Preference shares -- keeping it simple

[johnhemming]

Nope. You've expired your quota.

[GoSeigen]

John,

You said I've ignored your posts about the definition of "irredeemable". Here is one such post where you touched on the subject -- quoted in full and paragraphs labelled by me:

viewtopic.php?f=52&t=10506&p=125490&hilit=irredeemable#p125490

A: I think we agree that our disagreement is as to the definition of redemption and irredeemable.

B: I cited two links where the word "redemption" was used for situations involving a repayment of capital using S641 Companies Act 2006. One was HMRC and the other was ACCA.

C: You cite the 2006 Companies Act. I disagree with using that for a number of reasons
1. It is the 2006 Act. That cannot be used for the definition of words in an agreement in 1992.
2. The objective is to define the words redemption and irredeemable in the contract. I don't see anything in the statute which makes an attempt to limit the definition of redemption and irredeemable in contracts in any way. It merely says that there is a formal process for the creation of shares which are redeemable (at the which for the purposes of the 2006 Act are called redeemable shares)
3. I think it was the 1985 Act that preceeded this. I have not bothered to look this up because it would not be a primary authority for determining the definition of the words in the contract.

D: The most important source of information as to how the words are supposed to be constructed is in fact the company's references to the preference shares in the annual reports in the 1990s. They are not supposed to miss out important information or tell people things that are wrong. Hence the fact that they do not refer to a threat of reduction of capital means that they did not consider this as being anything other than a redemption.

E: I would not argue that the companies act 1985 is irrelevant to the construction of the contract, but that the meanings of the words redemption and irredeemable have to be considered from a number of sources starting with the dictionary and with perhaps the most persuasive other authority being the annual reports of GA in the 1990s. (which indicate what GA's intention was).

F: To summarise:
My authorities are a) the dictionary, the company, HMRC, the ACCA and general market understanding.
You pray in aid the 2006 companies act which does not attempt to define the words concerned for contractual purposes at all let alone in 1992. I don't think it is a material authority for this purpose.

But I didn't ignore it, I replied here:

viewtopic.php?p=125534#p125534

You have interpreted what happened as my ignoring you; I had two broad thoughts at the time:
1. I disagree with a number of things in John's post including his views on the meaning of "irredeemable".
2. It is better to find areas of common ground: one is John's suggestion to use the 1985 Companies Act (in preference to CA2006).

The common ground and sources for definitions was what I focussed on in my reply. That necessarily meant the other points in your post were overlooked. But that was not because I was ignoring you, merely focussing on area of agreement, and leaving the contentious issues till later. It happens that we didn't succeed in returning to the issue of defining "irredeemable".



Perhaps you felt today and before that instead of asking you again for a definition I should have recalled or sought out the above post. But couldn't you equally have pointed it out if it was fresh in your mind? YOU wrote the post so it would be clearer in your recollection. I on the other hand read hundreds of different posts the day you wrote it and in following days. Was I supposed to recall weeks later what you wrote in that post? I think that is unfair.

But I don't blame you because you probably haven't thought about it from my point of view. When I ask for a definition though, it is not to annoy you but because I don't recall each and every one of your posts! And, admittedly, have not used the search facility to find them because, this being a discussion board more than a research library I felt it was just as easy to ask you again. Sorry if that was presumptuous.


So, having looked back that is my view on why I have "disrespected" and "ignored" your posts. I think a similar process might conceivably have occurred with other posts on this subject.




