What is an ‘open offer’?
An open offer is a pre-emptive offer and involves a company giving its shareholders the opportunity to subscribe for additional shares pro rata to their existing shareholding. Open offers often occur before such shares are offered to new investors outside the current shareholder base (sometimes referred to as a ‘private placement’), although a company may carry out an open offer without an attendant placing.
The placing mechanism can operate so that if the existing shareholders do not take up some of the shares that are the subject of the open offer, then the new investors will take those shares up automatically. The selected new subscribers can be institutional investors who will underwrite the share issue and ensure that it is taken up.
How to carry out a pre-emptive open offer
Step 1: Check company’s articles of association and any shareholders agreement for any restrictions on shares to be issued/allotted
- The company should check to make sure that there are no provisions in its articles of association (and any shareholders agreement in existence) that impact on how a company can allot/issue new shares. The company’s shareholders may have to pass a resolution to adhere to the constitution, or to remove or amend a provision that could negatively effect the ability of the board to carry out a pre-emptive open offer.
- If the company in question was incorporated under the 1985 Companies Act (and so has Table A articles) then the company should check its memorandum of association to make sure that the authorised share capital provision has been removed.
Step 2: Check that directors have authority
- Directors need authority to allot the new shares that are the subject of a pre-emptive open offer.
- If the directors do not have the requisite authority then an ordinary resolution (unless varied by the constitution) will need to be passed to give them the authority they require to issue/allot the new shares.
Step 3: Consider pre-emption rights
- The company will need to dis-apply the statutory pre-emption rights if they would like some other provisions to be applicable to the pre-emptive open offer.
- If the company decides not to dis-apply the statutory pre-emption rights then the company will only be able to make a pre-emptive open offer to shareholders that own ordinary shares. So, if the company has shareholders who hold different kinds of shares such as preference or redeemable shares then they will not be able to make the pre-emptive open offer to them unless they dis-apply the statutory pre-emption rights (note that if a shareholder owns participating preference shares then they will not be excluded from the pre-emptive open offer).
- The company may also have shareholders who do not own ordinary shares but have the right (by operation of contract) to participate in a pre-emptive offer, and in which case the company would need to dis-apply the statutory pre-emption rights so as to make it possible to make the open offer to such shareholders.
Step 4: Consider holding a general meeting, or circulate written resolutions
- As mentioned in the preceding steps, the directors may need to call a general meeting of shareholders (or decide instead to circulate written shareholder resolutions) if – a) a provision in the company’s articles or shareholders agreement needs to be removed or amended, b) the directors do not have the requisite authority to issue/allot new shares, or c) the company needs to disapply statutory pre-emption rights.
Step 5: Decide the price
- It is the company’s decision to work out what the private company’s valuation might be (and on what principles to base this on) and then whether the shares are offered at a premium or at a discount.
Step 6: Notify shareholders of the open offer
- The company should release a circular informing the shareholders of the open offer. The circular should explain the offer clearly and contain the application form (for shareholders to complete should they want to accept the pre-emptive open offer and purchase some of the new shares) and also the notice of the general meeting (or written shareholder resolutions instead). The company can decide whether to post this circular in hard copy or alternatively to make it accessible electronically.
- If the open offer is subject to shareholder approval then this should be made clear in the circular.
- Section 562(3) of the Companies Act 2006 provides that if a shareholder has no registered address in an EEA State or has not given the company an address in an EEA state for the service of notices to him, or if the shareholder holds a share warrant, then the offer can be made by causing it, or a notice specifying where a copy of it can be obtained or inspected, to be published in the London Gazette.
Step 7: Notice requirements
- Section 562(4) and (5) of the Companies Act 2006 deal with how long the pre-emptive open offer must last.
- Subsection (4) states that the “offer must state a period during which it may be accepted and the offer shall not be withdrawn before the end of that period”.
- Subsection (5) states that the period must be a period of at least 14 days beginning –
- in the case of an offer made in hard copy form, with the date on which the offer is sent or supplied;
- in the case of an offer made in electronic form, with the date on which the offer is sent;
- in the case of an offer made by publication in the Gazette, with the date of publication
- This notice period is able to run contemporaneously with the notice period for a general meeting (if one needs to be held) or for written shareholder resolutions to be passed (if instead resolutions are to be passed this way).
Step 8: Documents
- When carrying out an open offer, the main documents involved will be the circular that is sent to the shareholders along with the application form, a placing (subscription) agreement and details of the shareholders resolutions to be passed.
- The circular should be as informative as possible and provide the shareholders with an overview of all significant information (including terms and conditions) in relation to the offer.
- The application form is the means by which shareholders can subscribe for the new open offer shares.
- The placing agreement will be between the investors and the company and will set out the specific terms governing how the placing and offer will take place. Along with the placing agreement (or integrated within it) there might be a deed of adherence whereby the investors agree to be added as a party to any pre-existing shareholders agreement (which they will also need to be provided with a copy of).
What is the difference between an open offer and a rights issue?
Open offers and rights issues function in a very similar way. However, a rights issue is where the company seeks to raise money by giving existing shareholders a “right” to purchase new shares which is a tradeable security that can be sold to external investors, whereas under an open offer the shareholders cannot sell their right to buy the new shares that are the subject of the open offer.