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Aviva and General Accident preference shares

Gilts, bonds, and interest-bearing shares
AleisterCrowley
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Re: Aviva and General Accident preference shares

#124209

Postby AleisterCrowley » March 12th, 2018, 1:01 pm

However, on a winding up, preference shares carry a preferential right of return of capital ahead of the ordinary shares.”

Which is widely known and understood - however it doesn't say if that's the only mechanism by which capital may be returned.
Aviva appear to be planning a 'redemption in effect' without calling it a redemption.
The drop in prices across prefs last week suggests that investors (professional as well as retail) didn't believe such actions likely , or even possible (??)

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Re: Aviva and General Accident preference shares

#124217

Postby CatcheeMonkee » March 12th, 2018, 1:29 pm

It's a return of capital that they're planning??

So surely their guidance for investors shouldn't read "However, on a winding up, preference shares carry a preferential right of return of capital ahead of the ordinary shares.”

but rather "However preference shares carry a preferential right of return of capital ahead of the ordinary shares.”

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Re: Aviva and General Accident preference shares

#124220

Postby AleisterCrowley » March 12th, 2018, 1:35 pm

You would think so.
I'm just trawling the documentation for the AV.A prefs, checking for 'loopholes' !

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Re: Aviva and General Accident preference shares

#124223

Postby CatcheeMonkee » March 12th, 2018, 1:40 pm

Is there a prospectus for Aviva ordinary shares? I cannot find it online.

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Re: Aviva and General Accident preference shares

#124238

Postby scrumpyjack » March 12th, 2018, 2:02 pm

I don't hold the Pref shares but I do hold ordinary shares.

As I understand it Aviva are planning to hold a vote of all shareholders (ordinary and preference) voting together and believe that a majority vote of that pool of shareholders would be sufficient to allow them to redeem the preference shares. They have presumably taken legal advice on this. Obviously the ordinary shares would swamp the prefs and outvote them

So legally it seems they may do this. I'm not a lawyer but I wouldn't be surprised if this was challenged on the basis that it amounts to oppression of one class of shareholders by another class of shareholders, as long as someone has the funds and inclination to challenge it.

However redemption at par clearly disadvantages the preference shareholders and morally at least is hard to justify given that they have been led to believe they are irredeemable and bought them on that basis. It would not surprise me if a premium of some sort is paid on their redemption to give a clock of 'fairness' to this and to discourage legal action.

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Re: Aviva and General Accident preference shares

#124248

Postby AleisterCrowley » March 12th, 2018, 2:28 pm

It would not surprise me if a premium of some sort is paid on their redemption to give a clock of 'fairness' to this and to discourage legal action.
premium based on pre-announcement market price, or the suppressed price ?!

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Re: Aviva and General Accident preference shares

#124253

Postby Avidya » March 12th, 2018, 2:51 pm

Hi,

I used to post quite regularly on the Motley Fool banking board. I haven’t participated in these sort discussions for several years now, but I can’t resist posting on the Aviva situation because it’s so fundamental to the valuation of “Irredeemable” prefs!

Goseigen has made a number of fascinating and well thought out points, and it’s useful to see the arguments from Aviva’s point of view set out so cogently. As so often, there is an arguable case to be made on both sides, and if this matter were to come to court it is conceivable that the ruling could go either way. But FWIW my view is that if it came to court the odds are slightly in favour of Aviva NOT being allowed to return capital and in effect redeem these prefs at par, unless there were to be a separate vote of the pref class to allow that.

Boiled down to its essence, the issue here is whether a return of capital to the pref holders would constitute a variation of their class rights. If it would, then it’s clear that a separate class vote would be required to allow that - see Companies Act 2006 Section 630, and also Section 8 of the Av.A and AV.B listing particulars. It’s fundamental to UK company law that variation of Class rights requires a separate vote of the class concerned. In this respect, Aviva is no different to any other company, so their argument will no doubt be that a return of capital does not involve a change in the pref class rights, and that hence a separate class vote to approve it is not required. In making this argument they will no doubt be relying on historic case law in which a return of capital to preference shareholders has in several cases been determined by the courts not to involve a change in class rights - most notably in House of Fraser v AGCE (1987). However there are also historic cases in which it has been ruled a that return of capital to preference shareholders without their consent does in fact involve a variation of their class rights - e.g. Old Siltstone Collieries Ltd (1954).

