The Association of British Insurers has, in a letter to the chairmen of listed companies, expressed concern over the use of cashbox structures to raise equity funding on a non pre-emptive basis. This follows similar concerns expressed by the National Association of Pension Funds.
What is a cashbox placing?
Cashbox placings were undertaken by a number of public companies in the early part of 2009. The structure involves the issue of shares for non-cash consideration so that statutory pre-emption rights under section 89 of the Companies Act 1985 do not apply.
In outline, the structure involves the establishment of a new company (typically a Jersey company): the so-called "cashbox". An investment bank agrees to subscribe for shares in the cashbox company. The placing of shares by PLC is structured so that cash subscriptions from placees are paid to the investment bank as principal. The investment bank uses those proceeds to pay for the shares it has agreed to subscribe in the cashbox company. PLC agrees to acquire the bank's shares in the cashbox company in consideration of PLC issuing the placing shares to placees. As such, the shares are issued by PLC not for cash, but for shares in the cashbox company.
Use of a cashbox structure means that there is no need to utilise any of the authority for disapplication of pre-emption rights that the public company will typically have sought at its AGM, which under the Pre-Emption Group Guidelines is limited to 5% of existing issued share capital. This means that there is flexibility to raise additional funds, although cashbox placings are normally limited to below 10% of existing issued share capital to avoid the need to produce a prospectus.
ABI's views regarding cashbox placings
In its letter to company chairmen, the ABI makes clear that it views cashbox placings as a circumvention of the Pre-Emption Group Guidelines. It also points out that it had agreed to recent relaxations in the rules and guidelines applicable to rights issues (see article in our January e-bulletin: ABI guidance on directors' power to allot shares) on the understanding that "the pre-emption principle would be properly preserved".
The ABI states it will "hold boards to account" for breaches of the Pre-Emption Group Guidelines, which it would typically do by voting against the re-election of directors at the next opportunity following a cashbox placing.
Cashbox structures are also being used increasingly in the context of rights issues because they can create additional flexibility in respect of distributable reserves. Since rights issues are pre-emptive in nature, the ABI has not expressed concern regarding the use of cashboxes in that context.