Preference shares -- keeping it simple

[johnhemming]

That's good. I agree it is very clearly settled that in CA2006 "redemption" (s684ff) is not "reduction of capital" (s641ff) and vice versa: point 4 in the OP, which you used to dispute but happily have not this time.

The reduction of capital is an accounting process which frees up money in the accounts to redeem the shares. A reduction of capital in itself does not do anything to shareholders. It is a movement in the books of the company. The reason for court authorisation is to protect creditors not shareholders.

[OwenSwansea]

To quote a poster on another site, everyone should drop the armchair lawyer stuff, at the end of the day these things should do what they say on the tin, irredeemable means just one thing to most people.
Why should the UK be out of line with every other market on the planet?

[paulmiller]

Thus you will see that some Articles (not Aviva/CU) specify that the preference share class must have its own vote. LLPC/D for example get their own ordinary resolution.

I've been investing in RBS and LLOY ords, both of which I think will have huge excess capital to deal with, and assume shareholders would not want to see them being held hostage by their pref holders.

Have taken a small position in LLPD as a hedge.

GS

I am not clear what you are saying here. Are you saying that you think LLPC/LLPD are protected from being cancelled/reduced/redeemed at a price of £1 ?

You say that you have taken a hedge position in LLPD. A hedge against what ? I thought that your whole argument here on this board was that investors in Preference shares should be aware that they can be cancelled for £1 at any time ? LLPD are priced at about £1.60 so I do not understand what you are saying now.

You also say that RBS and Lloyds will not want to be “held hostage” by Preference holders, but then you say that you have bought LLPD at £1.60 ? Do you think LLPD are good value now at £1.60 ? I do not understand.

I also understand from the other board that NWBD have a class vote protection in their articles. Do you know about this ? If this is the case then I would assume that RBS ordinary shareholders will have no say in being “held hostage” by Preference holders as NWBD are protected from being cancelled/reduced/redeemed at a price of £1.

[GoSeigen]

everyone should drop the armchair lawyer stuff,

Huh? What are you talking about? Look up there ^ this is Investors' Roundtable. What else are we supposed to do here, discuss hairstyles?


GS

[GoSeigen]

Thus you will see that some Articles (not Aviva/CU) specify that the preference share class must have its own vote. LLPC/D for example get their own ordinary resolution.

I've been investing in RBS and LLOY ords, both of which I think will have huge excess capital to deal with, and assume shareholders would not want to see them being held hostage by their pref holders.

Have taken a small position in LLPD as a hedge.

GS

I am not clear what you are saying here. Are you saying that you think LLPC/LLPD are protected from being cancelled/reduced/redeemed at a price of £1 ?

You say that you have taken a hedge position in LLPD. A hedge against what ? I thought that your whole argument here on this board was that investors in Preference shares should be aware that they can be cancelled for £1 at any time ? LLPD are priced at about £1.60 so I do not understand what you are saying now.

You also say that RBS and Lloyds will not want to be “held hostage” by Preference holders, but then you say that you have bought LLPD at £1.60 ? Do you think LLPD are good value now at £1.60 ? I do not understand.

I also understand from the other board that NWBD have a class vote protection in their articles. Do you know about this ? If this is the case then I would assume that RBS ordinary shareholders will have no say in being “held hostage” by Preference holders as NWBD are protected from being cancelled/reduced/redeemed at a price of £1.

I don't think prefs are particularly good value, but I could be wrong. So I've taken a small position which will do okay if I am wrong. You're right, I think LLPC/D shareholders get an ordinary resolution so will need a sweetener and/or big stick to clear them out. 6%pa while waiting is fair enough.

I haven't looked at NWBD but maybe will; they are slightly more expensive than LLPD anyway.

As I said in the earlier posts I am not well versed in this area so it's a punt. For example, could Lloyds just opt to wind up HBOS? I'm betting they won't do that without some preparation and others will move first. But I am not familiar with capital restructuring. Maybe should start to study it. There's also the possibility of various dependencies: offer a sweetener to a big holder here in exchange for a positive vote there.

I thought that your whole argument here on this board was that investors in Preference shares should be aware that they can be cancelled for £1 at any time ?

Not exactly: it was more that investors in Preference shares should not assume that they can never be repaid, Aviva being a case in point; other prefs need to be judged individually.