The legal arguments involved in the various cases that have come to court are extremely subtle, but in essence in each specific case come down to the precise wording of the articles of association of the company concerned and the exact terms of that company’s preference shares. Where the documentation is silent on the question of “redemption” or return of capital, then it does indeed appear that the courts are inclined to take a narrow view of the preference shareholder class rights, and conclude (as in HoF v AGCE) that a return of capital does not constitute a change of class rights. But what is interesting about the Aviva situation is that in fact the listing particulars for both AV.A and AV.B make it very clear that they are to be irredeemable unless pref shareholders consent to redemption:

1. They are described in the heading to both documents as “cumulative Irredeemable Preference Shares” (note that not all so-called irredeemable preference shares are described in their terms in this way, but in this case they are)

2. Under “rights attaching to the Preference Shares” the documents state (Clause 4(i) ) that “The New Preference Shares” [now called AV.A, then Commercial Union] “will not be redeemable, save with the approval of the holders of the New Preference Shares to a variation of the rights attached to such shares”. ( Again this clause is not contained in all so called irredeemable preference share terms, but in this case it is).

3. Under Clause 4 (ii) it states that on a return of capital on a winding up, a premium over par is to be paid by reference to the gross yield on War Loan. This is what is known as a “Spens clause”, and was sometimes inserted into the terms of pref shares at the time these were issued (1992) in response to the 1987 HoF v AGCE decision, precisely so that pref shareholders could be protected from being redeemed at par against their will via an involuntary return of capital!

Taking the above three points into consideration, I’d say that on balance it is likely that a court would find that the situation in this particular instance does not follows HoF v AGCE, but is more akin to Old Silkstone Collieries, and that therefore class consent is required to repay the pref capital at par and cancel the shares, because repayment and cancellation would involve a change in their class rights.

In arguing against the above, Aviva would have to rely on Clause 4 (iii) of the pref terms, which states that “on a return of capital (otherwise than on a winding up or on a redemption or winding up or purchase by the company of shares of any class)” the pref holders will be entitled to receive just par plus accrued. I can see how they might seek to use this and argue, firstly, that return of capital is not the same as “redemption” (they have to argue this because redemption clearly needs class approval under clause 4 (i) ), and further that if the court accepts that return of capital/cancellation is not the same as redemption (a stretch in my view, but arguable) the return of capital does not in itself constitute a change in terms because on a narrow reading it is allowed under Clause 4 (iii) where the return of capital is not as a result of winding up or redemption. This is certainly an arguable case, but on balance I’d say that a court is likely to give more weight to points 1, 2 and 3 I outlined above when deciding what the terms of the pref take as a whole determine. It’s not completely clear to me why “Spens wording” was inserted into clause 4 (ii) (governing what pref shareholders receive on a winding up) and not into clause 4(iii), but I assume it’s because the drafters felt in no doubt that a return of capital would involve a change of class rights and hence would need pref shareholder approval, and so they assumed that any premium over par to be received by the pref holders could be negotiated at the time of repayment of capital as a condition of their approval (whereas in winding up pref holders would have no choice other than to be redeemed, hence why a “Spens clause" had to be inserted into clause 4 (ii) to specify what they would get in such circumstances).

Sorry the above is all very detailed and legalistic, and perhaps difficult to follow, but as Goseigen has repeatedly pointed out, that’s the nature of preference shares! I’m sure Aviva will have received legal advice that they have a good case to rely on clause 4 (iii), but I’m equally pretty sure that they will be aware that the outcome if it comes to court is uncertain. So my feeling is that they are unlikely to risk actually trying to go ahead with repaying the prefs at par via a return of capital, the more so because quite apart from arguments over the precise terms of the prefs, under Companies Act 2006 Directors now have a specific duty (Section 172 (1) (f) ) to “act fairly as between members of the company”. The proposed scheme would obviously advantage ordinary shareholders at the expense of pref holders, so the Directors could potentially be liable if they promote it and a court were to rule it to be unfair. There are also Companies Act provisions against oppression of minority shareholders which could be relevant in this situation. So my feeling is that this is a “softening up” exercise ahead of a liability management offer to the pref holders. They’ve certainly succeeded in getting the market prices down, and my feeling is that any offer will be pitched between the current prices and the recent highs - say at 140 to 150. Or they may decide to abandon the idea altogether if pref holders make enough fuss. Either way, I think both AV.B and AV.B look good value around 120, so I’ve bought both today.

Incidentally, the above comments are specific to AV.A and AV.B. I think some other finance sector “perpetual prefs” may in strict legal terms be more vulnerable to a forced repayment of capital at par because the precise wording in their terms may be different, but it has to be looked at on a case by case basis and I haven’t yet gone though the terms of other instruments in enough detail to have a fully thought through view (when I was last posting on perpetuals several years ago, most of them were trading below par, so the issue of whether they could be forcibly repaid at par via a return of capital wasn’t pertinent!). But in a general sense I think it may actually be quite good for investors that this issue has first been raised by Aviva, because I think Aviva may have a weaker argument than some other issuers might have, so if Aviva don’t pursue this then that may discourage others from trying it too! And if it has to be tested in court, then I think from investors’ point of view AV.A and AV.B would be a relatively advantageous test case.

Finally, to Goseigen I would say that he's absolutely right that it’s in the nature of all share capital that a company can decide to repay capital and retire shares, but only provided that they have shareholder and court consent. The voting mechanism required for obtaining shareholder consent (shareholders voting as a whole or separate class vote) depends on the precise terms of the class of share capital concerned, and whether the rights of that class are changed by the proposed repayment of capital. In this case, as I argue above, I think it is more likely than not that that separate class consent is required, notwithstanding Aviva’s assertion to the contrary. But the reality is that nobody can know for sure one way or the other until a court rules on the matter!

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Re: Aviva and General Accident preference shares

#124259

Postby naeclue » March 12th, 2018, 3:05 pm

Thank you for a most welcome return Avidya, I've missed your posts. This one was worth waiting for.

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Re: Aviva and General Accident preference shares

#124264

Postby Redhill » March 12th, 2018, 3:13 pm

Avidya, I well remember your knowledgeable and sensible posts on TMF and felt I learnt a great deal from them. I'm sure many others will join me in appreciating your post above which is both informative and, for Pref holders, I think very encouraging.

Whatever happens with the current Aviva situation I expect the market in Prefs has taken such a jolt that the share prices current just a few days ago won't be achieved again, not at least in the short to medium term. Assuming Aviva Prefs and/or others are not cancelled, while it is a shock for capital values to take a sudden hit, for those of us who invested in Prefs for long term income this shouldn't be too much of a problem; to put it in perspective, Pref share prices today are generally back to the levels of 18-24 months ago when I was thinking they were getting a bit "toppy" anyway.

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Re: Aviva and General Accident preference shares

#124272

Postby GoSeigen » March 12th, 2018, 3:37 pm

scrumpyjack wrote:I don't hold the Pref shares but I do hold ordinary shares.

As I understand it Aviva are planning to hold a vote of all shareholders (ordinary and preference) voting together and believe that a majority vote of that pool of shareholders would be sufficient to allow them to redeem the preference shares. They have presumably taken legal advice on this. Obviously the ordinary shares would swamp the prefs and outvote them

There's a long thread above this covering some of the points but... the above is probably accurate, adding that, with some careful campaigning, preference shareholders who have evidently four votes per share may be able to make it a close run thing.

So legally it seems they may do this. I'm not a lawyer but I wouldn't be surprised if this was challenged on the basis that it amounts to oppression of one class of shareholders by another class of shareholders, as long as someone has the funds and inclination to challenge it.

On the evidence seen so far, oppression won't come even close: they will lose. It is not proposed that the pref holders forfeit anything, there is no haircut, they are being afforded their rights in full. There is case law supporting Aviva.

