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Share Capital and Rights Issues
4 July 2008
Treasurers are responsible for the capital structure and funding strategy of their companies. That includes the funding element that comes from equity, but yet I bet most of us spend the bulk of our time on the debt side of the balance sheet.
The problem is that the equity side is less flexible to adjust and manage and certainly more expensive in issue related costs and have you seen the thickness of an equity prospectus? I raise this now because of the fuss we are seeing in the market at the moment over the rights issues by several major banks. Their problem, or at any rate one of their many problems, has been that having announced a rights issue at a heavily discounted price the dismal market tone has meant the market price dipping below the rights price, thus rendering it totally unattractive to shareholders. While we cannot control the market share prices, we could institute a far quicker timetable for the whole process.
As Paul Myners, the author of the 2005 report on pre-emption rights, said in the Telegraph a week ago,
In the HBOS case, this document ran to 192 pages but the only really important information, a trading update and an explanation of the purpose of the equity raising, took just half a dozen pages. Paul Myners
It is important to preserve the pre-emption rights of sharehoIders but I think we must cut down on the paperwork, go electronic on the shareholder voting process and remove the time period at risk.
www.pre-emptiongroup.org.uk has the latest guidance form the pre-emption Group
By Martin ODonovan
Comments
I agree with Martin's sentiments but is document length such a problem? Interested parties can usually find as much or as little as they need if a document is well laid out and indexed (which the HBOS example seems to be.) Is there a risk that, perish the thought, a reduced documentation requirement could tempt issuers to be more economical with their disclosures?
It may also be worth asking whether streamlining the process would actually reduce the risk of a share price being driven below the rights price. While a dismal market tone may plenty to do with the recent problems so, we are led to believe, do the actions of market players actively seeking the disruption of rights issues. Could a faster process thwart a determined attacker?