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Lloyds under pressure over prefs amid Aviva fallout

Campaigner Mark Taber urges bank to reassure investors it will not seek to cancel preference shares amid fallout from Aviva's shelved plans.

 
Lloyds under pressure over prefs amid Aviva fallout
 

Lloyds (LLOY) is under pressure to reassure investors it will not seek to cancel its irredeemable preference shares, as the fallout from Aviva's shelved plans continues to rattle investors.

Campaigner Mark Taber, among the leaders of a protest against Aviva's plans that eventually led the insurer to back down over its threat, has written to Lloyds boss Antonio Horta-Osorio urging him to pledge not to attempt a similar move.

'I ask that you act responsibly to restore the trust of your preference shareholders and the wider market by making a prompt public statement that you will not seek to cancel your irredeemable preference shares,' he said.

Fears have continued to dog the small UK market in preference shares, which tumbled on Aviva's announcement last month that it was considering cancelling the instruments.

The insurer's eventual climbdown sparked a relief rally, but some, such as those issued by Lloyds and Standard Chartered, have since drifted lower.

Investors have calculated that if Aviva believed it could push through a cancellation of investments marketed as 'irredeemable', so could others.

Taber said in his letter to Horta-Osorio he understood that prior to Aviva's initial announcement, 'an investment bank promoted a similar scheme for extinguishing the rights of preference shareholders to a number of issuers of listed UK preference shares'.

'Hence there is a risk of further contagion and market instability until issuers make statements on their position in respect of their preference shares.'

Any issuer which decided to pursue a cancellation would be risking a similar backlash to that endured by Aviva. 

The insurer's plans were met with anger from retail and institutional investors and scrutiny from MPs and the Financial Conduct Authority.

Fund groups M&G, Invesco, BlackRock, Legal & General, EdenTree and GAM opposed the move, meeting with Aviva chairman Adrian Montague last month to urge the insurer to back down.

After Aviva's climbdown, they urged other preference share issuers to reinforce the 'true irredeemable nature' of the investments in their documentation.

But issuers have not been forthcoming in offering reassurances. Only Ecclestiastical Insurance has issued a stock market announcement saying it has no plans to cancel its preference shares, reacting swiftly with a statement just days after Aviva's move. Those preference shares have recovered all the value lost in the immediate sell-off following Aviva's initial announcement.

'It's hardly surprising the market is nervous,' said Taber. 'No-one has said anything to try and calm things down. It does make you nervous.'

Lloyds has previously pushed through a forced redemption of its enhanced capital notes, after a long-running battle with investors that ended in the Supreme Court.

Lloyds had not responded at the time of publication.

89 comments so far. Why not have your say?

Garth Nicholson

Apr 06, 2018 at 18:11

When Lloyds redeemed their ECNs after the Supreme Court judgement then a side affect was the consequent loss of investor trust. Their deafening silence after Mark Taber's enquiry does nothing to improve that trust, in fact it does the reverse. It would be refreshing if Lloyds considered their position and then responded promptly and publicly. Either they are considering redemption of their Preference Shares at Par or they aren't. It's a simple enough question and deserves a straightforward answer from an Institution that many people trust to handle their money.

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P B

Apr 06, 2018 at 18:31

Lloyds spend hundreds of thousands on adverts telling us how cuddly they are , how they really are there for you , will be interesting to see how accurate that is.

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halfinchnut

Apr 06, 2018 at 18:35

Why would LLoyds back themselves into a corner by replying, Mr. Taber is asking a question that may move the market if answered, better they say nothing until they decide one way or the other, this is not a LBG problem.

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Garth Nicholson

Apr 06, 2018 at 18:43

I can't see how it's not an LBG problem. They have been asked a reasonable question on behalf of their Preference Share holders (I am one) and I for one would like a clear response within a reasonable time. Of course, if they plan to respond clearly within a reasonable time, that's fine. As for market moving that can be handled in the usual way by RNS.

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andrew moffat

Apr 06, 2018 at 21:05

"Taber said in his letter to Horta-Osorio he understood that prior to Aviva's initial announcement, 'an investment bank promoted a similar scheme for extinguishing the rights of preference shareholders to a number of issuers of listed UK preference shares'."

What is the name of this investment bank and what is the name of the ever-so-clever little pipsqueak who suggested this?

Aviva chairman Adrian Montague should resign or be sacked. This matter should never have reached the light of day.

