Editor’s note: this is general educational information about how UK equity fundraising rules work, not investment advice. It is based on the companies legislation and the FCA rulebook text listed at the end.
Analysis: the discount is a compensation mechanism, not a giveaway
Read together, these provisions describe a transaction where the discount is neutralised rather than granted. A rights issue is exempt from the 10% cap that binds open offers and placings because every holder is offered securities in proportion to their existing holding, so a larger discount transfers value between shareholders only to the extent that a holder fails to act. The rules then close that residual gap directly: an untaken entitlement is not simply handed to underwriters, it must be offered on terms that any premium above the subscription price flows back to the holder who did not subscribe, with the £5.00 de minimis as the only exception.
The theoretical ex-rights price does the work that the middle market price does elsewhere. In an open offer the reference is the market quotation, because the shares being issued are a small increment to an unchanged capital base. In a rights issue the capital base itself changes, so the market price before the terms are announced is not the right benchmark for what a share is worth after the issue. That is why UKLR 9.4.1 measures the placing price against the offer price plus half the gap up to the theoretical ex-rights price, and it explains why a deeper discount does not by itself indicate a better or worse deal for existing holders.
What the rules do not do is set the discount. Nothing in the sourcebook or the statute says how far below the market a rights issue must be priced, and none of the cited sources gives a customary figure. The determinants are commercial: how much money the company needs, how much of the issue is underwritten and on what terms, and how confident the board is that shareholders will subscribe over a window that must run at least 10 business days. The checkable items are the ones the rules compel into public view: the announced issue price and terms, the notified results of the issue, the price at which any untaken rights were sold and when, and, for issues outside pre-emption, the directors’ written justification of the amount to be paid to the company.
What the documents say
The subscription price in a rights issue is the one number every shareholder reacts to, and it is the number with the least freedom in the transaction. Company law sets a hard floor beneath it, the pre-emption regime decides whether the discount needs shareholder approval at all, and the FCA rulebook ties the pricing of the associated placing of rights to a calculated reference price rather than to the market price on the day.
The pre-emption default
The starting position is that new shares belong to existing holders first. Section 561 of the Companies Act 2006 prevents a company allotting equity securities on any terms to anyone unless it has first made an offer to each holder of ordinary shares to allot, on the same or more favourable terms, a proportion of those securities as nearly as practicable equal to the proportion in nominal value of the ordinary share capital that the holder already owns. Section 562 governs how that offer must reach shareholders. A rights issue is simply the transaction that complies with this rule rather than avoiding it, which is why it does not require the shareholder vote that other placings do.
Disapplication is available but procedural. Under section 571, where the directors are authorised to allot under section 551, the company may by special resolution resolve that section 561 does not apply to a specified allotment, or applies with specified modifications. Such a resolution ceases to have effect when the underlying authorisation is revoked or would expire, and it may be renewed only for a period no longer than the renewed authorisation. It must not even be proposed unless the directors recommend it and have made a written statement setting out their reasons for the recommendation, the amount to be paid to the company for the securities to be allotted, and the directors’ justification of that amount. That statement goes to every eligible member with the written resolution, or is circulated with the notice of the general meeting. Section 572 makes it an offence to knowingly or recklessly authorise the inclusion in that statement of anything misleading, false or deceptive in a material particular.
The effect on pricing is direct. A company issuing outside pre-emption has to write down, and stand behind, a justification of the price it is charging. A company issuing through a rights issue has already offered every holder the same terms in proportion to their holding, and the discount is therefore a matter of structuring rather than a matter of one group of shareholders being treated differently from another.
The floor and the cap
Company law fixes the absolute floor. Section 580 states that a company’s shares must not be allotted at a discount, and that an allottee who receives shares in contravention is liable to pay the company an amount equal to the amount of the discount, with interest at the appropriate rate. The discount there is measured against nominal value, not against the market price, so the rule bites only on companies whose shares trade near par. It is nonetheless the reason a deeply discounted issue by a company with a high nominal value per share may require the nominal value to be dealt with before the terms can be set.
The rulebook cap is written for other structures. UKLR 9.4.13 provides that if a listed company makes an open offer, placing, vendor consideration placing, offer for subscription of equity shares or an issue out of treasury of a class already listed, other than under an employees’ share scheme, the price must not be at a discount of more than 10% to the middle market price of those shares, measured at the time of announcing the terms for an open offer or offer for subscription, and at the time of agreeing the placing for a placing. Middle market price means the middle market quotation derived from the daily official list of the London Stock Exchange or another recognised investment exchange’s publication for the relevant date, with an intra-day on-screen price permitted where the transaction happens during the trading day.
That cap has two exits and one notable omission. It does not apply if shareholders have specifically approved the terms at that discount, or if the issue is for cash under a pre-existing general authority disapplying section 561. And the list of transactions it covers does not include a rights issue. Disclosure follows either way: the company must notify a regulatory information service as soon as possible after agreeing the terms, giving the number of shares, the middle market price at the time, the percentage discount to that price, and, where the discount exceeds 10%, whether shareholders specifically approved it.
Where the theoretical ex-rights price appears in the rules
The theoretical ex-rights price is not a market convention that the rulebook ignores. It is written into UKLR 9.4.1, which governs a placing of rights arising from a rights issue before the official start of dealings. Such a placing must relate to at least 25% of the maximum number of equity securities offered, the placees must be committed to take up whatever is placed with them, and the securities must be of the same class as those already listed. The pricing condition is the one that matters here: the price paid by the placees must not exceed the rights issue offer price by more than one half of the calculated premium over that offer price, with that premium defined as the difference between the offer price and the theoretical ex-rights price. The FCA may modify the 25% requirement downwards if satisfied that insisting on it would be detrimental to the success of the issue.
The same section deals with the shareholders who do nothing. Under UKLR 9.4.4, where existing shareholders do not take up their rights, the company must ensure the securities are offered for subscription or purchase on terms that any premium obtained over the subscription or purchase price, net of expenses, is for the account of those holders, except that proceeds for an individual holder not exceeding £5.00 may be retained for the company’s benefit. Only if no premium net of expenses has been obtained at the expiry of the subscription period may the securities be allotted or sold to the underwriters.
Timing and disclosure are prescribed. The issue price and principal terms must be notified to a regulatory information service as soon as possible, as must the results of the issue and, where rights not taken up are sold, details of that sale including the date and price per share. The offer must remain open for acceptance for at least 10 business days, counted from the first day on which it is open.
