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A & GA Prefs

Gilts, bonds, and interest-bearing shares
GoSeigen
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Re: A & GA Prefs

#128184

Postby GoSeigen » March 27th, 2018, 1:32 am

Wizard wrote:
GoSeigen wrote:On the other hand the companies Act 2006 was based upon the EC Company Law directive 2:

That states:

http://eur-lex.europa.eu/legal-content/ ... 31977L0091

Article 31

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.

Obviously this contemplates the possibility that capital is reduced and that this has an impact on each class of shareholders.


Terry.


Thanks Terry. I'm afraid JohnHemming didn't read the very important caveat which I have emboldened above -- but of course you weren't to know that.


English courts have ruled that in a capital reduction, class rights are NOT AFFFECTED FOR NON-EQUITY SHARE CLASSES. Therefore the caveat applies and a class vote will not be needed.


Sorry for the shouting but I have explained this over and over to John without making the slightest impact. He himself linked to a great web page with numerous case examples of exactly this principle. Clearly he didn't read his own document or disagreed with it but posted it anyway! Here's the link yet again with extract:

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

The following three cases decide that a company may reduce its share capital by returning nominal capital to preference shareholders with priority rights to return of capital on a winding up and no further capital participation without approval of the holders of the class and the preference shareholders cannot complain about the loss of the right to share in the future wealth of the company by continuing to receive their preferential dividends.


GS

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Re: A & GA Prefs

#128185

Postby Alaric » March 27th, 2018, 1:41 am

GoSeigen wrote:English courts have ruled that in a capital reduction, class rights are NOT AFFFECTED FOR NON-EQUITY SHARE CLASSES. Therefore the caveat applies and a class vote will not be needed.


You are bending the intent of words again. "Non Equity Share Class" was given a special meaning in the 2006 Companies Act. Does this mean that Companies have been awarded a unilateral option to pay off debt in the form of Preference Shares at par? If so, it's an unintended draft error which is contrary to the intent of the borrower/lender parties at issue and for that matter EU law on capital repayments and reconstructions.

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Re: A & GA Prefs

#128198

Postby Wizard » March 27th, 2018, 7:31 am

GoSeigen wrote:
Wizard wrote:...Article 31

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....


Thanks Terry. I'm afraid JohnHemming didn't read the very important caveat which I have emboldened above -- but of course you weren't to know that.


English courts have ruled that in a capital reduction, class rights are NOT AFFFECTED FOR NON-EQUITY SHARE CLASSES. Therefore the caveat applies and a class vote will not be needed.


Sorry for the shouting but I have explained this over and over to John without making the slightest impact. He himself linked to a great web page with numerous case examples of exactly this principle. Clearly he didn't read his own document or disagreed with it but posted it anyway! Here's the link yet again with extract:

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

The following three cases decide that a company may reduce its share capital by returning nominal capital to preference shareholders with priority rights to return of capital on a winding up and no further capital participation without approval of the holders of the class and the preference shareholders cannot complain about the loss of the right to share in the future wealth of the company by continuing to receive their preferential dividends.


GS

GS

I am not trying debate what the law says now, based on old case law. Out of interest, in terms of the EU Directive I guess it comes down to what is meant by "rights" as it may not align to the view of the UK courts. Has this been tested in the European Courts since this directive was issued?

My point is really that what would protect preference shareholders in future is a change that makes clear that a return of capital requires a vote by the class whose capital is being returned. This is what was suggested to have happened in Australia, but I have not yet found anything confirming that. While they are interested in the issue lobbying the Treasury Select Committee to recommend such a change would be in the interests of holders of irredeemable preference shares.

Terry.

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Re: A & GA Prefs

#128217

Postby NealMorris » March 27th, 2018, 9:07 am

Preferred shares are carried on the corporate balance sheet in the shareholder's equity column, not the debt column.

Preferred shares are equity !

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Re: A & GA Prefs

#128218

Postby NealMorris » March 27th, 2018, 9:08 am

So they are effected and need a separate vote.