GS

[OwenSwansea]

everyone should drop the armchair lawyer stuff,

Huh? What are you talking about? Look up there ^ this is Investors' Roundtable. What else are we supposed to do here, discuss hairstyles?


GS

Once again, I ask, why should the UK be out of line with every other market on the planet regarding this issue?

Owen.

[johnhemming]

Once again, I ask, why should the UK be out of line with every other market on the planet regarding this issue?

What else do we get from Brexit.

[Alaric]

This is clearly stated in the terms: market or fair value is nowhere to be seen. Fair value would be a concession, an act of generosity and kindness, or forced out of them by guerilla tactics.

If you regard a class vote as guerilla tactics then yes. But you cannot have an orderly market when issuers can make it up as they along regarding return of capital at anything other than the value of the income stream being foregone.

A method of valuation is to ask how much investors are prepared to pay for the income stream of the longest fixed income Gilt which I think is now dated to mature in around the 2060s. You then reduce the price a bit or somewhat because Aviva isn't as secure as the UK Government.

[paulmiller]

You're right, I think LLPC/D shareholders get an ordinary resolution so will need a sweetener and/or big stick to clear them out. 6%pa while waiting is fair enough.

GS

Thank you for your reply.

When you say you think LLPC/D get an ordinary resolution do you mean that they will get a separate class vote if there is any attempt to cancel/reduce/redeem their Preference shares for £1 ?

If so why do you think LLPC/D get this ordinary resolution ? Can you please point out the relevant clause or sentence in the prospectus or articles ?

[Wizard]

If what you say of Mark Taber's views is correct, then I think he is quite wrong to be ignoring the legal niceties, if that is what he is doing. The law is the law is the law. If some people have bought Irredeemable Prefs without fully understanding that they can in certain circumstances be repaid that is their problem. The fact is though that most people will not read the prospectus never mind the Companies Act and so it should maybe be made clear to them that in certain circumstances they can be repaid. If that is what Mark Faber is trying to do that is one thing but if he is trying to have them made truly permanent or unable to be bought out in any circumstances, that is a nonsense.

I think he is pushing for the latter...

Wrong. Mark is not pushing to prevent them being bought back in any circumstances. He is not seeking to prevent a fairly priced tender offer. He is trying to prevent a purchase at par pushed through by the holders of the ord's to the disadvantage of the holders of the pref's.

Terry.

[Alaric]

. He is trying to prevent a purchase at par pushed through by the holders of the ord's to the disadvantage of the holders of the pref's.

I would have thought that self evident and that was the threat of Aviva towards the GA Prefs.

[GoSeigen]

That's good. I agree it is very clearly settled that in CA2006 "redemption" (s684ff) is not "reduction of capital" (s641ff) and vice versa: point 4 in the OP, which you used to dispute but happily have not this time.

The reduction of capital is an accounting process which frees up money in the accounts to redeem [<-- misused word warning!] the shares. A reduction of capital in itself does not do anything to shareholders. It is a movement in the books of the company.

This must be some kind of wind-up. Let's read the law:

641 Circumstances in which a company may reduce its share capital
(3) [...] a company may reduce its share capital under this section in any way.
(4) In particular, a company may—
(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up, or
(b) either with or without extinguishing or reducing liability on any of its shares—
(i) cancel any paid-up share capital that is lost or unrepresented by available assets, or
(ii) repay any paid-up share capital in excess of the company’s wants.
[...]
(6) This Chapter (apart from subsection (5) above) has effect subject to any provision of the company’s articles restricting or prohibiting the reduction of the company’s share capital.
[/b]


The above text collected: "a company may reduce its share capital under this section in any way. In particular a company may -- either with or without extinguishing or reducing liability on any of its shares -- repay any paid-up share capital in excess of the company’s wants."

Further:


658 General rule against limited company acquiring its own shares
A limited company must not acquire its own shares, whether by purchase, subscription or otherwise, except in accordance with the provisions of this Part.
[...]
659 Exceptions to general rule
[...]
Section 658 does not prohibit— (a) the acquisition of shares in a reduction of capital duly made;




The law is clear that shares may be bought in a Reduction of Capital: it is an explicitly stated exception from the prohibition on purchase of shares. Far from being merely "a movement in the books", it may be effected in any way including acquiring shares from shareholders.


I repeat: it is very clearly settled that in CA2006 "redemption" (s684ff) is not "reduction of capital" (s641ff) and vice versa.

The reason for court authorisation is to protect creditors not shareholders.

Teaching grandma to suck eggs??


GS

[Dod101]

If what you say of Mark Taber's views is correct, then I think he is quite wrong to be ignoring the legal niceties, if that is what he is doing. The law is the law is the law. If some people have bought Irredeemable Prefs without fully understanding that they can in certain circumstances be repaid that is their problem. The fact is though that most people will not read the prospectus never mind the Companies Act and so it should maybe be made clear to them that in certain circumstances they can be repaid. If that is what Mark Faber is trying to do that is one thing but if he is trying to have them made truly permanent or unable to be bought out in any circumstances, that is a nonsense.

I think he is pushing for the latter...

Wrong. Mark is not pushing to prevent them being bought back in any circumstances. He is not seeking to prevent a fairly priced tender offer. He is trying to prevent a purchase at par pushed through by the holders of the ord's to the disadvantage of the holders of the pref's.

Terry.

If indeed Wizard/Terry is correct then I agree with him. That would to me be the fairest and most sensible way to proceed but the trouble with it is that if there is no compulsion, the Pref holders could act against the interests of the company as a whole in perpetuity. That does not seem right.

Dod

[GoSeigen]

If what you say of Mark Taber's views is correct, then I think he is quite wrong to be ignoring the legal niceties, if that is what he is doing. The law is the law is the law. If some people have bought Irredeemable Prefs without fully understanding that they can in certain circumstances be repaid that is their problem. The fact is though that most people will not read the prospectus never mind the Companies Act and so it should maybe be made clear to them that in certain circumstances they can be repaid. If that is what Mark Faber is trying to do that is one thing but if he is trying to have them made truly permanent or unable to be bought out in any circumstances, that is a nonsense.

I think he is pushing for the latter...

Wrong. Mark is not pushing to prevent them being bought back in any circumstances. He is not seeking to prevent a fairly priced tender offer. He is trying to prevent a purchase at par pushed through by the holders of the ord's to the disadvantage of the holders of the pref's.

Terry.

Terry there is simply a misunderstanding here: Dod's "in any circumstances" was not a good wording and perhaps I should have pulled him up, but I took him to be referring to the topic of Reduction of Capital not other procedures over which (I think) there is no controversy. Also I took him to be referring to the effect of Mark's changes which would be to hand minority holders a veto over any capital reduction thus making them "unable to be bought out" in a capital reduction. I think if you read Dod's earlier paragraph (quoted below) you will understand the context of the discussion.

I think the question of who is be allowed a say in reduction of capital (by way of repayment of the Prefs for example) is fairly obvious. Everyone who is shareholder, whether a holder of the Prefs or the ordinaries, should be given the right if they do not already have it. WE are talking here of the company as a whole and all the shareholders have an interest in that.

GS

[Alaric]

The FCA have now written to issuers of Preference Shares asking that they clarify their position regarding compulsory buybacks at other than a market price.

http://www.londonstockexchange.com/exch ... 10222.html

The FCA wants to ensure investors have access to the information that they require in order to properly assess the risks and rewards attaching to such shares.

and rightly so.

[stockton]

Seems like the FCA agrees that there is a "muddle" but remains in "How do we avoid action" mode.

[johnhemming]

Seems like the FCA agrees that there is a "muddle" but remains in "How do we avoid action" mode.

That is actually quite a good action. It is up to the government and parliament to change the law if needs be. However, if all of the issuers make it clear that they will not try to redeem at par then they are bound legally by that.

[stockton]

It seems to me that GS is reading a lot into the Compamies act that is not there.

For example s687 specifically permits redemption from capital, and with that, bang goes the most fundamental point in his first post - that redemption means repayment from profits.

[Alaric]

- that redemption means repayment from profits.

I would have thought redemption should just mean paying off the holders. That could be financed in a mix of three ways, namely from profits, from capital or from the proceeds of a replacement issue.

The regulatory capital issue is ticking away at all the Prefs being reported for that purpose, so affecting those issued by Banks and Insurance Companies. Come 2026, they will no longer count in the Solvency margin tests. Fine for those Companies who have sufficient regulatory capital without them and can afford to just repay them, those that cannot are likely to need to issue a replacement if they want or need to retire the Prefs.

[GoSeigen]

You're right, I think LLPC/D shareholders get an ordinary resolution so will need a sweetener and/or big stick to clear them out. 6%pa while waiting is fair enough.

GS

Thank you for your reply.

