A & GA Prefs

[Dod101]

A previous, related topic has been locked so I have started this new one and crave the indulgence of the Mod. I missed all the excitement in relation to the previous topic because I was away for a couple of weeks but had I been around I would have been asking those who have a better idea about these things than I, why Aviva could not have chosen to buy out the prefs at something nearer to the market price because there is no doubt that the dividend payable is now well out of line with current interest rates. After all, companies regularly buy in their own ordinary shares, naturally at something approximating to the current prices available. Sometimes they take these shares into treasury but sometimes they cancel them and thus reduce their capital. I assume they could have done the same and indeed might do the same with the Prefs and no one could then accuse them of anything since no one need sell. Were the Aviva directors so stupid/greedy/arrogant as not to have had a Plan B, so that if something went awry with their cunning plan to try to retire the Prefs at par they would not end up with egg not just over their faces but such that they were buried in it?

This may already have been covered and if so my apologies.

Dod

[Wizard]

Dod

I am not sure that you will get a clear answer here. The other thread you refer to seemed to get to a somewhat unpleasant place pretty quickly and this one may well follow that path*. Based on the most recent statement from Aviva it would at the very least seem to have been a misjudgement by management, who did not think fully about how some of the institutional holders of the preference shares (who in many cases also held ordinary shares) would react.

Terry.

* IMHO you are likely to find a better discussion of the topic on OldBoyReturns' discussion board if you frequent that as well as here. So you may want to post your question there.

[PeterGray]

They could have offered to buy in the market, quite clearly. However, that would have cost more money, and would not have guaranteed completely clearing out the prefs. No doubt they could have come up with a deal that included a degree of compulsion, or a more likely a price that would have got the support of 75% of the pref holders, and there would have been no major complaints of the sort we have seen. But this was a clear attempt to do it on the cheap on the back of a perceived legal right, real or otherwise, that had only recently been spotted - apparently by an unnamed investment bank, who were presumably looking for a cut. Either at par or by using the threat of their interpretation of the terms to push back the market price to allow a tender at a "compromise" price - they always left something of that sort open as an option in their statements.

In practice, they were unprepared for the sh*t storm that they unleashed!

Peter

[colin]

They could have offered to buy in the market, quite clearly

if they had wanted to buy a significant percentage of their preference shares through the normal market maker channel then presumably the price would have gone through the roof, as far as i know preference shares are not as liquid as the ordinary shares of large quoted companies and market makers only keep a small inventory as they do not expect to trade many,when demand overwhelms their inventory supply they have to offer a higher price to tempt holders to sell, and who would sell once they realize a big player is trying to hoover up the available stock?

[Dod101]

They could have offered to buy in the market, quite clearly

if they had wanted to buy a significant percentage of their preference shares through the normal market maker channel then presumably the price would have gone through the roof, as far as i know preference shares are not as liquid as the ordinary shares of large quoted companies and market makers only keep a small inventory as they do not expect to trade many,when demand overwhelms their inventory supply they have to offer a higher price to tempt holders to sell, and who would sell once they realize a big player is trying to hoover up the available stock?

Yes and Aviva would have been no worse off. They could simply not have bought but everything has its price and when an IT has decided to buy in say pricey Debentures they have usually managed it sometimes at a premium to the market price but they have deemed that worthwhile in order to remove the expensive interest charge. I simply do not understand how the management of Aviva could have been so stupid as not to have expected the furore their suggestions stirred up. They should have been able to take a much broader view of the matter and it just confirms my feeling of the arrogance or stupidity of that company's Directors.

Dod

[colin]

Yes they absolutely should have recognized the outrage that their plans would engender, definitely something not quite right in their characters, perhaps they would be better suited to careers in accountancy?

[Alaric]

why Aviva could not have chosen to buy out the prefs at something nearer to the market price because there is no doubt that the dividend payable is now well out of line with current interest rates.

They could of course. Also they could offer say a 4% Bond or Preference Share at a relationship of around 1.6 new to 1 old.

The procedures to pay off the shares would have involved invoking clauses of appropriate Companies Act. Whilst these say that 75% of shareholders have to be in favour, they appear to fail to stipulate that it should be 75% of each class. But that may have to be tested in a Court to resolve.

Provided there's always a blocking vote, options to redeem at par are valueless to both parties and likely to be mostly ignored in market pricing.

It's a regular thing for Companies to return Capital periodically. Aviva's problem with doing this is that Prefs have a blocking vote, in that their shares have to be redeemed as well. For avoidance of doubt, redeemed is used with the meaning of paid back or a capital return.

