Preference shares -- keeping it simple

[stockton]

Further, a redemption is entirely distinct from a Reduction of Capital (as mooted by Aviva). Not a subset. Not a superset. Not a synonym.

This is probably the most appropriate point to ask for some form of legal authority.

No problem.

Companies Act 2006 Part 17 Chapter 10 Reduction of Capital, sections 641-653 deals with Reduction of Capital. When you read it you will see that redemption is not mentioned at all in this context.

Companies Act 2006 Part 18 Chapter 3 Redeemable Shares, sections 684-689 deals with Redemption. When you read it you will see reduction of capital is not mentioned at all in this context. See also s733 and how it applies to Redemption but not to Reduction of Capital.


GS

I cannot see that the fact that specific words or phrases are not mentioned in a particular paragraph of an act constitutes a legal authority for their meaning or application.
Surely you must be able to find a better authority.

[GoSeigen]

I cannot see that the fact that specific words or phrases are not mentioned in a particular paragraph of an act constitutes a legal authority for their meaning or application.
Surely you must be able to find a better authority.

Excuse my being rude, but I can't believe you read all that and understood it in less than an hour. It took me a couple of days to get my head round it.


I cannot find a better authority -- it is the exact authority referred to in the terms of every (EDIT: UK issuer's) preference share I have ever looked at.

GS

[stockton]

Markets up to the 2010s therefore classified it as irredeemable.

You might note that "the market", in the references above, used the term "undated". It is also unusual in English for two words to have exactly the same meaning.

[GoSeigen]

Further, a redemption is entirely distinct from a Reduction of Capital (as mooted by Aviva). Not a subset. Not a superset. Not a synonym.

This is probably the most appropriate point to ask for some form of legal authority.

Please share your thoughts on the above when you have considered these sections.


I forgot to put links in to the original references. Repeated below:

Companies Act 2006 Part 17 Chapter 10 Reduction of Capital, sections 641-653 deals with Reduction of Capital. When you read it you will see that redemption is not mentioned at all in this context.
https://www.legislation.gov.uk/ukpga/20 ... chapter/10

Companies Act 2006 Part 18 Chapter 3 Redeemable Shares, sections 684-689 deals with Redemption. When you read it you will see reduction of capital is not mentioned at all in this context. See also s733 and how it applies to Redemption but not to Reduction of Capital.
https://www.legislation.gov.uk/ukpga/20 ... /chapter/3

GS

[stockton]

Please share your thoughts on the above when you have considered these sections.
I forgot to put links in to the original references. Repeated below:

Companies Act 2006 Part 17 Chapter 10 Reduction of Capital, sections 641-653 deals with Reduction of Capital. When you read it you will see that redemption is not mentioned at all in this context.
https://www.legislation.gov.uk/ukpga/20 ... chapter/10

Companies Act 2006 Part 18 Chapter 3 Redeemable Shares, sections 684-689 deals with Redemption. When you read it you will see reduction of capital is not mentioned at all in this context. See also s733 and how it applies to Redemption but not to Reduction of Capital.
https://www.legislation.gov.uk/ukpga/20 ... /chapter/3

The best I can offer is that I can find nothing in the Companies act that clearly contradicts your thesis, but neither can I find anything that clearly contradicts the common understanding of the situation. There is no obvious need to include either of the mentions that you feel are missing.
Maybe someone else can do better.

[GoSeigen]

The best I can offer is that I can find nothing in the Companies act that clearly contradicts your thesis, but neither can I find anything that clearly contradicts the common understanding of the situation. There is no obvious need to include either of the mentions that you feel are missing.
Maybe someone else can do better.

Now you've looked at it perhaps you will be kind enough to give a summary of the two sections for other pref investors. A quick overview of what Capital Reduction is about and similar for Redemption, with a brief list of the differences/similarities?

I've tried as you know but perhaps made a meal of it.

GS

[Clitheroekid]

I've not read this thread, but seeing that there have been 85 posts to date I couldn't help chuckling at the title of the thread!

[stockton]

I've not read this thread

It would clearly be interesting if you would read the thread , or at least the last page. Lawyers seem to be in short supply hereabouts.

[johnhemming]

a capital reduction creates a distributable reserve which can be used for various things including paying dividends as well as redeeming or purchasing stock.

[GoSeigen]

Lawyers seem to be in short supply hereabouts.

Still interested in your summary of those sections of the Companies Act. Maybe to summarise first what you call " the common understanding of the situation" e.g. the common understanding of "Redemption" in a sentence or two would be nice, as so far no poster has attempted this AFAICS, and you find it at least as credible as my statement that "Redemption and Reduction of Capital are distinct in company law".


GS

[GoSeigen]

a capital reduction creates a distributable reserve which can be used for various things including paying dividends as well as redeeming or purchasing stock.

I think the first half of your sentence got cut off; it seems to be missing some context.


GS

[johnhemming]

I suppose I should have started it with a capital "A".

The point about a capital reduction is that it relates to the issued capital. After that point all sorts of things can happen including paying a dividend and redeeming shares.

