CG51756 | Reorganisations of share capital: open offers

A company may invite the holders of a class of its issued share capital to subscribe for further shares subject to a guaranteed minimum entitlement based on their existing shareholding. The shareholders may also be given the opportunity to subscribe for shares which other shareholders do not want to take up out of their entitlements. The subscription may be subject to a maximum limit. Any shares not sub-scribed for by existing shareholders on this basis will be placed with institutions. Such arrangements are usually described as an ‘open offer’.

The reality of the arrangements may be that the company has already made arrangements for placing all the shares with institutions but these are subject to ‘clawback’ to satisfy the demands of the existing shareholders.

Almost certainly the new issue will require the approval of the existing shareholders. They will want to be given the opportunity to acquire the new shares in priority over new investors in order to avoid their shareholdings being diluted.

Any subscription for shares up to the level of a shareholder’s own minimum entitlement should be treated as a share reorganisation. Any shares subscribed for in excess of the minimum entitlement should be treated as a new purchase outside the scope of any reorganisation of share capital.

One of the features which distinguish an open offer from a rights issue is that in an open offer an existing shareholder does not receive a letter of allotment in respect of the new shares to which they are entitled (see CG51746). They are not able to ‘sell on’ their preferential entitlement to new shares if they do not want to subscribe for those shares: any potential advantage or benefit is lost if they do not subscribe, but see CG51757 (compensatory open offers) below.