The operations that affect me as a shareholder

Transcription

1 The operations that affect me as a shareholder a. Capital increases Capital increases are financing operations that increase a company s equity (except for increases charged to reserves). They can be carried out by increasing the nominal value of all the existing shares, or by issuing new shares. The counter value of the capital increase can consist of both new contributions monetary or non-monetary to the net worth including the compensation of credits against the company, as well as the transformation of reserves that are already part of net worth. Capital increases always have to be approved by the Shareholders Meeting, although it can delegate to the Board the power to choose the date for enacting the agreement and set the conditions in everything not envisaged at the Meeting, within a certain timeframe. In the case of non-monetary contributions, at the same time as the calling of the Meeting 3 it is obligatory to make available to shareholders a report by the directors. This report will describe in detail the contributions, the people that make them, and the number and nominal value of the shares to be delivered. Moreover, at listed companies you can later consult the valuation report drawn up by an independent expert, contained in the operation s information prospectus. In the case of capital increases by compensation of credits the creditors can change their loans for shares in the company and change from being creditors to shareholders. According to the Public Limited Companies Act, at least 25% of the credits to be compensated must be liquid, matured and demandable, and the maturity of the others should not be more than five years. Furthermore, at the same time as the calling of the Meeting the company will make available to shareholders a certification of the auditor of the accounts, which accredits the veracity of the figures provided by the directors on the credits. 3 Articles 155 of the Limited Companies Act. 15

2 When the capital is increased by conversion of bonds into shares, the conditions and timeframe established at the time of the issue will be applied. In capital increases via the issue of new shares with monetary contributions, both existing shareholders and the public in general can subscribe. Shareholders can exercise their preferential subscription right to acquire new shares, while others must have previously acquired the rights that enable them to subscribe to the number of new shares desired. The price of the new shares depends on whether the capital increase is done at par, with issue premium or charged to reserves: Capital increase at par: the price of the new shares is the same as the nominal value. Capital increase with issue premium: the price of the new shares is the nominal value plus an amount called issue premium. Capital increase charged to reserves bonus issue: the reserves available, the issue premiums and the legal reserve (that part which is more than 10% of the already increased capital) are used as the counter value of the new shares issued (i.e. new shares are delivered free to shareholders). These capital increases represent for the company an accounting transfer of the reserves account to the capital stock. There is thus no change in equity or in the company s net worth. The shareholders of a company that increases its capital by issuing new shares have preferential subscription rights over non-shareholder third parties. This means that they can subscribe to new shares in a proportion that allows them to maintain their previous shareholder percentage, thereby avoiding the impact of the dilution of reserves that would happen if this mechanism were not in place. The reserves of a company are built up as part of the profits that have not been distributed as dividends among shareholders over the years. In this sense, these reserves represent a relinquishment by shareholders of their return via dividends, but they clearly form part of the company s value, and so are included in the market price. The arrival of new shareholders means sharing with them the past profits accumulated in the reserves, as a result of which existing shareholders must be compensated through the delivery of preferential subscription rights, which can be exercised or sold. 16

3 The Shareholders Meeting, when deciding the capital increase, can agree the exclusion of the preferential subscription right. But in this case, it is obligatory that at the same time as calling the Meeting 4, the company must make available to shareholders a report from the directors. This will fully describe the proposal and the type of share issuance indicating who will receive them, and a report drawn up by the auditor appointed by the mercantile registrar on the reasonable value of the company s shares, the value of the preferential subscription rights whose cancellation is proposed and the factors behind the figures contained in the directors report. In listed companies, normally the market value is a good approximation of the reasonable value, although the General Meeting can agree to issue new shares at any price, provided it is more than the net asset value of these and the decision to cancel the preferential subscription right is justified. The subscription rights are tradable on the stock market. Shareholders therefore have several options: a) maintain or increase their shareholding, exercising their rights or buying more rights to acquire more shares; b) sell the rights on the stock market and obtain additional income, while diluting their shareholding in the company; c) sell part of their rights and use the income to subscribe the others still maintained, without any disbursement. In this way, the shareholder softens the impact of the dilution of the capital increase. Listed companies must draw up and register a prospectus and a three-page pamphlet every time they make a capital increase 5. Chapter 2 of the prospectus describes all the features of the issue and the purpose of the operation. If it entails any risk, which because of its features it is necessary to point out, there is a chapter 0 where you will find detailed and precise information about the risks. 4 Article 159 of the Limited Companies Act 5 Royal Decree 291 of March 27, 1992 on issues and public offerings of sale. 17