[johnhemming]

European Law says each class.

[stockton]

The whole business has been very peculiar.

In at least one dictionary “irredeemable” is defined as meaning “ having no redemption date “ (a meaning presumably derived from the word deem), and it would appear that General Accident/Aviva have been using this meaning in their documents for at least 20 years.

The problem is that this meaning is manifestly not the meaning generally accepted by stock market participants, and quite how an insurance company has managed to ascribe a peculiar meaning to a word for quite so long is not clear, but it might be a reflection of how the insurance market works.

Overall, had it not been for the existence of OBR, events might well have followed a different sequence.

(With acknowledgements to GS)

[Dod101]

I am trying to avoid the previous arguments about Company law, redeemability or not and so on. I am simply asking why Aviva could not have bought the Prefs on market as they can do with the Ordinaries and either placed them in Treasury indefinitely (thus not redeeming them) or cancelling them (if they are allowed to do so)

This could have been accompanied by meetings with the institutional holders who appear to have successfully persuaded Aviva to withdraw their proposals. They would surely have been sympathetic to Aviva's position and, as everything has its price, might even have agreed to support some sort of retirement of the Prefs.

Fundamentally, my point is that the Aviva Directors seemed to be totally oblivious of the market and the fact that they are running a public company with all that that implies. Questions need to be asked by shareholders (of which I am not one) at the upcoming AGM.

Dod

[Alaric]

I am simply asking why Aviva could not have bought the Prefs on market as they can do with the Ordinaries and either placed them in Treasury indefinitely (thus not redeeming them) or cancelling them (if they are allowed to do so)

"on market" is the key point, where they would have had to pay 150-180 as opposed to 100 if they paid them back at par. Postings at the fixedincomeinvestor site suggest it was a proposal put to Aviva and others by an as yet unnamed merchant bank or law firm who might have been in for a cut of the profits.

Fundamentally, my point is that the Aviva Directors seemed to be totally oblivious of the market and the fact that they are running a public company with all that that implies.

Hopefully the FCA will remind them of this, wearing one of its many supervisory hats. If not, I'd expect the Treasury Select Committee to be asking the FCA some pertinent questions.

[GoSeigen]

Dod

I am not sure that you will get a clear answer here. The other thread you refer to seemed to get to a somewhat unpleasant place pretty quickly and this one may well follow that path*.

Terry.

* IMHO you are likely to find a better discussion of the topic on OldBoyReturns' discussion board if you frequent that as well as here. So you may want to post your question there.

No Terry, I don't want to post over there. I happen to like Lemon Fool and the people who post here. Why should I have to go to a different website to discuss something of interest to me. If you are the one who asked for the other thread to be shut down that was not very nice. It was an extremely popular and useful thread. I know I probably posted a bit too much there, but many readers were asking me specific questions as they were trying to evaluate the legalities of what Aviva were attempting. And yes, the thread got heated in places, but that was already handled and fixed as far as I can tell, and Mark's board was even worse with some quite personal and unpleasant things being written about both Aviva and other posters.

GS

[johnhemming]

The procedures to pay off the shares would have involved invoking clauses of appropriate Companies Act. Whilst these say that 75% of shareholders have to be in favour, they appear to fail to stipulate that it should be 75% of each class. But that may have to be tested in a Court to resolve.

a) EU law requires a separate vote and will be in force until 2020 at the moment
b) The government says it intends to maintain most of EU law anyway
c) The 1972 European Communities Act would imply that this should be the interpretation anyway

However, it would be good to have this written explicitly into UK statute.

I think some of the confusion here comes from the mixture between legal, investing and accounting/tax nomenclature. In the end there has to be one solution. However, company law applies limits as to capital returns. Hence a capital reduction is required before some shares (preference or otherwise) can be redeemed.

The capital reduction is nothing to do with the shareholders (although they have to vote for it). It is all about reducing the issued capital of the company. After that then capital can be returned to shareholders.

[GoSeigen]

that had only recently been spotted - apparently by an unnamed investment bank

Peter, this is false and put out by the anti-cancellation side IMO. The possibility of par purchase had been in the annual accounts since at least 2011, maybe before. See my posts here:

viewtopic.php?f=52&t=10757

EDIT: re-reading your post I see you allude to this, but then how does that square with "recently spotted"? I can't believe no-one saw that and queried it with Aviva. I asked Mark about it and he claimed confidentiality and some hand-waving about the wording meaning something different...