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Re: A & GA Prefs

#128221

Postby Alaric » March 27th, 2018, 9:19 am

NealMorris wrote:Preferred shares are equity !


There's an obscure definition in the 2006 Companies Act which defines Equity Share Class to mean shares with voting rights and thus excludes Prefs. For accounting and taxation purposes, Preference shares are treated in the same way as Ordinary shares.

The entire issue has been brought about by lawyers trying to exploit what appears loose wording in the 2006 Act. In particular as to whether a separate vote is needed so that both the Preference and Ordinary shareholders have to independently approve the return of capital. Provided that is securely in place, the shares can be priced as if any future return of capital will be at a price reflecting the value of the income stream being retired on the grounds that Prefs wouldn't vote for anything less.

There's a long piece by Mark Taber which summarises the various issues raised.
https://www.fixedincomeinvestments.co.u ... #post-2527

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Re: A & GA Prefs

#128227

Postby GoSeigen » March 27th, 2018, 9:28 am

Wizard wrote:
I am not trying debate what the law says now, based on old case law. Out of interest, in terms of the EU Directive I guess it comes down to what is meant by "rights" as it may not align to the view of the UK courts. Has this been tested in the European Courts since this directive was issued?


Terry, to be clear I'm not debating with you either or trying to change your mind, just setting out the other side of the argument so that both sides can be judged, in response to someone (you!) who is prepared to think logically and present evidence.

You have a point about the interpretation of rights. But that is not going to be tested in court or in a commercial proposal now I guess.

My point is really that what would protect preference shareholders in future is a change that makes clear that a return of capital requires a vote by the class whose capital is being returned. This is what was suggested to have happened in Australia, but I have not yet found anything confirming that. While they are interested in the issue lobbying the Treasury Select Committee to recommend such a change would be in the interests of holders of irredeemable preference shares.

Terry.


What would also protect preference shareholders is if they did full due diligence and knew what they were investing in. Knew for instance that preference shares are not debt. Knew that the reason some things are not spelled out in the terms is that it is already in company law.

I said in almost my first post on the Aviva issue that pref holders were making a mistake by focussing on the "prospectus" to the exclusion of the law. How a company behaves (and recall pref holders are members) is laid out in two main places: the Companies Acts and the Articles of the Company (and a third: the resolutions). It's been that way for (almost) hundreds of years. But certain people have got it into their heads that preference shares are loan agreements with a 100% contractual basis.

I hope to god that the industrious Mark and supporting baby-boomer contingent don't succeed in changing the law. That would be the death knell for preference shares as a class and potentially have wide ranging repercussions throughout our economy. What Mark is proposing doing is giving minority shareholders a veto over the allocation and return of capital. The complaint (without a shred of justification IMO) is of shareholders' rights being denied, yet they suggest fixing the non-problem by removing the rights of other (the residual) shareholders. That makes no sense at all.

Mark and others have also singularly failed to consider the underlying economic drivers of what has happened here. Aviva's capital reduction came as a natural side-effect of falling yields. Gilt yields collapsed starting ten years ago. All my perpetual gilts were cleared out by the government "unilaterally" at par. If they hadn't done that my war bonds would now be trading around 150p and still be paying a reliable income stream. Long-dated gilt prices reached almost 200p!

Preference shares are just a few years behind gilts. Their yield has also collapsed and it is only right that companies take the opportunity to refinance their liabilities and even retire their capital when there is so much capital that no-one knows what to do with it. Otherwise what do we do -- cripple our own UK businesses with expensive capital while nimble new entrants from China and elsewhere clean up with their cheaper funding base? It's crazy. There are precious few ways for companies to return capital as it is, removing another one of them is rather regressive in my view.

I've already suggested an excellent way for preference shareholders to benefit from the trend that has tripped them up -- buy equity. It's a good match: what they want is a perpetual stream of dividends issued by solid UK firms. They want to be senior in the decision making and want to be paid last. Equity suits them perfectly.

