whether they would intend the prefs to be in category 2 or 3. To me it is obvious it is 3. QED.

Redemption is the process of paying for shares as can be seen in the HMRC definition or the ACCA definition. The capital reduction frees up cash in the balance sheet to redeem the shares. Simples.

[GoSeigen]

Simples.

Please provide your set of answers to the questions.

Thank you.

GS

[johnhemming]

You are trying to redefine the English language without properly trying to understand contract law. It doesn't matter how many times you assert what you do, it does not make it true.

Although the issue has not gone away as we need legal certainty for now I think I will stop responding to you on this issue. Aviva have done what I suggested on this board about a week ago. That is the right thing for them to do.

[GoSeigen]

You are trying to redefine the English language without properly trying to understand contract law. It doesn't matter how many times you assert what you do, it does not make it true.

Applies equally to yourself.

Please provide your set of answers to the questions.


GS

[PeterGray]

Dream on Owen - you know that will never happen.

Yes, it's hard on a number of people who sold - (but good for those who bought!). But I'm afraid that's the market.

To have any chance of compensation you would have to successfully argue in court, at massive expense, that Aviva never had any possible case and they knew it. That simply isn't the case, or going to be provable.

Peter

[ayshfm1]

No it didn't. You clearly do not understand what you are looking at.

They are equity with fixed coupons and arcane prospectus', hence carry a risk. Which I might add you just saw realised.

These are not investments for people who cannot afford to lose the money invested in them. In the vernacular "widows and orphans".

[AleisterCrowley]

Another question for thinking investors, is how much compensation Aviva should pay to the holders of their Irredeemable Preference Shares for the mental anguish and losses they have suffered.

I quite agree - having just seen my prefs jump more than 20% since I bought them last week I'm positively traumatised wondering how to spend the profit!

I didn't sell, but I didn't buy either so back to square one
(I did pick up some ELLA after their promise to not be naughty like Aviva, but they are flat at 150 ish)

[Alaric]

Well they don't carry much risk now do they?

The risk is back to what it always was, namely risk of company failure and the risk to capital value if or when interest rates rise. The income could fail as well and certainly would if they got a capital repayment voted through. Their latest announcements imply that any such repayment would be done with regard to yields and prices of comparable income sources.

The remaining mystery is as to why it should be that the 2006 Companies Act doesn't appear to insist that in the event of a capital repayment having an adverse effect on a class of shareholder, that a 75% majority isn't required for each class.

[ayshfm1]

I think the GA ones could be redeemed if they wanted to at par and no one could stop them.

Would they? Not right now, but you need to price that in.

[GoSeigen]

All, please move this off-topic discussion to a new thread. For some reason the mods are not acting on reports.

Thank you.

GS

[ayshfm1]

I will stop posting as per GS after this.

The whole thing is real, it only got stopped because the ordinaries (whom Owen wants compensation from) stepped and stopped it.

[BobGe]

Ah, well GS, it seems that we will now be unlikely to ever know the outcome of legal argument in respect of this hotly debated topic, which is probably a good thing (for now). The ECNs issue demonstrated well that things do not always turn out as people might expect, hope or wish for.

[NealMorris]

It's odd that the other board has been locked. There is still lots to be discussed about those preference shares such as will Aviva be made to compensate those holders whom it scared into selling at low prices and what about fàct it's actions created a disorderly market.

Bad luck GS on buying the wrong asset class on this occasion. Now that the rights and wrongs of actually redeeming them has been dealt with, perhaps you might like to turn your very sharp legal mind to methods the FCA or Parliment could propose to stop any chance of something similar occuring in the future. Particularly Lloyds whom have already shown they cannot be trusted to do the right and hounrable thing.

[Alaric]

methods the FCA or Parliment could propose to stop any chance of something similar occuring in the future.

Is it any more difficult than ensuring that the rules for making a capital distribution insist that all shareholder classes should approve at a 75% majority? Also it needs to be clearly understood, not least by the FSA, in the context of undated securities that the right to repay capital at par is an option and can be an expensive option for lenders to permit. As a consequence it wasn't the general intention to grant this at issue and it should be possible for it to be blocked when it's to the disadvantage of the holders of the securities proposed for this treatment.