4 b. Capital reductions Capital reductions have to be agreed by the Shareholders Meeting. There are two reasons for a capital reduction; either because the capital stock is regarded as being higher than the company s needs or because the company must adjust the capital figure to its net worth in order to absorb losses (reduction from accounting adjustment). In the first case reduction because of excess capital stock, the operation can have different purposes: Return of contributions to shareholders. This method has been used a lot over the past few years as way to remunerate the shareholder. The establishment or increase in voluntary and/or legal reserves. If the reduction is due to the need to re-establish the balance between the capital stock and the company s net worth, reduced as a result of losses, the purpose of the reduction will be to achieve a financial structure that is adequate for the new situation. Regardless of the motives and the ends, there are two ways to carry out a capital reduction: Reduction in the nominal value of shares, maintaining their number. Redemption of shares. Meanwhile, there is a financial operation which reduces and at the same time increases the capital known as an accordion operation which is used to clean up a company. It consists of reducing the capital stock and, at the same time, increasing it, without the obligation to reach the volume prior to the reduction. Generally, these operations tend to be linked to corporate cleaning up processes, which require the absorption of losses before new capital is injected into the company. c. Public Offerings of Securities Public offerings of sale are operations involving shares that already exist, while public offerings of subscription are for shares that have to be issued. The first one disseminates ownership in order to guarantee liquidity prior to admission for listing or increase it if the company is already publicly quoted and the second enables financing to be obtained from the market and also disseminates ownership where necessary. A Public Offering of Sale is carried out in order to sale part or all of a company s capital stock, to a certain public and in a proportion that is set out. It is used in the following cases: 18

5 Privatisations or listings of state owned companies. There have been many privatisations over the last few years and the process is now almost over. The state sells a percentage of the capital of a company to be privatised, which is already listed or will begin its listing. In both cases the state obtains financing, and if the company is newly listed it acquires a dissemination that will partly determine its future liquidity. Listing of private companies. Usually one or several shareholders sell part or all of their shares in the company, obtaining income and achieving at the same time the dissemination required to be listed. In many cases only part of the shareholding is sold and control of the company is maintained. Sale of a significant shareholding by a majority shareholder or one of control. A Public Offering of Subscription is an offering carried out through a capital increase in which one, several or all the shareholders give up their preferential subscription rights. Both listed and unlisted companies can carry out this operation, and in both cases the participation of existing shareholders is diluted. In general, the purpose for both types of company is the capturing of funds which enables them to undertake new projects. In the case of unlisted companies, they also could meet the requirement of shareholder dissemination required for a listing. When a company decides to carry out a public offering of sale or subscription aimed at the public in general, it is obligatory to register the information prospectus with the CNMV. This gives the investor full information of the placement of shares, the issuing entity, its economic/financial situation, its shareholder and organizational structure, as well as the envisaged dividend policy. Moreover, because of the importance of the operation, the prospectus includes a chapter 0 which describes the issuer s financial risks, the business risks, the risks of the operation, and where appropriate, the business plan drawn up by the directors. It is therefore important that the investor carefully reads the information that is set out in the information prospectus, particularly that regarding the risks and warnings contained in chapter 0 and in the three-page summary. It is also advisable to become acquainted with the placement and price-setting mechanisms, the price range, the subscription period, the pro-rata system, etc, as well as the functions and responsibilities of everyone involved in the operation. These concepts are now described. The offering can consist of three tranches: retail, institutional and for employees. The first is for small investors, and generally through it shareholder dissemination and liquidity is achieved. This is why it is important to look at the size of this tranche in relation to the offering and to the total capital stock: the larger the retail tranche, the greater the dissemination and liquidity, and the greater the possibility of your voice being heard at Shareholders Meetings. 19