GS

[swill453]

Peter, this is false and put out by the anti-cancellation side IMO. The possibility of par purchase had been in the annual accounts since at least 2011, maybe before.

Purchase surely isn't the same as cancellation. Whether redemption was the same as cancellation was debated endlessly, but this is yet another option.

Scott.

[Dod101]

I have I think had my question/suggestion answered by those who probably know more about Prefs than I do. I asked for the indulgence of the Mod to reopen the subject, which I have received and it seems that this thread is reverting to the subject of the thread that was shut down. I will now withdraw from any further postings on this subject as I personally do not think there is any point in covering the old ground again

Dod

[PeterGray]

GS,

I've answered this issue before, both here and on the fixed interest board. I think that the earlier statement:
subject to the provisions of the Companies Act 2006, the Company may at any time purchase any preference shares at either par or on the prevailing market price upon such terms as the Board shall determine. is a simple statement of their right, which there have been resolutions on at various AGMs, to purchase the prefs. We all knew that - why would anyone have queried it?

I don't read it as saying they have a right to compulsory purchase at par, regardless of the current SP, which is not the same thing. And the fact that the "additional information" that Aviva put out 10 days or so ago about their proposals made it explicit that a "purchase" was something different to what they thought they had a right to do, and were proposing, underlines that. They did not see their recent moves as having a connection to any previously stated right to "purchase".

Peter

[ayshfm1]

As I understand the salient points

The prefs were supposed to irredemiable and the dictionary definition of irredemiable is clear.

The terms can be varied only by a class vote, ie the preferences must vote to change the conditions.

Company law allows a return of capital, sharp minds argue that this allows the irredemiable prefs to be redeemed (albeit by having a vote of all shareholders and going to court to obtain permission to do so) at par.

75% of shareholders have to vote yes to carry the motion.

GA is a wholly owned subsidary of Aviva therefore a shareholder vote inside GA is a forgone conclusion and the prefs are out voted. Not so in AV. itself.

Company directors have a duty to all shareholders and whilst there are fewer pref holders it was hard to see how this posposal had any benefit to them

So

The prefs are not risk free investments - the more above par paid the riskier they are.

The legal argument about capital return is not closed and would have to go to court to be decided, deep pockets are required for that. This risk remains live.

Aviva backed down for two reasons :-

Firstly it was turning into a messy public fight, which would detract from the saving's made. Still worth doing.
Secondly the ordinary shareholders made it clear they would not support the motion. This is why Aviva climbed down, there was simply no point in proceeding. I also think GS has a good point had Aviva socialised the proposal with the big institutions they might have prevailed.

[johnhemming]

Company law allows a return of capital, sharp minds argue that this allows the irredemiable prefs to be redeemed (albeit by having a vote of all shareholders and going to court to obtain permission to do so) at par.

Two different words:

Return

Reduction

A company has issued capital. The idea of this is to give protection to creditors so they can make assessments as to how likely they are to be paid by the company (whose capital is otherwise limited and the shareholders of which have limited liability).

Capital can be "returned" in a number of ways to shareholders. Shares can be purchased or they can be redeemed or distributions can be made

The law has limits as to how much capital can be "returned" as that should not go below the issued capital. The level of issued capital can be reduced through a formal process which can involve a court consideration and then that allows shares to be redeemed which otherwise could not be redeemed.

The experts who argued that a capital reduction followed by paying the shareholders was such a different process to redeeming shares out of profits that it was not a "redemption". I would be interested in seeing the precedents for this as I don't believe it.

There is a valid argument in the House of Fraser case that preference shares without an explicit term of redemption have an implicit term of redemption through a capital reduction. However, if those shares are explicitly irredeemable then a class vote is required.

[Wordchild]

I don’t think Aviva could ever have got round the problems with the major institutions however they had approached this
It may have been a clever little plan and , who knows, it may even have had some arguable legal basis . But, it would never have got the support of key shareholders, and , once they had really thought about it, the Aviva board realised this.
The threat of redemption at par ( or whatever you want to call it ) was too extreme a position. For a number of powerful U.K. institutions ,this move was seen as an existential threat , because of the potential for it to be used by others in the future. I have certainly heard it was seen in those terms by one major institution and their bond and equity teams were simply instructed to ensure it was stopped.
I am just amazed that the Aviva board did not foresee this as the most likely turn of events. I suspect that , for the non execs , the risks were glossed over by the execs, bankers and the lawyers, and I am pretty sure that the non execs are now really furious about this. I think positions have now hardened and, from what I have heard, some shareholders want to see at least one executive departure, most likely the FD.