CAN YOU NAME ONE THING that Ocado, self-storage company Big Yellow and Carphone Warehouse all have in common? Each of them have carried out ‘cash box’ placings within the last 12 months.
So-called cash boxes are a method of raising money used by UK companies which allows them to raise funds in a shorter time period than would otherwise be the case.
UK companies are restricted by statute from issuing shares for cash on a non-pre-emptive basis, meaning that any issue of shares by a company must first be offered to existing shareholders in proportion to their existing shareholdings. These pre-emption rights are designed specifically to prevent the dilution of existing shareholdings. The obligation to offer the shares on a pre-emptive basis does not apply to the extent that shareholders have agreed to disapply the rights.
As such, it is typical for UK listed companies to obtain shareholder approval that disapplies pre-emption rights over 5% of existing share capital, a practice that is in line with UK institutional guidelines.
The restriction does not apply to issues of ordinary shares for “non-cash” consideration. This is what happens on a cash box placing, where the cash box placing is not an issue for cash, but rather made in consideration for the transfer of shares in another company to the listed company issuer.
Provided that the issue of new shares by the listed issuer is less than 10% of the existing share capital, there will be no need for the listed company to publish a UKLA-approved prospectus in connection with the issue.
Cash boxes can therefore provide access to funds in a shorter time period – and at considerably less cost – than would otherwise be the case if shareholder approval were to be sought (not least because the notice period required for the shareholder meeting is at least 14 clear days) and/or if an UKLA-approved prospectus were to be published (as that approval process itself takes time as well as the time needed to prepare the documentation).
The other benefit of a cash box is that it can help create distributable reserves at the issuer level.
This comes about due to the application of merger relief which can allow much of the capital transferred to the issuer (see step seven in the box below) to be treated as “other reserves”, thus qualifying as distributable reserves which can then be used to pay dividends to shareholders.
This has resulted in companies using cash boxes alongside pre-emptive issues (sometimes with an approved prospectus), in particular if the funds raised are to be used in connection with an acquisition.
They do so because the creation of distributable reserves at issuer level facilitates the return of capital to shareholders if the acquisition does not complete. This would not be the case in a typical placing in which the monies raised would not be treated as distributable reserves.
A word of warning to potential users of the cash box method, however: cash boxes can be unpopular with shareholders if they are used in connection with a non-pre-emptive issue on the grounds that they bypass shareholders’ statutory protections. This concern can be addressed by engaging with shareholder representatives prior to the cash box going live. ?
1 The issuer sets up a new company, typically in Jersey (“JerseyCo”).
2 The issuer’s investment bank will then subscribe for ordinary shares in the issuer’s new JerseyCo company, which will represent more than 10% of the issued ordinary shares.
3 The bank agrees to subscribe for redeemable preference shares in JerseyCo and to pay the subscription price for those shares, on the condition that the new shares to be issued by the issuer are admitted to trading on the London Stock Exchange.
4 The bank carries out a placing of the issuer’s new shares where it identifies investors interested in taking up those new shares. The issuer issues new shares to the investors that are nominated by the bank.
5 The bank receives the proceeds of the placing and uses those proceeds to discharge its undertaking to pay for the redeemable preference shares in JerseyCo (see step 2).
6 The ordinary shares and redeemable preference shares (see step 5) in JerseyCo are then transferred to the issuer, in return for the issue of the new shares in the issuer to investors (see step 4). JerseyCo is now a wholly-owned subsidiary of the issuer.
7 The issuer may then access the cash in JerseyCo, either by way of redemption of the redeemable preference shares, loan or liquidation.
Kate Ball-Dodd is a partner in the corporate practice of Mayer Brown’s London office