[GoSeigen]

I suppose I should have started it with a capital "A".

The point about a capital reduction is that it relates to the issued capital. After that point all sorts of things can happen including paying a dividend and redeeming shares.

Well the problem was it presents part of what can be done as the entirety. I'd agree completely if you'd written:

"If desired a capital reduction creates a distributable reserve which can be used for various things including paying dividends as well as redeeming or purchasing stock."

In Aviva's case there is really no need for this route as they have ample distributable items. What they want to achieve is to eliminate expensive preference share capital. So rather than reducing share premium (or similar) which was what you were writing about, they want to simply return assets directly to shareholders, cancelling the prefs -- without creating distributable reserves en route, but as the final product (or by-product). [This sentence EDITED]


Also worth noting that you say:
"After that point all sorts of things can happen including paying a dividend and redeeming shares."
but the Aviva preference shares are irredeemable (i.e. they cannot be redeemed), so merely creating further distributable reserves would be utterly ineffective for redeeming them. They would still need to carry out a further capital reduction to eliminate the preference shares!

Of course they could purchase the shares in the market or tender for them, but why do that when they have the right to repay in a reduction of capital at par?


To summarise, the statement, even when correctly qualified as in blue above, is really pretty irrelevant to this situation.

GS

[Alaric]

Of course they could purchase the shares in the market or tender for them, but why do that when they have the right to repay in a reduction of capital at par?

That as you are well aware is disputed. It can arise only if a particular interpretation of the Companies Act is applied which disallows a class vote and equally if it can gain court approval. If clauses about "rights" are applicable it also requires the opinion that paying 100 for an asset worth 160 does not infringe the rights of those holding that asset.

The FCA's position appears that even if poor drafting of the Companies Act and the terms and conditions of Prefs appears to have created a possibly legal opportunity, that Directors should not take that route. It's a market confidence issue.

Certainly Preference Shares are riskier than previously thought. It's the default risk arising from controversial legal opinions being used by directors to partly default.

[GoSeigen]

Of course they could purchase the shares in the market or tender for them, but why do that when they have the right to repay in a reduction of capital at par?

That as you are well aware is disputed.

Okay, let me allow for that then, hopefully without altering the main message (changes in bold):

Of course they could purchase the shares in the market or tender for them, but why would they [Aviva] want to do that when they believe they have the right to repay in a reduction of capital at par?

(Aviva have been clear about what they wanted to do. I am discussing how Capital Reduction would be implemented to achieve their goals because I think Hemming's proposed implementation fails.)

GS

[Alaric]

Of course they could purchase the shares in the market or tender for them, but why would they [Aviva] want to do that when they believe they have the right to repay in a reduction of capital at par?

They withdrew the threat because major shareholders said they didn't support the move, not least because of reputational damage. That does count for something, a reason why UK and US government bonds are considered risk free is that those governments have a long historic record on not changing the rules to the disadvantage of investors.

If you borrow money on terms fixed at outset and threaten to not pay it back at market price, your default risk assessment goes up and you would likely to have to pay more in future for borrowings and fund raising. If any institution in the future issues undated paper, whether in the form of bonds or Prefs, I would expect to see stronger clauses giving protection against unilateral repayment if the price rose above par.

[GoSeigen]

Of course they could purchase the shares in the market or tender for them, but why would they [Aviva] want to do that when they believe they have the right to repay in a reduction of capital at par?

They withdrew [...irrelevant text about what actually happened]

I was discussing how, if they had proceeded, Capital Reduction would have been implemented to achieve their goals because I think Hemming's proposed implementation fails.


GS

[Alaric]

I was discussing how, if they had proceeded, Capital Reduction would have been implemented to achieve their goals because I think Hemming's proposed implementation fails.

They would first have to get it past a vote of shareholders and a legal challenge to restrain them was possible if they attempted to deny the financial rights of preference shareholders by not holding a class vote. Whether such a challenge would succeed and whether they had the support of shareholders were risk factors for the management, sufficient, it would seem to put them off the idea of even trying.

[GoSeigen]

I was discussing how, if they had proceeded, Capital Reduction would have been implemented to achieve their goals because I think Hemming's proposed implementation fails.

They would first have to get it past a vote of shareholders and a legal challenge to restrain them was possible if they attempted to deny the financial rights of preference shareholders by not holding a class vote. Whether such a challenge would succeed and whether they had the support of shareholders were risk factors for the management, sufficient, it would seem to put them off the idea of even trying.

As OP, I started this thread to discuss the legal meaning of capital reduction, redemption and purchase of shares, not the ethical or practical merits of Aviva's actions. There are other threads where that can be discussed.

HS

[Alaric]

As OP, I started this thread to discuss the legal meaning of capital reduction, redemption and purchase of shares, not the ethical or practical merits of Aviva's actions.

They are connected though. Ariva were trying to exploit legal small print to claim rights they weren't supposed to have. If they announced that they intended to make a tender offer or equivalent for the Prefs, then the exact legal and accounting mechanisms by which they might do this is not of great interest other than to lawyers and accountants specialising in that area.