6 In these operations, the issuer or those making the offering assign a specific tranche of the offering to make it possible to exercise the purchase option (known as green shoe). The number of shares assigned to the green shoe is set in the conditions of the offering, and its possible exercising always corresponds to the co-ordinators. This option can be exercised in one or several ways, fully or partially, on the day of the operation (the day when the shares are allocated) or during the 30 days following this date. The option is exercised at the same price as the offering, leaving it increased by the number of shares on which the purchase option has been effectively exercised. Its purpose is to tend to the excess demand that can be produced in the institutional tranche. It can be accompanied by stock lending for a maximum amount equal to that of the green shoe, with which the over-allocation is met if it occurs, meeting the possible excess demand in that tranche. As of the first day of listing, the Global Co-ordinating Entities acting on the account of the underwriters can carry out stabilization operations in the market, following the international practices for this kind of operation. Stabilization operations enable the market to gradually absorb the number of sell orders that at times arise after a public offering of sale/subscription. The debtor position assumed by the underwriters tends to be covered by the acquisition of these shares on the stock market or directly through exercising green shoe. In both cases share price stabilization is benefited. This practice, however, is not obligatory. Another very important aspect is to know how the share price is set, who sets it value and with what criteria it is done. The price in a public offering of sale/subscription is set throughout the subscription period, and can be linked to a maximum price or to a price range. In the second case, the price range can be binding (i.e. the final price has to be within this range), or not binding, with a scale of indicative prices, within which the final price does not necessarily have to be. When the price range is not binding, after setting the maximum price a period of revocation is opened so that investors can cancel orders if the price does not seem adequate to them. Both the price range, as well as the maximum price, are established on the basis of a valuation made by an independent expert and by the company in accordance with the Co-ordinating Entities, or just by the company without any third party that assumes any responsibility for the operation. These operations were largely the creators of the phenomenon known as popular capitalism, through which large parts of the population massively entered the stock markets. 20

7 When in these operations a very high number of requests is produced and demand outstrips the total volume of the offering, there is a pro-rata system to allocate the shares definitively. Although there are different kinds of pro-rata, the usual one is to give priority to the orders received in the first days of the placement over those received in the last days, and in many cases to existing shareholders or clients of the company. Because of this, investors must not inflate their demands and ask for amounts that are more than they intend to invest. This bad practice increases demand excessively and puts upward pressure on the final price. Furthermore, it distorts the operation and complicates allocation and, in the last resort, if the offering does not obtain the envisaged demand, you could find yourself with many more shares that you wanted, a possible overdraft in your account and if you opened several accounts with this purpose, an equivalent number of associated commissions. In both the design of the offering as well as the placement process, entities are involved that carry out different functions: Global Co-ordinating Entities: they co-ordinate the offering in all its tranches, control the state and evolution of demand, set the final price in accordance with the company, and, where appropriate, re-distribute the shares between tranches. Management Entities: they manage and prepare each of the tranches, assuming an underwriting commitment greater than that of the underwriters. They are also responsible for the veracity and integrity of the information contained in the information prospectus. Underwriting Entities: they assume the commitment to guarantee the economic result of the operation in the face of the placement risk. Placement Entities: they mediate in the placement of shares amongst the public, with or without underwriting commitment. All of them must make available to investors the prospectus and three-page summary of the offering. 21

8 d. Takeover bids A takeover bid is an operation in which an individual or a company offers to buy from the shareholders of a listed company their shares or other securities convertible into shares, at a certain price or payment. This price is usually higher than the market s and the aim is to obtain a significant shareholding. The takeover bid operation is based on transparency in order to guarantee the principle of equal treatment for all shareholders, especially in those operations in which the bidder has agreements with certain shareholders of the affected company for the acquisition of their shareholdings. With protection of small shareholders the main objective, Spanish legislation makes takeover bids 6 obligatory in different situations, including: When the aim is to obtain a shareholding equal to or more than 25% or 50% of the capital stock of the company affected, respectively. When a shareholder with more than 50% of the votes wants to modify the articles of association in a significant way. When there is a capital reduction via the acquisition of treasury stock for their redemption. In order to exclude a company from listing (takeover bid followed by the removal of the company s listing) Takeover bids can be friendly or hostile, depending on whether there are agreements or not between the offering company and the directors and management of the company affected. Some companies, in order to avoid a hostile takeover bid, establish in their by-laws restrictions on voting or the election of directors. It is important for minority shareholders to observe these anti-takeover bid measures if they exist, because in certain circumstances they could damage their interests. Once a takeover bid is formulated, other parties interested in acquiring a significant shareholding in the company affected can formulate competing takeover bids, which logically have to improve the conditions of the initial bid. Once the competing bid is formulated, the individual or company that made the first offer can improve it by changing the conditions. The formulation of a takeover bid can be positive or negative for the bidder company, depending on whether a set number of shares is reached. If the bid is not for all the shares and acceptances exceed the maximum of the offer a pro-rata is carried out among all shareholders that accepted it. 6 Royal Decree 1197 of July 26, 1991 on takeover bids. 22