Now a quick review of what I liked and didn't like about the above post, as I didn't comment on it all at the time. No need to respond to this, it is for completeness:

Paragraph A: Agreed with this.
Para. B: The links you cited were secondary sources. Company Articles routinely refer to the Companies Acts for definitions. The ACCA also cites the Companies Acts extensively. CA2006 or CA1985 are primary sources. ACCA and HMRC are secondary. I recall you finally accepted that the Articles expressly incorporate the Acts.
C: I agreed to use CA1985 in preference to CA2006 as you argued.
D: While the points about Annual reports needing to be accurate were true enough, Reports are not primary sources for understanding the terms. It was premature to be considering them. You described capital reduction as a "threat". It is only a threat in the present context of these Aviva shares. Capital reduction in general is better described as a feature of every share class. As such it is no surprise that it is not specifically referred to in any company's Reports: doing so would be as odd as a Report "informing" investors of the existence of the Memorandum and Articles! BTW legal wording is construed, not constructed.
E: I discussed this paragraph in my reply.
F: I disagreed with your summary and a few posts later we both reached agreement that CA1985 was required by the Articles.

GS

[GoSeigen]

Hmm, not the first time johnhemming has walked away from a simple question he preferred not to answer.

http://www.transparencyproject.org.uk/a ... -question/



Once again, what is the meaning of the words "Redeemable" and "Irredeemable" in reference to UK shares?


GS
Note to mods: John Hemming is a public figure and makes regular reference on TLF to his role as a (former) MP and businessman.

[Wizard]

Hmm, not the first time johnhemming has walked away from a simple question he preferred not to answer.

http://www.transparencyproject.org.uk/a ... -question/



Once again, what is the meaning of the words "Redeemable" and "Irredeemable" in reference to UK shares?


GS
Note to mods: John Hemming is a public figure and makes regular reference on TLF to his role as a (former) MP and businessman.

He answered you question exactly as you answered mine, I think he made it clear he was not providing anything more as you did to me. Cake and eat it springs to mind!

[Alaric]

Once again, what is the meaning of the words "Redeemable" and "Irredeemable" in reference to UK shares?

Why confine the question to UK shares? What about international shares and UK bonds?

Companies Acts can come and go, but the market understanding of "Redeemable" was that there was a fixed date and a fixed price at which the security came to an end. Variations on the theme being possible. Irredeemable on the other hand meant that there was no such fixed price and date, so the security would be priced as if it continued for ever. That didn't preclude the issuer having well defined options to announce such a date and price, as was seen when the UK Government paid off all its undated stocks a few years ago. But the point is that the options were well defined and known to the issuer, buyers and sellers. It wasn't a firm of lawyers or merchant bankers convincing a management team that they could exploit small print to award the issuer an undocumented and unpriced option to pay 100 to pay off a liability that was priced well above that.

As was seen in the pricing of the 1952 War Loan after 1952, if there's a redemption option that's above the trading price of the security, the issuer won't redeem and the stock will be treated and classified as Irredeemable. It was only when the yield fell back towards the 3.5% coupon that the issue of potential redemption comes into play.

[colin]

He answered you question exactly as you answered mine, I think he made it clear he was not providing anything more as you did to me. Cake and eat it springs to mind!

Don't you mean Pot Kettle and Black?

[GoSeigen]

Once again, what is the meaning of the words "Redeemable" and "Irredeemable" in reference to UK shares?

Why confine the question to UK shares? What about international shares and UK bonds?

Only because my interest and knowledge lies in the Aviva situation and UK shares in general. My brain can't take in a wider context at the moment, except in generalities!

Companies Acts can come and go, but the market understanding of "Redeemable" was that there was a fixed date and a fixed price at which the security came to an end. Variations on the theme being possible. Irredeemable on the other hand meant that there was no such fixed price and date, so the security would be priced as if it continued for ever. That didn't preclude the issuer having well defined options to announce such a date and price, as was seen when the UK Government paid off all its undated stocks a few years ago.

Quite so. For those holding this view but still unhappy about Aviva, presumably the quibble is with the price of a potential capital reduction and/or the lack of class vote -- my sympathies, because these are often intricate legal details varying from share to share. I do support the FCA's action to have the rights spelled out.

Nevertheless, that still leaves market participants who swear that irredeemable share capital can not be retired at all... is it time for me to accept their view is completely groundless? One feels foolish for having entertained so much hot air...

But the point is that the options were well defined and known to the issuer, buyers and sellers. It wasn't a firm of lawyers or merchant bankers convincing a management team that they could exploit small print to award the issuer an undocumented and unpriced option to pay 100 to pay off a liability that was priced well above that.

We might call the Aviva plan a black swan. The fact that the black swan was unveiled by God-denying naturalists and mercenary adventurers to a shocked general public who always knew that swans could only be white did not make the swan less real... The "rule" about swans (or civilised humans) always being white was a product largely of their own imagination -- or unquestioned but flawed convention.

As was seen in the pricing of the 1952 War Loan after 1952, if there's a redemption option that's above the trading price of the security, the issuer won't redeem and the stock will be treated and classified as Irredeemable. It was only when the yield fell back towards the 3.5% coupon that the issue of potential redemption comes into play.

I think we agree, the rights of debt holders are usually much easier to discern than those of shareholders. Also the observation about price relative to par value is exactly the one I have made -- in relation to FI shares as well as bonds.


GS

[Alaric]

Quite so. For those holding this view but still unhappy about Aviva, presumably the quibble is with the price of a potential capital reduction and/or the lack of class vote -- my sympathies, because these are often intricate legal details varying from share to share. I do support the FCA's action to have the rights spelled out.

The key point to my mind was that it was not thought possible to unilaterally pay off an issue other than by reference to the market price of the entitlements unless there was very CLEAR wording to this effect. It would be assumed that a class vote of holders proposed to be short changed in this manner would always be defeated thus justifying the pricing of the entitlements as a perpetuity. That was until Aviva or their advisers claimed to have unearthed the possible use of return of capital provisions without a class vote.

[paulmiller]

GS

We might call the Aviva plan a black swan. The fact that the black swan was unveiled by God-denying naturalists and mercenary adventurers to a shocked general public who always knew that swans could only be white did not make the swan less real... The "rule" about swans (or civilised humans) always being white was a product largely of their own imagination -- or unquestioned but flawed convention.

If the black swan exists then I think that the FCA and The Treasury are very probably planning to pass new legislation to make it extinct! And if they do not do this then they are probably planning to have a word with all the present owners of the breed to ensure that it is never again released in public!

Almost everyone in the UK has shown an intense dislike of the breed since it was first viewed by large numbers of the general public a few weeks ago, and so just like those dangerous dogs a few years ago the UK Government probably thinks that it will be better for everyone if it is either banned or never sighted again!

[Wizard]

He answered you question exactly as you answered mine, I think he made it clear he was not providing anything more as you did to me. Cake and eat it springs to mind!

Don't you mean Pot Kettle and Black?

Yes Colin, I think you are right on that one, my mistake.

Terry.

[Wizard]

GS

We might call the Aviva plan a black swan. The fact that the black swan was unveiled by God-denying naturalists and mercenary adventurers to a shocked general public who always knew that swans could only be white did not make the swan less real... The "rule" about swans (or civilised humans) always being white was a product largely of their own imagination -- or unquestioned but flawed convention.

If the black swan exists then I think that the FCA and The Treasury are very probably planning to pass new legislation to make it extinct! And if they do not do this then they are probably planning to have a word with all the present owners of the breed to ensure that it is never again released in public!

Almost everyone in the UK has shown an intense dislike of the breed since it was first viewed by large numbers of the general public a few weeks ago, and so just like those dangerous dogs a few years ago the UK Government probably thinks that it will be better for everyone if it is either banned or never sighted again!

Indeed Paul. As I posted on another thread, since the Aviva announcement any action from other issuers has all been to distance themselves from the Aviva plan, ultimately including Aviva themselves.

Terry.

[Alaric]

None of those are shares in a public company! All completely irrelevant to capital reduction.