Don't try to turn prefs into equity. Just sell the prefs and buy the equity. UK shares have gone nowhere in twenty years: surely now is a good time to be buying? Or is this a case of the last bear turning bullish...


GS
P.S. Preferred shares are not equity. That is a clear matter of definition. CA2006 s548 https://www.legislation.gov.uk/ukpga/20 ... ection/548

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Re: A & GA Prefs

#128228

Postby GoSeigen » March 27th, 2018, 9:34 am

NealMorris wrote:Preferred shares are carried on the corporate balance sheet in the shareholder's equity column, not the debt column.

Preferred shares are equity !


The topic under discussion is company law not accounting. See P.S. in my previous post. Shall we talk about the accounting treatment in another thread if it's an isssue? Personally I don't mind if it goes in either the equity or debt entries -- it's hybrid.

GS

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Re: A & GA Prefs

#128230

Postby Alaric » March 27th, 2018, 9:39 am

GoSeigen wrote:What Mark is proposing doing is giving minority shareholders a veto over the allocation and return of capital.


I think he is trying to enforce rights that already exist and whose presumed existence has been a long standing feature of the public market in Preference Shares.

I believe it the intention of those who lent money to Aviva and GA on Preference Share terms back in the 1990s that the ordinary shareholders should not be in a position to pay themselves off and leave the preference shareholders with a company unable to support their dividends. Hence a very good reason for them to have a veto over such activity.

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Re: A & GA Prefs

#128242

Postby GoSeigen » March 27th, 2018, 10:29 am

Alaric wrote: lent money to Aviva


Great example. Thank you.

GS

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Re: A & GA Prefs

#128250

Postby ayshfm1 » March 27th, 2018, 11:04 am

lol

Why is it that even those that own prefs fail to comprehend what they are.

Which is equity ie shares, they own the company (albeit in minority). With all the risks and rights therein implied.

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Re: A & GA Prefs

#128257

Postby Alaric » March 27th, 2018, 11:19 am

In economic terms, an iredeemable Preference Share is the same as an undated Bond, so in my view the term "loan" is perfectly appropriate to describe the relationship between the seeker of funds and the provider of funds. The legal, accounting and perhaps more importantly the taxation treatments are different. So back in 1992, the holders of capital were prepared to offer it to Aviva and GA in exchange for a perpetual income of around £ 8.50 per £ 100. There were no doubt reasons that the placings were structured as Preference Shares rather than undated bonds, but the economic effects were the same.

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Re: A & GA Prefs

#128259

Postby Alaric » March 27th, 2018, 11:24 am

ayshfm1 wrote: With all the risks and rights therein implied.


As has been pointed out elsewhere, the responsibilities of Directors are to all shareholders, thus embarking on a course of action detrimental to a minority class is not one they should contemplate. Elsewhere also in a "now you don't" opinion, the term "Equity Share Class" is stated not to include Preference Shares because they don't normally have votes.

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Re: A & GA Prefs

#128298

Postby GoSeigen » March 27th, 2018, 1:22 pm

Alaric wrote: The legal [...] treatments [of preference shares vs undated bonds] are different.


Thank you. Completely agree.

GS

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Re: A & GA Prefs

#128306

Postby Alaric » March 27th, 2018, 1:55 pm

GoSeigen wrote:Thank you. Completely agree.


Do you also agree that in economic terms ignoring taxation, they are the same thing?

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Re: A & GA Prefs

#128425

Postby Wizard » March 27th, 2018, 6:37 pm

GoSeigen wrote:
Wizard wrote:...My point is really that what would protect preference shareholders in future is a change that makes clear that a return of capital requires a vote by the class whose capital is being returned. This is what was suggested to have happened in Australia, but I have not yet found anything confirming that. While they are interested in the issue lobbying the Treasury Select Committee to recommend such a change would be in the interests of holders of irredeemable preference shares.

Terry.


What would also protect preference shareholders is if they did full due diligence and knew what they were investing in. Knew for instance that preference shares are not debt. Knew that the reason some things are not spelled out in the terms is that it is already in company law.