9 A takeover bid followed by the removal of the company s listing is an offer that the company makes to its shareholders, in order to delist. A delisting means the shares lose liquidity, and thus the last opportunity for shareholders to sell their shares on the market before the company is delisted. In these cases the price has to be authorized by the National Securities Market Commission (CNMV), and in order to establish a fair price, the company must provide a valuation by an independent expert. The payment for a takeover bid can be with money, an exchange of shares, or both at once. Only in bids followed by delisting does the payment always have to be in cash. Once the takeover bid is formulated, the offering company must register a prospectus explaining the operation with the CNMV. This provides all the necessary and relevant information on the operation, and in the case of bids with exchange of shares the features of the shares to be exchanged, their proportion and the justification of the proposed exchange equation. The prospectus also gives economic and corporate information on the offering company and its group, and, where appropriate, a description of the agreements between the offering company and certain shareholders and/or directors of the company affected. The percentage of capital to whom the offer is aimed at is also indicated, the timeframe of acceptance, the way the operation is to be financed, the impact of the financing on assets, and the indebtedness and earnings of both companies. The purpose of the acquisition and the intentions of the acquirer regarding the future activity of the company affected are also set out; joint strategies, industrial and commercial synergies that show the interest of the operation, changes to the by-laws, information on the management team, measures regarding the listing of the company affected, etc. Shareholders will find in the prospectus the answer to almost all the questions they should or can ask before deciding whether to accept the takeover bid or not. 23

10 e. Mergers and spin-offs Mergers are operations through which a company absorbs another, or two or more companies decide to create a new one. They are the most used instruments for the grouping together of companies, and have a series of mechanisms to protect shareholders the drawing up of a merger project by the directors, a report by one or more independent experts, a report by the directors themselves, an evaluation of the merger, and the dissemination to all shareholders of all these documents, which must pronounce on the merger at the General Meeting. Shareholders must weigh up the advisability of its company merging with another one, and pay particular attention to the exchange equation, which represents the proportion in which the shares of one company will be exchanged for those of the other, and which responds to the valuation made of the different companies. Spin-offs are restructuring operations, and the reverse of mergers. With a spin-off, a new company can be created from a branch of activity of the existing company. It is also possible that a branch of activity is sold to another existing company. Or the original company can disappear and give rise to various companies. The rules on spin-off are similar to those for mergers. Both operations require changes to the articles of association. 24

11 f. Splits and reversal splits A split consists of dividing the nominal value of shares in a certain proportion and, at the same time, multiplying the number of shares and dividing their price in the same proportion. Generally the objective is to make the shares more liquid. The shareholder has a larger number of shares but their price is proportionately lower. In theory this operation does not alter the value of the investment for a shareholder; reducing the price of the shares has no economic-financial effect, although probably a psychological one. A reversal split is the opposite of a split. When the shares have a very low price, a reversal split eliminates the volatility generated by the percentage impact on it of the change in one unit of the price. 25

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13 In a capital increase find out the purpose of the operation and consider whether this is the ultimate goal of your money. This operation will determine to some extent the evolution of future profits and thus the share price. Always find out who decides the prices of operations, and whether there is a valuation or report by an independent expert that justifies them. Always: Positively view companies whose Boards have approved good governance regulations and have control committees presided by an independent director and with a majority of independent directors. Ask if there is armour-plating in the by-laws, because in situations of taking control the interests of directors and majority shareholders could prevail over your interests. Verify that the operation has an information prospectus registered in the CNMV. Bear in mind the importance of the information or explanatory prospectus because it is the official document which governs the conditions of the operation and ask anything that you do not understand. Ask the placement entities for the information prospectus and three-page prospectus and read it carefully because it details all the features and risks of both the issue as well as of the issuer. You can then make a sound judgement on the proposed investment. 42

14 If you are a shareholder of a company whose shares have been excluded from trading and it is inactive, you can ask your depository entity, where appropriate, to handle at the Clearing and Settlement Service (SCLV 9 ) the exclusion of your references in order to avoid in the future the charging of commissions for the deposit of these shares. Read the publicity carefully. Because of its very nature, it cannot fully reflect the features of the operation. The CNMV ensures that the publicity for the issue reflects the prospectus and oversees this. 9 SCLV Circular 7, July 18,