However redemption at par clearly disadvantages the preference shareholders and morally at least is hard to justify given that they have been led to believe they are irredeemable and bought them on that basis. It would not surprise me if a premium of some sort is paid on their redemption to give a clock of 'fairness' to this and to discourage legal action.


Redemption at par is what the pref holders are entitled to under their terms. The preference shares are equity and not debt. Investors overlooked the fact that non-equity share capital may be retired with the agreement of the shareholders and approval of the High Court in a capital reduction. It's a rare occurence for sure with market prices at such a premium.

Several posters agree with you that a modest premium may be offered as a inducement and to ensure smooth passage of the capital reduction resolution, perhaps in the form of a coercive tender.

GS

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Re: Aviva and General Accident preference shares

#124285

Postby paulmiller » March 12th, 2018, 4:00 pm

Avidya - A very informative post and thank you very much for taking the time to share your expert knowledge. I am sure that Mark and everyone on his website will also want to read this.

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Re: Aviva and General Accident preference shares

#124288

Postby Alaric » March 12th, 2018, 4:03 pm

GoSeigen wrote: there is no haircut


You hold an asset that pays £ 8 per year with a reasonable amount of security. You find one day that by an arcane legal interpretation, the issuer is going to make you accept £ 100 for it. You cannot replace that income of £ 8 with the same level of risk.

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Re: Aviva and General Accident preference shares

#124305

Postby Darwin » March 12th, 2018, 5:01 pm

It seems to me that management are sending a message with this proposal.

They are saying that the business is carrying a significant amount of needless high cost debt in an era of low interest rates. Back us to sort this out.

I'm sceptical about the prospect of higher interest rates in the near or medium term. Either there won't be rises or there will be rises and the economy will suffer.

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Re: Aviva and General Accident preference shares

#124307

Postby GoSeigen » March 12th, 2018, 5:09 pm

Avidya wrote:Hi,

I used to post quite regularly on the Motley Fool banking board. I haven’t participated in these sort discussions for several years now, but I can’t resist posting on the Aviva situation because it’s so fundamental to the valuation of “Irredeemable” prefs!

<snip>


Avidya, could I add my voice to others, that it's great to see you posting -- I'd wistfully wondered if we had lost you forever... Thank you for your thoughts on the whole situation and on my contributions too.

That's a very well considered post -- Avidya was probably right to hold off for a while before posting! Agree with much of those comments. I had not seen the prosectuses for AV.A and AV.B and no-one pointed out the language in them. It is significantly different than the General Accident language, which I have seen and I agree with Avidya that the rights of their pref holders look stronger. I agree there may be enough to make a decent case in court. I'd attach greater probability of success to Aviva than Avidya has though: I think the proposed Aviva argument that redemption is not the same as return of capital is sound. If a share class is declared redeemable it is very clear that all the associated law in the 2006 Act applies, whereas if the class is not redeemable, it does not. Yet the law still anticipates a return of capital for share classes which are not redeemable. Furthermore, the prospectuses I have seen refer to the shares as not redeemable, yet in the very next clause deal with the question of return of capital. Clearly they are entirely distinct events. IMV this will be a very easy for Aviva to demonstrate. I accept that Avidya has far greater experience than me and welcome any corrections he can make.

Regarding the Spens language, no holders pointed this out either, so I was unaware. I agree with Avidya that this also is not waterproof: first, as Avidya points out it applies only to capital return on winding up. Avidya has made useful suggestions as to why this may be the case. I haven't considered it enough to make my own contribution. Secondly, the language does not apply to dividends but only to the amount to be paid in respect of the share capital. Furthermore, this amount is capped at twice the nominal value. It seems to me this is not sufficient for the class to be deemed an equity class and that the court would therefore find that none of the rights were being altered or denied. To counter this, holders might argue that in a return of capital it is not clear whether the winding up of the company is to follow immediately or not. If it were, then the holders would have been entitled to the winding up premium. It is therefore impossible to determine at any moment before winding up exactly what the rights of holders are and so it cannot be said that the rights of holders were not being altered. Aviva may respond by saying that the rights of a contract should be clear at its formation and have the court construe the contract accordingly. &c.

