4 May 2009
A Jersey cashbox vehicle has emerged as an expeditious tool for the creation of a rights issue for a UK plc. By Jonathan Walker and James Hill
Structuring a rights issue for a UK plc using a Jersey cashbox vehicle can make it easier to implement as well as adding to the benefits to be gained from it. The advantages that a cashbox structure offers are flexibility in relation to making the offer and, in relation to the proceeds of the issue of the shares, the availability of merger relief under the UK Companies Act.
The turmoil in the financial markets has reduced the availability of debt financing and has simultaneously created a need for companies to recapitalise their balance sheets. There are various methods of raising equity capital, but for large equity fundraisings, rights issues are probably the preferred mechanism.
Although historically rights issues could be slow or cumbersome to implement, the recent reduction by the Financial Services Authority (FSA) of the minimum rights issue subscription period in the Listing Rules to 10 business days, together with the revised guidance issued by the Association of British Insurers, have made rights issues a quicker and easier way of raising equity capital.
Where a cashbox structure is used, it allows flexibility in making the offer because the shares are issued for a non-cash consideration and, consequently, the offer is not subject to the pre-emption restrictions that apply where shares are issued in return for cash. The benefit of this flexibility is clear in relation to placings, but it is also valuable in relation to rights issues, particularly where there are shareholders resident outside the UK and for the purposes of placing shares that are not taken up under the rights issue.
Cashbox structures also enable the rights issue to be structured so that the requirements for merger relief may be met for the shares issued in the rights issue. This has the advantage that distributable reserves can be created rather than share premium.
What is a cashbox structure?
Incorporation of a subsidiary: A UK-listed company, UK plc, that wishes to make a rights issue incorporates a new subsidiary that acts as the ‘cashbox’ company, CashboxCo. CashboxCo is usually incorporated in Jersey, but in order to avoid the need for HM Treasury consent under the UK Income and Corporation Taxes Act, CashboxCo must be managed and controlled in the UK for the purposes of UK tax. If merger relief is to be sought, a proportion of the equity share capital of CashboxCo needs to be held by the underwriters of the rights issue. CashboxCo will also have a class of redeemable preference shares for issue to the underwriters.
Subscription for and transfer of shares in CashboxCo: UK plc, the underwriters and CashboxCo enter into a series of agreements, under which: UK plc and the underwriters agree to subscribe for and pay up their respective ordinary shares in CashboxCo; the underwriters agree to subscribe for the redeemable preference shares in CashboxCo, to be issued fully paid for an amount equal to the net proceeds of the rights issue and to transfer to UK plc all of the shares in CashboxCo held by the underwriters in return for the issue by UK plc of shares to investors exercising their rights; and UK plc agrees to issue new shares to investors taking up the rights in exchange for the transfer to UK plc by the underwriters of the shares that the underwriters hold in CashboxCo.
The agreements also contain option arrangements to enable the structure to be unwound if the issue of UK plc’s shares does not proceed.
Where a cashbox structure is used in connection with a rights issue, the agreements will usually provide for CashboxCo to issue more than one tranche of shares.
Payment of cash to UK plc: As a result of the transfers of the CashboxCo shares, CashboxCo becomes a wholly owned subsidiary of UK plc, holding funds equivalent to the net proceeds of the rights issue. These may be lent by CashboxCo or paid to UK plc by way of redemption of the redeemable preference shares, or distributed to UK plc in a winding up of CashboxCo.
Jonathan Walker and James Hill arepartners at Mourant du Feu & Jeune
Jersey companies are suited for use in cashbox structures for a number of reasons relating to corporate and tax strategies: