Editor’s note: this is general educational information about how UK rights issues and pre-emption rights work, not investment advice. It is based on the statutes and rules listed at the end.
Analysis: what a shareholder is actually choosing between
Stripped of the arithmetic, a rights issue puts three options in front of a holder. Take up the entitlement and pay, in which case the proportional stake is preserved and the discount received on the new shares offsets the fall in value of the existing ones. Renounce the entitlement to someone else under section 561(2), in which case the proportional stake shrinks but the value of the entitlement is realised in cash. Do nothing, in which case the stake shrinks and whatever the entitlement was worth is realised by someone else or lost. The statute makes the first two possible. It does not make the third harmless.
The timetable is the constraint that makes this a real decision rather than a formality. The minimum acceptance period is 14 days, and the offer cannot be pulled during it, which sets the floor on how long a holder has to find cash or a buyer. A holder whose registered address falls outside the United Kingdom or an EEA State, and who has given no address there for notices, may be relying on a Gazette publication rather than on a document arriving.
A second distinction is worth holding onto, because the two regimes are easy to blur. Pre-emption is company law and protects proportional ownership. Whether a prospectus must be published is capital markets regulation and protects the quality of information. They can diverge. Under the FCA’s prospectus rules, equity securities fungible with equity securities already admitted to trading on the same regulated market are exempt from the prospectus requirement where, over a 12-month period, they represent less than 75% of the number already admitted, for issuers other than closed-ended investment funds. For closed-ended investment funds the equivalent equity threshold is less than 100%, and for non-equity securities issued by such funds it is less than 75%. Most rights issues sit well inside those limits, which means a shareholder may receive a full statutory pre-emption offer and no approved prospectus at all.
What does not vary is that the new shares must reach the market on a deadline. An issuer making a further issuance fungible with securities already admitted must obtain admission to trading no later than 60 days from allotment for equity securities, with 365 days allowed for equity shares in the international commercial companies secondary listing category and for depositary receipts. That obligation applies whether or not an exemption was used and whether or not a prospectus was ever published.
What the documents say
A rights issue is often described as a discount handed to loyal shareholders. The law describes it as something narrower and more interesting: a company’s obligation to ask permission before it changes the ownership arithmetic. Section 561 of the Companies Act 2006 states that a company must not allot equity securities to a person on any terms unless it has first offered to each holder of ordinary shares, on the same or more favourable terms, a proportion of those securities as nearly as practicable equal to that holder’s proportion in nominal value of the ordinary share capital, and the offer period has expired or every offer has been accepted or refused.
That is the entire protective idea. The discount is a commercial device layered on top of it. The legal entitlement is proportionality.
What the offer must look like
Section 562 sets the mechanics. The offer may be made in hard copy or electronic form. Where a holder has no registered address in the United Kingdom or an EEA State and has given the company no address there for service of notices, or holds a share warrant, the company may instead publish the offer, or a notice saying where it can be obtained or inspected, in the Gazette. The offer must state a period during which it may be accepted, and it cannot be withdrawn before the end of that period. That period must be at least 14 days, running from the date the offer is sent or supplied in hard copy, the date it is sent in electronic form, or the date of publication in the Gazette. The Secretary of State may vary the period by regulations but may not cut it below 14 days.
The entitlement is transferable in a way that matters more than the statute’s terse language suggests. Under section 561(2), securities offered to a holder of ordinary shares may be allotted to that holder, or to anyone in whose favour the holder has renounced the right to their allotment, without breaching the requirement to wait for acceptances. Renunciation is what makes a rights entitlement itself a tradeable thing. A shareholder unwilling or unable to find the cash need not simply let the entitlement lapse.
Treasury shares are stripped out of the calculation. Section 561(4) provides that shares held by the company as treasury shares are disregarded, so the company is not treated as a holder of ordinary shares and those shares do not form part of the ordinary share capital for the purposes of the section.
What happens when the rule is broken
Section 563 gives the entitlement teeth without giving it a remedy in the shares themselves. Where there is a contravention of section 561 or section 562, the company and every officer who knowingly authorised or permitted the contravention are jointly and severally liable to compensate any person to whom an offer should have been made, for any loss, damage, costs or expenses sustained by reason of the contravention. Proceedings cannot be commenced after two years from the delivery to the registrar of companies of the return of allotment, or, where equity securities other than shares are granted, from the date of the grant.
The remedy is compensation, not unwinding. The shares stay issued.
The route around the rule
UK boards do not have to run a rights issue every time they raise equity, and most do not. Section 570 allows directors who are generally authorised to allot shares under section 551 to be given power, by the articles or by a special resolution, to allot equity securities as if section 561 did not apply, or applied with such modifications as the directors determine. That power ceases when the underlying allotment authorisation is revoked or would expire, and it can be renewed by special resolution for no longer than the renewed authorisation. Directors may still allot after expiry in pursuance of an offer or agreement made earlier, where the power allowed the company to make an offer that might require securities to be allotted later.
This is the mechanism behind the routine annual resolutions at UK company meetings and behind the placings that raise money in an afternoon. Pre-emption is a default that shareholders themselves can switch off in advance, within limits they set by the size and duration of the authority they grant.
The paper trail after the money is raised
The closing step is a disclosure one. The issuer must notify a regulatory information service of any admission to trading and ensure the information is capable of being disseminated to as wide a public as possible, and as close to simultaneously as possible, in the United Kingdom, within 60 days of that admission. The notification must carry the issuer’s name and legal entity identifier, the regulated market concerned, the name, type and ISIN of the securities, the number of further securities admitted, the total number admitted taking the further issuance into account, confirmation that the new securities are fungible with the existing ones, and the relevant dates.
That last item, the total in issue after the raise, is the number that turns dilution from an abstraction into something a holder can check. It is published because a rule requires it, on a fixed clock, in a form a machine can read.