I am minded to attend the Aviva AGM to raise such a point.

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P B

Apr 06, 2018 at 21:26

........

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IcarusCRB

Apr 06, 2018 at 21:41

Lloyds behaviour with the ECN’s was disgraceful, hopefully they aren’t allowed to behave like this again.

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James Wilson

Apr 06, 2018 at 23:09

@halfinchnut - I wouldn't be so sure 'this is not a LBG problem.' There could be a lot more to this than has been reported yet.

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Garth Nicholson

Apr 07, 2018 at 07:44

@ James Wilson. You could very well be right in that there could be a lot more in this. When the lid is lifted off the can recently there have been times when an awful lot of worms are found inside. Let's lift the lid off this one and have a look inside. Lloyds should have nothing to lose by being open and honest with their investors and hopefully help recreate the trust that should exist with our banking community.

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halfinchnut

Apr 07, 2018 at 08:45

If any organisation can legally redeem their preferential shares to refinance at lower cost, it is the duty of the management to do so. Lloyds announced a £1.4 Billion share buyback, it never crossed my mind that prefs may be included.

As a shareholder, getting rid of expensive debt, if legal, gets my vote. This isn't a moral issue or a belly rubbing exercise to keep pref holders warm and cuddly, contractual law applies as it did in the successful redemption of the ECN's a couple of years ago. Maybe another court case is needed to qualify any prospective redemption, not a demand letter from Mark Taber,

Garth Nicholson above postulates that Lloyds have nothing to lose by being open and honest, I agree, I'll be more than happy for them to come out and call expensive prefs, even paying a little above par if it soothes tthe pref holders a little, but of course they won't, if Antonio Horta-Osorio is given advice from the very expensive corporate lawyers he employs that he is legally entitled to call the prefs, he will do, at par, he fought through two appeals to get the ECN's off the books, and if needed, will do so again.

Watching with interest, how this one plays out, good luck, the ords are cheap at the moment paying a good divi, that's where I'd be putting my money if the prefs are called, PPI coming to an end, Lloyds is hopefully climbing out of the mire and becoming a very profitable bank, savings, wherever they come from are very welcome.

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andrew moffat

Apr 07, 2018 at 09:33

Well, I have no holdings in the Preference shares but I do have ordinary shares in both Aviva and Lloyds and consider it absolutely disgraceful that there is even any contemplation of reneging on the obligation towards Pref shareholders, which denotes a gross absence of moral compass. The terms of the Companies Act 2006, which might enable this to occur, could never have been predicted at the time to have had this outcome. It seems we have developed in this country a 'spiv culture' which permits people, who should know better, to renege on their word - and let it be quite clear, this is what we are discussing. The only circumstances in which Pref shareholders can be bought out is to buy them out in the market, at market prices, in the same way that ordinary shares are bought back and cancelled by a corporation.

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Garth Nicholson

Apr 07, 2018 at 10:06

I don't think that calling the prefs is what is being discussed - and here we get into the legal niceties which can end in a Court case. AFAIK they are not callable or redeemable. What Aviva proposed and is feared with other issuers is to cancel them (which comes financially to the same thing). To do this Aviva planned to use the vote of all the shareholders to cancel the Prefs. I understand that this situation whereby all the shareholders vote as opposed to just the Pref holders (as provided in the original Preference Share documentation) has come about because in past years Company reorganisations have changed the voting base. I quite understand that Company Board members are obliged to maximise shareholder returns, the question is how far should they go to do this? Certainly only as far as is legally allowed - which is why this may very well end in another Court Case.

I hold Aviva ordinary shares and not the Prefs. I would have voted against their proposal on the grounds that it will make very little difference to the ordinary shareholder returns and that it was morally wrong.

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P B

Apr 07, 2018 at 12:46

@halkinchnut ,

Your view is all very well but in reality the prefs payments are small , manipulative behaviour , for that is what it is , will actually cost them .

As well as Aviva having irritated some of their major holders they found their cost of financing actually rose thus wiping out the supposed savings .

Equally if they follow this route whereas they just got away three to two , so it was questionable , in the case of the ECNs , they will mostly certainly find with this one they will seal their reputation as untrustworthy in the market and financing will be more expensive and should they get into trouble ever again this will not be forgotten and a price extracted , quite rightly so .

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paul crocker

Apr 07, 2018 at 15:27

AV. Directors responsible 4 this greedy act to enhance their bonus s/b fined 4 creating false & disorderly

market in av. irred & the whole F. I. Market & bonus taken away AV. shareholders

should not have to pay any of the fine

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horshamtim

Apr 08, 2018 at 12:00

Knowing the way people tend to respond on this website if you challenge their views, I am probably going to get some rants but here goes anyway. I am a holder of both Lloyds and Aviva ordinary shares, so I have been following this issue as I might have to vote on any changes. There are two separate questions which are often confused. These are whether the company can legally make the changes proposed, and whether they should.

When the furore over Aviva broke, I read the prospectuses of the preference shares, and the answer to the first question appears to be yes, subject to the courts agreeing the relevant scheme of reconstruction. They may well do so if it can be shown the changes are in the interest of the company and the shareholders as a whole. As Halfinchnut says, the directors are under a duty to consider legitimate ways of reducing the company's costs.

The second question comes down to the savings that can be made and other benefits to the company weighed against the negatives such as reputation and the losses to preference shareholders, particularly those who bought at a big premium. Because there is now doubt about whether the total value of any preference shares can in future be counted towards the company's Tier 1 capital ratio - very important for solvency purposes - it may become critical, particularly in the next downturn. For that reason I don't think the issue is going to go away.

What was clear from many of the comments posted on this site and elsewhere, was that a lot of the preference shareholders had bought them without reading the relevant prospectus, and without any apparent understanding that preference shares are a more risky form of debt than bonds - which is why the interest rate tends to be higher. What surprised me even more was that some who had bought at big premiums didn't appear to realise that they were locking into a capital loss anyway when interest rates rose again, as well as due to the effects of inflation. The only group which is laughing are the ones who sold their preference shares at such high premiums!

The old advice of only buying things you understand remains true. While modified in certain respects, "Caveat Emptor" is still a valid principle.

PS I have seen no evidence that the ECN issue has done any long term damage to Lloyds.

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Nicholas Blake

Apr 08, 2018 at 12:51

horshamtim, I couldn't agree more. BTW would be interested in where you tracked down the Aviva prospectuses. I assume that they were issued many years ago.

Tabor comes across to me as an amateur publicity seeker.

The legal status of pref's is well established. The contract between the pref holders and a company is the articles. There is quite clear case law on this:

Re Hunting Plc [2005] 2 BCLC 211

On an application by the company for confirmation by the court of a resolution to reduce its issued share capital by the cancellation of convertible preference shares, preference shareholders argued that the scheme of reduction was unfair to them.

Held: The reduction was approved. A company is entitled to reduce its capital by cancelling preference shares to replace the preference share capital with cheaper capital. The reduction was not unfair to the preference shareholders because they knew when they acquired their shares they were assuming the risk of being paid off in full.

However, with the requisite class rights inserted into the articles at the time of issue such capital reductions require class approval:

Re Northern Engineering Industries plc [1994] 2 BCLC 704 (CA)

The company proposed to reduce its capital by way of paying off its preference shares and cancelling them. The articles provided that the rights attached to any class of shares shall be deemed to be varied by ‘the reduction of the capital paid up on those shares’ (7(b)) and for the consent of 75 per cent of the holders of a class of shares to be obtained before the rights could be varied or abrogated (6). The judge refused to confirm the reduction of capital on the grounds that it was a variation of the rights of the preference shares to which the consent of the holders had not been obtained. The company appealed.

Held: Dismissing the appeal, the reduction proposed by the company was caught by article 7(b) which was inserted to protect the rights of preference shareholders and the protection required the class holders to give their consent by an appropriate class vote not only where the reduction was piecemeal but also where it involved a complete repayment of their investment.

In light of this, Tabor appears to be asking companies to do pref holders a favour, which is at conflict with directors' fiduciary duties. Instead, I suggest he read the relevant articles, and only recommend investment at big premia to par where the articles contain the requisite protections (see above).

In other words, Caveat Emptor!!

Nicholas

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James Wilson

Apr 09, 2018 at 23:59

@Nicholas Blake @horshamtim - the issue with listed irredeemable preference shares is much more complex than you put it and the Hunting case. For example the prospectuses (which are required to contain all the information an investor needs to make an informed assessment of the rights of the securities) state that redemption requires a separate vote of preference shareholders and does not state that they can otherwise be cancelled without a class vote. Plus the acts and disclosures of issuers have reinforced the market understanding that the shares cannot be cancelled without a class vote over many years.

