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One of the most important species of corporate action, rights issues are a method of raising more capital by issuing more shares to existing shareholders in proportion to their shareholdings. As with other share issues, rights issues have to be conducted according to the Listing Rules of the UK Listing Authority. The right to buy new shares in proportion to one’s existing shareholding is known as a pre-emption right or subscription right and, in the UK, it normally requires a resolution to waive the right to be supported by 75% of shareholders. ^[21]

Clearly, only companies that need more cash will undertake such an exercise and rights issues are often interpreted as an important signal in the stock market. A rights issue confers an extra degree of influence to the shareholders as collectively they have power over the success or failure of the event. In the context of a rights issue, failure would be a widespread disinclination on the part of the shareholders to ‘take up their rights’ (pay for more shares in the company). ^[22] This not only sends an important negative signal to the market about how shareholders feel about their company, but also means that the issuing company has to look to the open market for buyers of the newly issued shares. Big sale of shares naturally tend to have the effect of forcing the share price downwards.

Companies will normally offer the rights issue of shares to the shareholders at a discount to the current share price in order to encourage the level of take-up. A deeply discounted rights issue was at one time taken as an indicator of the management’s lack of confidence and often heralded a decline of the company’s share price. In recent years deeply discounted rights issues have become more frequent and investors tend to see them as no more than a strategy for ensuring that the rights are all taken up.

Shareholders and analysts will look beyond the corporate action to the ‘narrative’ coming from the issuing company. A rights issue to pay for a convincingly explained acquisition, for example, will find more favour than one launched by an insurance company that has just announced its reserves are insufficient to cover recent claims for hurricane damage. For companies with solvency problems a rights issue may be the only alternative to takeover or liquidation. In these circumstances the shareholders collectively hold the power to decide whether the company survives or not.

As with a company being listed on the stock exchange for the first time, an issuer launching a rights issue would normally use the services of an investment bank in a lead manager role. One of the tasks of a lead manager may be to underwrite the issue or arrange for it to be underwritten by other financial institutions, which means that they will buy the new shares of those shareholders who do not wish to take up their rights. Normally substantial fees are charged for underwriting, which accounts for the significant expenses of a rights issue (see the example below). [The role of the lead manager will be looked at in more detail in Chapter 4.]

FIBERNET GROUP PLC

4 FOR 15 RIGHTS ISSUE TO RAISE APPROXIMATELY £77.0 MILLION

INTRODUCTION

The Board announces a 4 for 15 Rights Issue of 12,826,325 New Ordinary Shares to raise approximately £75.7 million, net of expenses. The Rights Issue has been fully underwritten by Old Mutual Securities.

The Rights Issue is conditional upon, inter alia, Shareholders' approval which will be sought at the Extraordinary General Meeting.

The Rights Issue Price represents a 54.8%. discount to the closing middle market quotation of 1328 per Ordinary Share on 22nd November 2000, the last business day before this announcement.