Understanding Shares
Types of Corporate Action
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Call Payments
This is the term given to any payment made in respect of newly issued shares. Whether it is as a result of a "Float" on a Stock Exchange, a Rights Issue or an Open Offer, the money used to pay for the new shares is described as the Call Payment. There can be a series of Call Payments for new shares. For example, to subscribe for an offer, you may be required to pay the first half of the cost at the time of the offer, then the second half at a later date. Each subsequent payment is a Call Payment. All of the Government Privatisation issues were paid for in this way as the ability to pay in instalments encouraged more people to take up the offer.
Capitalisation
Capitalisation (as in a Capitalisation Issue) is the process of turning cash reserves that the company holds into issued share capital. The shareholder automatically receives the shares and there is no cash payment involved. This is also known as a Scrip Issue, Bonus Issue, Free Issue or a Stock Dividend. It also has the effect of increasing the number of shares in the market and therefore reducing the price of those shares (share price dilution).
Consolidation
This involves consolidating the existing share capital into fewer shares with larger nominal values. For example, if you held 1000 Smith Plc Ordinary GBP0.20 shares and a Consolidation is announced on a 1 for 5 basis, then for every 5 shares you hold, you will receive 1 new share. As the total of all the nominal values should remain the same under a simple Consolidation, the new nominal value will be GBP1.00. This reduces the number of shares in circulation.
Conversion
These are similar to Redemption Opportunities but instead of having the particular stock redeemed for cash, you have it converted into another stock, usually Ordinary shares in the Company. For instance, if you hold Smith Plc Convertible Loan Stock, on the Conversion date you will be able to surrender the stock in return for Ordinary Smith Plc shares. The Company will issue a notice of this opportunity, together with a ratio for conversion e.g. for every 10 units of Convertible Loan Stock converted; you will receive 1 Ordinary share.
Dividend Reinvestment Plan
The company offers a Dividend Reinvestment Plan to give shareholders the opportunity to use their Cash Dividend to purchase shares through a special low-cost arrangement.
The Plan will be run by an administrator appointed by the Company.
For the Reinvestment Plan, shareholders will be paid a Cash Dividend and given the opportunity to reinvest it in shares through a special dealing arrangement. If shareholders join the plan, then as many whole shares as possible will be purchased for them from their Cash Dividend. Generally 1% dealing commission, plus stamp duty tax at the prevailing rate (currently 0.5%) will be charged. Purchases are made on or soon after the relevant Dividend payment date. The purchases are made on an execution-only basis.
Because only whole shares will be bought under the Plan, there will usually be "excess cash" left over afterwards that is insufficient to buy another whole share. This excess cash will be credited to the account in the normal way.
The Plan Administrator is not obliged to make the plan available for any particular Dividend. If it is not made available, a Cash Dividend will be paid.
Common questions on Dividend Reinvestment Plans
Entitlement Issues/Open Offers
An Open Offer is another method used to raise funds by a company, with a ratio and a Call Cost like a Rights Issue, but there are a few differences. First, the entitlement to buy shares at a lower price in the market is non-renounceable, meaning that you cannot offer or sell the right to anyone else. You either take up the right yourself or choose not to. For this reason, when an Open Offer is announced, you will be allocated sub shares, not Nil Paid shares. Sub shares, due to the nature of an Open Offer, cannot be sold. The second difference is that, although the ratio sets out your minimum entitlement, you are often able to apply for more than your entitlement. This is called an Excess Application. Shareholders advise how many shares they would like to take up, including any excess that they would like to apply for, and pay the funds for this amount. Before the Open Offer is announced, the Company calculates how many shares it needs to issue to raise the required funds. After the applications are received it will announce the results and inform of any scaling back. This means limiting the number of shares each person can take up because more shares have been applied for than the Company wishes to issue. Any unused funds are refunded to your account shortly after they are received from the Registrar. Companies or the Registrar may treat the pooled nominee account as a single large shareholder and not recognise the underlying clients. In such circumstances, clients may receive fewer shares than if they held their shares in their own name.
Please note that ISA and SIPP accounts can only take up their entitlement if sufficient funds are available to fund the Open Offer.
Common questions on Open Offers
Exercise of Warrants
Warrants, like Nil Paid shares, show the entitlement of the holder to purchase Ordinary shares in a specific company at a set price, at a future date. If you wish to exercise your Warrants you will pay the exercise price to receive new Ordinary share(s) for every Warrant held. As a holder of Warrants, you would hope that the price of the Ordinary share rises above the exercise price so that you can buy the Ordinary shares for less than the market price. Warrants are usually exercisable for a number of years, and are also tradable, meaning that you can buy and sell them in the open market.