BTW - you might want to look at what Taber has achieved for investors over the years (eg Bank of Ireland, Co-op Bank, Bradford & Bingley, Lloyds ECNs, Aviva preference shares) before dismissing him as an amateur publicity seeker !

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Nicholas Blake

Apr 10, 2018 at 09:26

James,

Sorry, but your understanding of the law is faulty. Unless someone is an original subscriber the prospectus is of no legal bearing. Simply put, if you want to establish a pref share's rights (over and above under the Companies Act) you need to read the articles.

Unless very specific, acts and disclosures, or rather the lack of them, the name by which the preference shares are known, and (uninformed) 'market understanding' simply have no legal bearing.

The default setting is that, unless the articles state to the contrary, preference shares can quite properly be redeemed via a return of the capital to which they are entitled on a windup, which is generally par. That is what the 'market understanding' OUGHT to be. There are a number of Company Law guides which you can reference if you're interested.

So far as Lloyds is concerned, Taber is acting in an amateur fashion. That said, he might get lucky!

Nicholas

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paul crocker

Apr 10, 2018 at 09:42

most posts refer to AV PREF they are IRREDEEMABLE big difference

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Garth Nicholson

Apr 10, 2018 at 09:45

Paul, be careful with the legal wording. They may be irredeemable but what was and may be proposed is cancellation. Similar difference financially but different wording.

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andrew moffat

Apr 10, 2018 at 10:45

It seems there are many ever so clever lawyers here. Well, we are not discussing a wind-up of the company and redemption at par. What we are discussing is moral compass and its earlier absence in the Boardroom of Aviva. The hullabaloo that broke out amongst the institutional shareholders, the FCA and MPs was sufficient to make the Board see sense, before an even bigger problem arose. Mark Taber is not a lawyer either but he is possessed of an understanding of good moral compass and there are a good number of elderly pensioners and savers who are grateful for his intervention and his ability to take up cudgels on their behalf.

As a shareholder in the ordinary class, I find the entire episode quite repellent and the words 'not in my name' come to mind.

The company was delighted to invite funding in the early '90s for its 'irredeemable' (ie perpetual) shares but a number of Boardroom Directors evidently considered it would be a clever thing to renege on the moral obligation, by use of their 'clever' interpretation of the law; one is reminded of Orwell's '1984' and the phrase 'black-white' and 'double-think'.

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Nicholas Blake

Apr 10, 2018 at 11:17

Andrew,

I'm sorry, but you have fallen into the trap of misunderstanding the term 'irredeemable', which is often unhelpfully used out of context. The usual case is that if a share has no fixed date for redemption it is frequently known colloquially as 'irredeemable'. However, in most cases the shares remain subject to the usual Companies Act right for companies to cancel at wind up value (even if there is no windup) -- they are NOT perpetual.

It appears that these shares are often marketed by advisers to retail investors as if they had no right to be CANCELLED, which as Garth intimates is legally quite different. Something one might have expected a professional adviser to point out. Buying such shares at big premia is like playing Russian roulette.

Certain pref's ARE covered by class rights if a return of their capital were mooted. In those cases investing at premia is much less risky.

If no official assurances to the contrary have been made (why would they be?), there is no moral compass issue at the company level. Indeed, for the vast majority of the periods such pref's have been around they have often sold at DISCOUNTS, so the issue simply did not arise.

Having said that, if the relevant companies did come out and make it clear that they had always had the right to cancel the 'non-perpetual' pref's, although they had no present intention to do so, it is hard to see how the holders (unless, perhaps, they were original subscribers) could complain.

At least then the market would be well informed.

Not sure I'd be retaining non-perpetual pref's if I held any.

BTW I am not a lawyer, just a retired professional investor.

Nicholas

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andrew moffat

Apr 10, 2018 at 12:26

Nicholas, I have fallen into no trap and you have given me no reason whatsoever to alter my opinion. In earlier correspondence, either here or below an earlier article, I observed that retail investors were not to be expected to study the wording of the Companies Act 2006, on which it appeared the Aviva Board partly relied.

The word 'irredeemable' can be defined, in relation to bonds, debentures or shares as 'without a date of redemption of capital; incapable of being bought back directly or paid off; not redeemable'. That suggests, unless one employs semantics, that they are perpetual and, in any event, cannot be redeemed unless the company fails. Perhaps, however, your point of reference is the Orwell new age dictionary. Happily, many MPs and, it seems, the FCA, in addition to numerous institutions, took another view and Aviva carried out its U turn in consequence but only after many pages of highly embarrassing and damaging publicity in the financial press.