Preference Shares, PIBS and other similar issues without an explicit maturity date are all examples of perpetual income. The potential investor in such instruments needs to know whether there's any lurking small print which gives the issuer the potential right to short change any investors who purchase at above par on secondary markets.

[GoSeigen]

\The potential investor in such instruments needs to know

The potential investor or his advisor can read.


GS

[johnhemming]

There are interesting things that have happened with pibs and there was a legal action coordinated by tmf banking board relating to boi, but otherwise I don't think these fixed interest instruments are comparable.

[Wizard]

You post on both sites. I only post here. Your post is of interest to readers on this site so why shouldn't users of this site post about it? If you don't want your posts discussed then don't publish them publicly. You certainly have no "ownership" of your published question that would justify an accusation that someone "stole" it!

GS

You have been asked this before, but were unwilling to give a straight answer at that time, so I will try again. You clearly read the posts on Mark Taber's board, so instead of dragging questions here why not simply post on their? You can copy questions over to TLF, but IMHO it is somewhat bizarre behaviour.

Terry.

[johnhemming]

Anyway back to the point if you can help. I am not a legal expert and many small investors like myself do not have financial advisers.

You make a good case that you and other ...(snip) small investors like yourself need one.

I have stayed out of these expressions of conflicting views (I hesitate to call it a debate). That is not because my views have changed, however.

It strikes me that it would be good if we could agree that experienced small investors should not have to have financial or legal advisers to make investment decisions. In particular legal advisers should not be an expected cost.

That is built into financial services regulation.

Otherwise there are some basic points upon which people disagree and are unlikely to find agreement. In the end it is unlikely IMO to end up in court as the FCA are trying to get clarification which would obviate this.

[ChrisNix]

Anyway back to the point if you can help. I am not a legal expert and many small investors like myself do not have financial advisers.

You make a good case that you and other ...(snip) small investors like yourself need one.

I have stayed out of these expressions of conflicting views (I hesitate to call it a debate). That is not because my views have changed, however.

It strikes me that it would be good if we could agree that experienced small investors should not have to have financial or legal advisers to make investment decisions. In particular legal advisers should not be an expected cost.

That is built into financial services regulation.

Otherwise there are some basic points upon which people disagree and are unlikely to find agreement. In the end it is unlikely IMO to end up in court as the FCA are trying to get clarification which would obviate this.

John,

I'll take your word on interpretation of the regulation.

That throws up a big issue, which is current guidance/market practice does not generate disclosure which covers a number of the inherent and salient investment characteristics of such investments.

To ensure this is implemented going forward requires the FCA to mandate 'spoon feeding' levels of disclosure, quite difficult when a document is many pages long.

And, as GS has pointed out, the ability to navigate the CA is a necessity, so summaries of the relevant sections would also be required.

Quite a task.

Until then, best advice for retail is, 'if in doubt, stay out' or get some advice.

Chris

[johnhemming]

That throws up a big issue, which is current guidance/market practice does not generate disclosure which covers a number of the inherent and salient investment characteristics of such investments.

Investment law, however, requires that this is done.

[melonfool]

Moderator Message:
I have pruned a number of intemperate posts from this thread. Please remain civil and do not make personal remarks. Also, I'm not comfortable with the copying of a post from another board, so I have deleted that and the hanging answer too. Mel

[Alaric]

To ensure this is implemented going forward requires the FCA to mandate 'spoon feeding' levels of disclosure, quite difficult when a document is many pages long.

They already do. For example they have investment trusts point out that if you invest 10000 after stamp duty and Broker commissions and earn 5%, there's the revelation that it would be worth 10500 after one year. If you earn 10%, it's worth 11000.

As regards undated securities of various types, what you want to know when buying above par is that there isn't a borrower option to pay off the security other than with regard to market price. Prior to the Aviva directors listening to smart lawyers and merchant bankers that was the accepted position. Those securities which could be repaid had the magic word "callable" somewhere prominent. There's a variant on that theme where the coupon can be rebased.