Interim Redemption/Option to Redeem
These are options to have a particular stock, such as a holding of Loan Notes, redeemed for cash, usually the nominal value. In the case of Loan Notes, the Redemption Opportunities occur on the Interest payment dates, usually 2 or 4 times a year. If you wish to have your Loan Notes redeemed you must give 30 days notice before the interest payment date. Other types of stock that can have Redemption Opportunities include Gilts (Gilt-Edged Securities or Government Bonds), B Shares and Redeemable Loan Stock.
Liquidation/Winding Up
If a company is unable to continue trading i.e. its debts and liabilities exceed its capital reserve and it cannot obtain financial backing from the banks or other institutions, then a Receiver may be appointed. The Receiver will attempt to sell the business as a going concern otherwise the company assets will be liquidated.
When the company is liquidated, the shareholders may obtain proceeds but this can take several years and the ordinary shares rank below other creditors.
The Stock Exchange may notify that the company has been declared as having negligible value under the Inland Revenue 1979 Capital Gains Act, Section 22(2). The shares are then worthless. Investment Trusts can also be wound up after receiving approval from shareholders at an EGM (Extraordinary General Meeting). This means that assets will be sold and funds distributed to the Ordinary Shareholders.
Offer/Take-over
An offer or take-over occurs when one company wants to buy another company. To own a company in full, the acquiring company must own all of its shares. The company could try to buy the shares in the open market but it is required under Stock Exchange rules to make a formal offer to the existing shareholders once its percentage of the company reaches a certain level. This is to make sure that all shareholders receive the same price.
The offeror or buying company will offer cash or shares in their company in return for shares in the company it wants to buy. Once an offeror has gained 90% acceptances, it can compulsorily acquire all the remaining shares under Section 429 of the 1985 Companies Act.
If insufficient shareholders accept the offer, it will lapse.
Reorganisation
A Company may wish to re-organise its capital structure in order to raise more finance or to pay a dividend. This includes Subdivision and Consolidation.
Rights Issue
A Rights Issue is a means of raising funds by issuing more shares. It is called a Rights Issue because the Company grants rights to existing entitled shareholders, to purchase newly issued shares before anyone else, normally at a price lower than the current market price. Only holders of the Ordinary Shares on a certain date (Ex Date) are entitled. There will be a ratio, showing how many new shares can be bought and a Call Cost, i.e. how much it costs to buy one new share under the terms of the offer. E.g. you can buy 3 new shares for every 5 held at 50p per share.
Please note that ISA and SIPP accounts can only take up their entitlement if sufficient funds are available to fund the Rights Issue.
Common questions on Rights Issues
Scrip Dividend
Scrip Dividends offer most shareholders a means of increasing the number of shares they hold in the Company by taking new shares instead of the cash dividend that they would otherwise receive.
The value of the new shares that participants receive will be as near as possible to the amount of the cash dividend to ensure the value received is the same whether a shareholder chooses to take the cash dividend or new shares. Shareholders do not have to pay any dealing charges or stamp duty on the allotment of new shares.
Common questions on Scrip DividendsScheme of Arrangement
These come in two forms:
- Mandatory, there are no options e.g. for every X, you WILL receive a Y.
- With Options, you have a choice e.g. for every X you can have a Y OR a Z.
Schemes of Arrangement are often used for mergers and demergers.
Subdivision
The opposite of Consolidation. For example, the Ordinary share nominal value is 50p per share and this Subdivided into 10p per share. The shareholder will then hold 5 x 10p shares for every 1 x 50p shares previously held. Subdividing will have the effect of increasing the number of shares in the market; decreasing the Nominal Value and decreasing the market price per share. The actual value of shares held will still be an equal proportion to the market total.
Tender offer
A Tender Offer is a way of executing a Corporate Action, quite often a buyback or repurchase of shares. In a buyback, the Company offers to return money to shareholders by offering to buy back some of their shares. The Company sets a price range and holders offer to sell their shares at a price in the range. The Company then sets a Strike Price and offers to buy all the shares tendered at or below that price. A Tender Offer is also used in Offers for Subscription (floating companies or sales of large holdings) whereby in simple terms, a selling agent advertises shares for sale and invites offers from potential investors who say how much they are willing to pay rather than agreeing to pay a set price.