I agree with Avidya that there is scope for ample argument in court and that, certainly for the issues with stronger language the offer of a premium is likely.


Need to head off now, so may make additional points later. Just a quick complaint: it has been difficult to comment in an educated manner without seeing all the documentation. I am not a holder of any of these prefs so completely neutral and contributing purely out of interest. It would be nice if some invested holder could do the work of finding all the prefs and articles and doing a post with links to all of them. That would make it easier for all to be informed.

GS

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Re: Aviva and General Accident preference shares

#124311

Postby GoSeigen » March 12th, 2018, 5:23 pm

Alaric wrote:
GoSeigen wrote: there is no haircut


You hold an asset that pays £ 8 per year with a reasonable amount of security. You find one day that by an arcane legal interpretation, the issuer is going to make you accept £ 100 for it. You cannot replace that income of £ 8 with the same level of risk.



Not correct. As has been repeatedly said, with references to the relevant law, the issuer has no power to redeem or call in the shares. They are not redeemable. It is the shareholders who will be voting whether to surrender their shares and have their capital returned.

EDIT: Further, I've NEVER made haircut calculations using a DCF, only actual cashflows. You can argue anything you like from the DCF.

GS
Last edited by GoSeigen on March 12th, 2018, 5:33 pm, edited 2 times in total.

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Re: Aviva and General Accident preference shares

#124314

Postby Alaric » March 12th, 2018, 5:29 pm

GoSeigen wrote: It is the shareholders who will be voting whether to surrender their shares and have their capital returned.


If it was just the Preference Shareholders voting, they would presumably only approve a reconstruction which left them with an asset equivalent in value to what they were giving up. The suggestion by Aviva is that they can rig it so the Preference Shareholders get out voted. Why else do you imagine it has created so much controversy?

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Re: Aviva and General Accident preference shares

#124317

Postby GoSeigen » March 12th, 2018, 5:46 pm

Alaric wrote:
GoSeigen wrote: It is the shareholders who will be voting whether to surrender their shares and have their capital returned.


If it was just the Preference Shareholders voting
, they would presumably only approve a reconstruction which left them with an asset equivalent in value to what they were giving up. The suggestion by Aviva is that they can rig it so the Preference Shareholders get out voted. Why else do you imagine it has created so much controversy?


Well, they're not and they can't -- never have been able to and never will. Well, go and change the law Alaric, to allow non-equity share classes to determine what happens to the share capital [EDIT: was "equity"] of UK companies. Then we'll continue this line of thought.

GS

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Re: Aviva and General Accident preference shares

#124318

Postby Alaric » March 12th, 2018, 5:51 pm

GoSeigen wrote:to allow non-equity share classes to determine what happens to the equity of UK companies.



Preference shares are equity. The word "share" is a bit of a give away.

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Re: Aviva and General Accident preference shares

#124323

Postby johnhemming » March 12th, 2018, 6:21 pm

I have studied particularly the prospectus of the GA 8 7/8% prefs into which I have now invested.

I cannot see how Aviva can avoid having a class vote of the prefs if they propose to abrogate the rights of the pref shares.

abrogate def:"repeal or do away with (a law, right, or formal agreement)."

SS6 of S630 of the Companies Act 2006 also leads to a similar conclusion. It was passed after the HL decision about House of Fraser.

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Re: Aviva and General Accident preference shares

#124324

Postby GoSeigen » March 12th, 2018, 6:24 pm

Alaric wrote:
GoSeigen wrote:to allow non-equity share classes to determine what happens to the equity of UK companies.



Preference shares are equity. The word "share" is a bit of a give away.


Again incorrect. Equity share classes share in the profit of the company. Non-equity share classes like many preference shares do not. The distinction is important, especially in the context of this Aviva discussion.

Companies Act 2006, s.548.

This is becoming exceedingly tedious Alaric. Please consider reading the above act.

GS


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