Am I meant to be impressed that you are a retired professional investor? Mark Taber is also a professional investor but he has not yet retired but you have described him as acting in an 'amateur fashion'. Were all the other institutional shareholders, who lobbied Aviva, also acting in an 'amateur fashion', do you think?

It seems to me that the only amateurs in this discussion are the amateur lawyers, who are lacking in moral compass, rather like certain professional lawyers.

You say that 'buying such shares at big premia is like playing Russian roulette'. One does not have to read' Extraordinary Popular Delusions and the Madness of Crowds' to appreciate that this has always been so. I recall umpteen professional investors buying and promoting internet stocks in the late '90s at enormous premiums, on numerous valuation measures. By 2001, most had lost 90% of their capital value.

I am also well aware that preference shares on occasion sell at discounts and for the simple reason that I have, in the past, bought such at discounts. I never expected them to be redeemed.

The only circumstances on which perpetual shares can and should be bought back by the company concerned, if not in a winding up, is at market prices or at a premium to market prices.

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Brian C

Apr 10, 2018 at 12:36

As may have been pointed out before, on Aviva's website they themselves also describe these prefs as "Perpetual".

So Perpetual and Irredeemable.

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Nicholas Blake

Apr 10, 2018 at 12:50

Andrew,

I'm sorry, but you seem to be hung up on people labeling a pref as irredeemable and therefore assuming it is so. In fact, many so-called 'irredeemable' pref's are NOT so under your classification.

You can try and evade the fundamentals as much as you like, but the inescapable fact remains that the terms of a pref are as set out in the articles of the relevant company.

I no not argue that retail investors ought to seek out and parse the articles. If they choose to fly blind, that is their prerogative. But, assuming they recognise the benefit in such cases of seeking proper advice, I'd expect professional advisers NOT to recommend non-perpetual/irredeemable pref's without having first done the appropriate due diligence. If they have not done so is is they who face a moral dilemma.

Genuine perpetual shares cannot be bought back by a company without the holders' consent. However, cancellable ones most certainly can have their capital returned. It is good that the market is starting to appreciate this misconception.

Pref's, which are generally non-voting, are seen by boards as a source of capital, no more, no less. Such boards have a fiduciary duty to minimise the sustainable cost of capital and thus their moral compass, if any, is to eliminate expensive capital as they can.

I do sympathise with the plight of the retail investors involved. But if they do not like the idea of holding cancellable pref's the simple answer is to selll them.

Nicholas

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P B

Apr 10, 2018 at 13:01

Myriads of arguments here , but for example Aviva were showing these on a chart of loans thatbthey presented to investors as to when they became due at the infinite end , for what of any other description , clearly believing themselves that they were committed to these long term , that was until Slaughter and May turned up and said look we can rid you of these via the manipulation of your capital .

Avivas potrayal of these therefore was mis leading in itself .

Suggesting Mr Taber is self seeking is very wrong , he has helped many smaller individuals who would have been otherwise completely walked over , without asking for any remuneration ,

The FCA will be hopefully suggesting simple legislation is brought in along the lines of that in Austarlia to clarify the position and to prevent what is shoddy behaviour from the supposed my word is my bond City .

Should Lloyds attempt this , one hopes the next time they need help they will have to pay an exceptionally high price .

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Nicholas Blake

Apr 10, 2018 at 13:09

P B Following the contract with the pref-holders as set out in the articles is a case of my word my bond.

In the Aviva case, it does seem the company made a number of statements which conflict with the articles, and that probably represents a special case.

But suggesting that someone who didn't do his homework should simply be granted a favour by a company he invested in is misguided. Perhaps Mr. Taber ought to turn his attention to those advisers who negligently advised their retail clients to buy pref's ill advisedly!

Nicholas

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andrew moffat

Apr 10, 2018 at 14:24

Nicholas, I really don't think I need a lesson from you on preference shares. I am well aware that not all are irredeemable and I have held both. When I bought Aviva's 8.75% cum, irred pref shares - at a discount as I recall (ie beneath £1.00), during the '90s, I also read the prospectus. As Aviva stated - or was it some ever so clever lawyer - the Companies Act 2006 has had a role in the controversy, doubtless unintended.