I said in almost my first post on the Aviva issue that pref holders were making a mistake by focussing on the "prospectus" to the exclusion of the law. How a company behaves (and recall pref holders are members) is laid out in two main places: the Companies Acts and the Articles of the Company (and a third: the resolutions). It's been that way for (almost) hundreds of years. But certain people have got it into their heads that preference shares are loan agreements with a 100% contractual basis.

That is probably fair comment GS, I certainly relied on a read of the prospectus when acquiring a number of holdings in preference shares. My only defence would be that of being amongst a large number of others who did not appreciate the risk that the provisions of Company law may present to the perpetual nature of the instruments I was buying.

An interesting point that has been made on LemonFool and in at least one article I have read is that at the time of issuance the 4 votes per share meant that preference share holders did have the ability to out vote equity holders in any consideration of a capital return at par. This suggests (to me at least) that at the time they were issued the 'architects' of the Aviva preference shares recognised the potential for a return of capital at par and (possibly to ensure the preference shares could be sold as perpetual instruments) they enshrined a means for preference shareholders to protect themselves from this happening against their wishes. That point seems to have been lost to many (including me) over time. Of course what has also happened is that many more ordinary shares have been issued and now the 4 votes per preference share does not protect holders from being outvoted by ordinary shareholders on a capital return. Whether Aviva did eveerything they should have as the ordinary share numbers increased has been question on another thread on LemonFool, but I can't comment on that as I do not have either the specialist legal or historical knowledge.

GoSeigen wrote:I hope to god that the industrious Mark and supporting baby-boomer contingent don't succeed in changing the law. That would be the death knell for preference shares as a class and potentially have wide ranging repercussions throughout our economy. What Mark is proposing doing is giving minority shareholders a veto over the allocation and return of capital. The complaint (without a shred of justification IMO) is of shareholders' rights being denied, yet they suggest fixing the non-problem by removing the rights of other (the residual) shareholders. That makes no sense at all.

Yes, but in the case of Aviva that would only be returning the position to that which existed at the time the preference shares were issued due to the 4 votes as per above. Would this really be the end of the world as we know it? I am not so sure. Surely preference shares are not so widespread as to be central to UK Plc and how it is financed? And if they do end up being an uneconomic form of financing, well they can be replaced by means of a tender offer or the issuer buying them in the market.

Terry.

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Re: A & GA Prefs

#128478

Postby GoSeigen » March 28th, 2018, 1:01 am

Moderator Message:
Discussion of moderation here is outside of TLF's guidelines/rules. Raptor.

GS

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Re: A & GA Prefs

#128504

Postby johnhemming » March 28th, 2018, 9:21 am

http://citywire.co.uk/wealth-manager/ne ... _Daily_EAM

The FCA are still looking at the Aviva issue.

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Re: A & GA Prefs

#128520

Postby Alaric » March 28th, 2018, 10:20 am

johnhemming wrote:The FCA are still looking at the Aviva issue.


The full text of their reply is at
https://www.investegate.co.uk/financial ... 04471964J/

I noticed some fence sitting.

In para 4 they say
However, we would note that consideration of legal changes which would prevent the approach proposed by Aviva would not necessarily be within the powers of the FCA.


However in para 6
In the event that the applicable legal framework does not provide adequate protection for investors then the FCA will offer its assistance in resolving this issue.


So they promise both inaction and action.

They evidently aren't prepared yet to say that if invoking the "return of capital" provisions of the 2006 Companies Act doesn't require separate votes of the differently affected classes of shareholder, then that offers inadequate protection to investors.

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Re: A & GA Prefs

#128604

Postby PeterGray » March 28th, 2018, 2:37 pm

So they promise both inaction and action.

Surely what they are saying in para 4 is simply that they don't create legislation, and that if that is needed it has to come from elsewhere, and that they will provide what help they can.

None of which means they will end up coming to that conclusion.

Peter


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