When you say you think LLPC/D get an ordinary resolution do you mean that they will get a separate class vote if there is any attempt to cancel/reduce/redeem their Preference shares for £1 ?

If so why do you think LLPC/D get this ordinary resolution ? Can you please point out the relevant clause or sentence in the prospectus or articles ?

Paul,

I always welcome any request for evidence of what I have written; you are a rare example of a poster who has bothered to do this.

When you asked for me to post the Clause giving LLPC/D an ordinary resolution in a class vote, I was ready to post an extract from the HBOS plc Articles under which the original prefs were issued. I confess that in doing so I was relying on Mark Taber's statements in reference to the 2008/9 Exchange that (and I quote):

"LBG made representations that the new LBG preference shares have rights which are in substance the same as those of the HBOS plc preference shares for which they were exchanged".


Before posting I decided to go back and check this claim. What I found was that in fact, Lloyds's prospectus was very clear about the fact that terms of the new Preference shares would be materially different to the previous terms:


http://www.lloydsbankinggroup.com/globa ... 9.75pc.pdf
[page 11]
It is proposed, as announced on 14 November 2008, that each class of preference shares issued by HBOS be cancelled in consideration for the issue of a substantially similar class of preference shares by Lloyds TSB.
[...]
The rights attaching to each class of New Lloyds TSB Preference Shares are in substance similar to those of the equivalent class of HBOS Preference Shares, however, certain provisions will be amended to conform the New Lloyds TSB Preference Shares to the terms of existing preference shares issued by Lloyds TSB and to the Articles.



Mark seems to be arguing that "in substance similar" = "in substance the same", and overlooking all the places where differences are pointed out!
In the Risks section:

[page 20]
Risks relating to the Preference Shares:
-absence of voting rights;
-the terms of the New Lloyds TSB Preference Shares will differ from the terms of the corresponding HBOS Preference Shares;



I'm not sure it can be much clearer than that. So it is now the responsibility of the reader to examine the differences.


I have done so, and regrettably, you are right to have questioned me, because it's clear that Lloyds Banking Group Articles and Terms do not provide the same protection in a Reduction of Capital as HBOS plc's did. [If an investor were interested in this sort of thing at the time, they would noticed that the exchange involved removal of the HBOS prefs by Capital Reduction subject to a special resolution. They might then have been curious and noticed that the new LBG shares did not require such a resolution...]


From the 19 Jun 2009 copy of the HBOS Articles:

10 Varying the rights of the Preference Shares
10.1 The rights of the holders of any series of Preference Shares will be regarded as being varied or abrogated if:
[...]
-any resolution is passed for the reduction of the amount of capital paid up on the Preference Shares of the relevant series.

Accordingly, [...] [this] event can only take place if:
[...] [holders agree in writing or a resolution at a separate meeting of the holders approves the proposal.]
Subject to section 125 of the CA1985, in the case of the 9 1/4% Preference Shares and 9 3/4% Preference Shares, the agreement in writing of the holders of a majority in nominal value of, or the approval of an ordinary resolution passed at a meeting of holders of the relevant class(es) of the Initial Preference Shares is sufficient.


whereas the relevant sections of Lloyds Banking Group PLC Articles of Association dated 22 Jan 2009 merely state:


Share Capital
3.3. The preference shares shall confer upon the holders thereof such rights [...] as may be determined by the directors on allotment [...]

7 Reduction of Capital
Subject to the provisions of the statutes the company may by special resolution reduce its share capital [...] in any way.

8 Rights attaching to shares on issue
-[allows any rights to be attached to issued shares as authorised by an ordinary resolution.]

33 Matters not constituting variation of rights
-[deals with relation of prefs to other shares]
-[is silent on reduction of capital]
138 Return of Capital and Winding up
138.1 On a return of capital, whether in a winding up or a reduction of capital or otherwise:
[...]
138.1.2 the preference shares shall be entitled to the rights attached to them on issue.



The 'rights attached" are in a submission to Companies House dated 30 Jan 2009 and reflect the Prospectus in the relevant sections: i.e. that reduction of capital is NOT explicitly or implicitly stated to constitute a variation of rights.


I therefore accept I was wrong in my earlier conclusion and think these prefs are at risk of repayment at par, subject to a special resolution put to all members. I agree with you that 160p for LLPD is too expensive given the risk and today have sold the small holding I'd acquired, at a small loss.


Thanks for your input.


GS