As Brian C correctly observes, even Aviva denoted that these were irredeemable and perpetual - which is exactly what anyone with a fundamental grasp of English would have concluded. Nonetheless, there seems to be a category of clever people who believe that a description of a class of share should not mean what it actually says. Perhaps these instruments should all be renamed 'irredeemable but actually redeemable when it suits the company and its legal advisors'. Or should we rely on the Orwellian speak instead?

I am a shareholder in the ordinary shares of Aviva - not the irredeemable class - and I found the company's activities in this matter highly immoral and indefensible. Heads should roll on the Boardroom.

You say: "Such boards have a fiduciary duty to minimise the sustainable cost of capital and thus their moral compass, if any, is to eliminate expensive capital as they can." The Board also has a duty to run the company in a manner that adds value. Engaging in an exercise which attracted reams of harmful publicity in the financial press across the nation, for a company that prides itself on attracting savings from retail investors, demonstrated unbelievable incompetence and poor judgement, which a fourth form schoolboy would not have countenanced. The Board then conducted its U turn, probably because it, the MPs involved, plus the institutional shareholders, took a very different view to that which you are articulating.

Not least, you have seen fit to condemn Mark Taber, deriding him as an amateur. In my view, he is a hero and, as PB stated, without any remuneration. Clearly, many institutions agreed with him but I suppose they are amateurs too?

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James Wilson

Apr 10, 2018 at 15:12

@Nicolas Blake - it is not my understanding of the law which is faulty but rather yours. Anyone who acquires listed securities is entitled to rely upon the prospectus and not just the original subscribers as you claim -

Section 90 of the Financial Services and Markets Act 2000 (FSMA) makes any person who is responsible for listing particulars and prospectuses (together with supplementary listing particulars and prospectuses) liable to compensate a person who has:

• Acquired or contracted to acquire securities to which the listing particulars or prospectus applies; and

• Suffered loss as a result of either:

- any untrue or misleading statement in the listing particulars or prospectus; or

- the omission from the listing particulars or prospectus of any matters required to be included by sections 80, 81 and 82 of FSMA in the case of listing par- ticulars and supplementary listing particulars, and sections 87A, 87G and 87B of FSMA in the case of prospectuses and supplementary prospectuses.

Furthermore all the information necessary to make an informed assessment of the rights attached to the securities must be included in the prospectus so investors should not have to track down the Articles, CA 2006 etc. to figure it out. The relevant statute is Sections 80(1) and 87A(2) of FSMA which respectively provide that listing particulars and prospectuses must contain all information that investors and their advisers reasonably require, and would reasonably expect, for the purposes of making an informed assessment of: the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the se- curities; and the rights attaching to those securities.

You unhealthy preoccupation with the actions of Mr Taber is illuminating as to your motives. You have not commented on the institutions including Blackrock, Invesco Perpetual, M&G, Legal & General, Ecclesiastical who have likewise asked issuers of preference shares to clarify their position and modernise their articles. Nor on the Chair of the Treasury Committee who has publicly asked for legal clarity as a matter of urgency.

When you describe Mr Taber as 'amateur' I assume you are using the word in the sense of 'a person who engages in a pursuit on an unpaid basis' rather than any libellous suggestion that his abilities and achievements (for which he has been credited by the regulators for keeping Co-op Bank out of resolution avoiding cost to the taxpayer and was consulted by HM Treasury to help retire B&B and Northern Rock bonds) are not up to scratch?

BTW - your suggestion that financial advisers should be feeling the heat over the destabilised market in listed preference shares are massively ill informed. The vast majority of the 100,000+ retail holders of Lloyds preference shares hold them as a result of the demutualisation of former building societies when members of those societies had their share in the society exchanged for preference shares in Halifax which subsequently became part of Lloyds.

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Brian C

Apr 10, 2018 at 16:01

James W's penultimate paragraph above about Mark Taber is spot on

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paul crocker

Apr 10, 2018 at 17:37

Agree completely with comments re Mark Taber he has helped many people for

no benefit to himself. I wanted to donate some money to him or charity but he

refused to accept. As for comments re Irredeemable the main problem is there

are far too many clever people about especially the Directors when just a smidgen of common sense would tell you it was wrong in many ways.``

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Nicholas Blake

Apr 10, 2018 at 19:33

James,

To start with the general position, the key words in your quotation are, 'to which the listing particulars or prospectus applies'. They apply solely to the original issues and subscribers thereto, not subsequent purchasers. So, in general, subsequent investors cannot rely on the prospectus: the articles are the relevant document (but see below).

And what's more almost all original pref investors subscribed at par, which is what returns of capital usually require. So no loss there.

Turning to 'modernisation' of articles, any such changes require a 75% vote of all shareholders, the vast majority of which hold the ordinaries. Is it realistic to expect that they will vote for anything which is against their best interests? I doubt it.

I very much support legal clarity, which in this case is likely to involve statements by issuers to make it clear that most 'irredeemable' pref's, whilst having no fixed redemption date, are cancellable in accordance with the standard Companies Act procedures. One would hope that discussion boards such as these in a small way aid such an improvement in understanding by investors at large.

As intimated above, there is a special category of pref's where the prospectus DOES have relevance. In fact, in the case of Lloyds the articles state that for the pref's returns of capital have to be undertaken as set out in the terms of issue (as contained in the prospectus)! That said, the prospectus indicates that the entitlement is to £1 per pref, i.e. THE ISSUE Price. In other words, the ex building society investors will get their money back, which I'd suggest was what they expected when they originally invested. No loss involved.

None of the above is difficult to discover with Google. Any competent professional investing in such pref's would have read the relevant documents and would invest accordingly. In contrast, to invest at a premium having discerned that the investee security was cancellable at par is no more than speculation. Then, after the fact to bleat that the pref terms weren't what one had thought, having not read the articles, does not meet my personal definition of professional, with the obvious implication.

In conclusion, the general position in a return of capital is that pref's get their money back, in line with their issue terms. Sound quite a lot like common sense to me!

Nicholas

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James Wilson

Apr 10, 2018 at 23:13

@Nicholas Blake - you are going to commendable efforts with your 'fake news' campaign. Here is the FCA's answer to ESMA on who is entitled to sue for damages relating to a prospectus -

6. Who is entitled to sue for damages (e.g. only original purchasers in the primary market or also subsequent investors in the secondary market, financial intermediaries)?

Section 90: any person who has acquired securities to which the prospectus relates (s.90(1)).

Negligence: liability depends on establishing a duty of care. It is possible that a secondary market purchaser could establish such a duty in appropriate circumstances. It is also possible that a person that had disposed of securities in reliance on statements in a prospectus may attempt to establish a duty.

Deceit: similar to negligence.

S.85(4): person who suffers loss as a result of contravention.

https://www.esma.europa.eu/sites/default/files/library/2013-619c_ann_iii_report_liability_regimes_under_the_prospectus_directive_annex_iii_published_on_website.pdf

And as I am sure you are aware the whole market priced irredeemable preference shares as perpetual without an issuer ability to cancel at par without a separate class vote for many years until the 8 March 2018. During this time all issuers I can find referred to their preference shares as perpetual with no ability to call by cancellation or otherwise and did not disclose or otherwise mention any such ability. Even to the regulators who would have disqualified preference shares as AT1 or own funds if the ability had been disclosed.

So in your world everyone (apart from you I presume?) - all institutional investors, all analysts, all issuers, all regulators and all retail investors got it wrong until 8 March

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Nicholas Blake

Apr 11, 2018 at 09:53

James,

Sorry, but you've more chance of hitting a hole in one than getting any recompense from the regulation you quote! To take an easy example, it is clear from the Lloyds prospectus that the company can cancel the irredeemable pref's at the issue price if it undertakes a Companies Act reduction of capital. Hard to see how a secondary investor could legitimately complain about that.

When you say the whole market priced irredeemable preference shares as if they were perpetual, you are being quite imprecise. The market price will have been made by the buyers which were not aware of the cancellation option. Yes, there must have been a lot of them, but its not the whole market. Those who read the articles and understood them would simply have chosen not to invest, with no real impact on the price.

In other words, not all investors got it wrong. Ask yourself this, knowing that its terms permit a cancellation at issue price (which is implicitly acknowledged by Taber's open letter) would you today buy Lloyds pref's at 150p? Would that change if Lloyds confirmed the position but stated that it had no present intention to undertake such a return?

It appears to me your gripe is that the terms are not widely publicised and that 'irredeemable', which in this case means no more than having no fixed date for redemption (under the Companies Act all shares, including ords, are irredeemable unless their redemption terms are as specified in the Act) has been widely misunderstood by the market. I agree with that, and would support issuers making clarificatory statements. It is the myth that irredeemable shares are perpetual is the fake news here!

Nicholas

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Brian C

Apr 11, 2018 at 10:31

Nicholas said

"It is the myth that irredeemable shares are perpetual is the fake news here!"

So , as far as Aviva's preference shares, at least, are concerned it is not a myth as Aviva's website clearly states they are perpetual

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P B

Apr 11, 2018 at 10:35

Nicholas Blake ,

I was interested to see Institutions pursuing this further yesterday, they have written to the Treasury asking that the technical loophole be closed , this clearly was not the intention when the Prospectii were written , if it were investors would have sought a higher premium for risk or just walked away en masse .

https://www.thetimes.co.uk/article/close-legal-loophole-in-preference-share-rules-say-city-institutions-t2zf96xvq

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James Wilson

Apr 11, 2018 at 10:47

@Nicholas Bale - thankyou for your acknowledgement that your were wrong on the law of prospectus liability.

Your sentence - 'It is the myth that irredeemable shares are perpetual is the fake news here!' summarises the issue which needs to be resolved here because issuers (including Lloyds) have been perpetuating the fake news by consistently describing and declaring their preference shares as 'perpetual' for many years.

If, as you say, there have been all these smart people who realised this over many years I find it strange that there was not been a single comment by any analyst, issuer, professional investor, regulator, yourself etc. prior to 8 March !

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Nicholas Blake

Apr 11, 2018 at 11:52

James,

If you think that only being right 99.9% of the time makes one wrong, it is understandable why people are still finding it hard to accept that irredeemable pref's are often cancellable!

It is most regrettable that the website administrators who populate company websites do not check the legality more carefully before posting colloquial descriptions which are misleading to many. Companies ought to get their corporate legal teams to peruse such things.

As I mentioned above, prior to 8 March the informed investors simply stayed away. I imagine they had better things to do than provide unpaid commentary.

PB, I did see the article, and indeed I know Rupert.

It is important to realise that when issued the aim was that the pref's sold at par. Any premia to par from QE, could not, of course, have been anticipated.

It may be that the law will eventually be altered. That said, it would be unusual for any such changes to be retrospective.

Will be interesting to watch how things develop...

Nicholas.

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andrew moffat

Apr 11, 2018 at 12:25

Yes, quite right, James Wilson!

"It is clear from the Lloyds prospectus that the company can cancel the irredeemable pref's at the issue price if it undertakes a Companies Act reduction of capital. Hard to see how a secondary investor could legitimately complain about that."

I presume, here, we are discussing - again - the Companies Act 2006, which was never designed for this eventuality. Furthermore, as I have previously reflected, it is completely unreasonable to expect investors, especially retail/private investors, to trawl through this Act to ascertain the possible situation with regard to their investments, a view apparently shared by MPs and the FCA. Cancelling irredeemables during a wind-up of the company is one thing; cancelling irredeemable preference shares because they, suddenly, do not suit the Board and, thereby, reneging upon a moral obligation, is something entirely different. Indeed, the only way in which these shares can and should be cancelled is via a purchase in the market - at market prices - or, perhaps, via a tender offer, suitably priced at a 5% premium to market prices. I seem to recall that this was what British Land did with its Preference Shares in the late '90s, which were redeemed ahead of their redeemable date.

Usually, the relevant share class would require exclusive consultation and agreement regarding any amendment attaching to their rights or interests. Clearly, one cannot go through each prospectus, here, to ascertain the individual wording in each case albeit, when a share is sold to another investor, the rights attaching to that share are sold too and transferred to the new investor.

Investors have a right to interpret English in accordance with its true meaning, as defined in the dictionary. This does not embrace Orwellian 'newspeak', which reverses the true meaning. Thus, an irredeemable share is exactly what it says. It is not irredeemable only for so long as the relevant board considers it prudent to suit its own interests - and perhaps the bonuses of its directors. If a share class is not irredeemable (ie perpetual, as Aviva admitted in its instance), then this term should not be employed, excepting where sleight of hand is intended.

Quite apart from the legal issues, which might be thrashed out in a court of law, which is unlikely to happen, we also have the moral issue. Frankly, I find it absolutely amazing that Nicholas Blake is indifferent to the ethics involved. Clearly, his view is not shared by the financial press, by MPs, by the FCA or by most, if not all, institutions. As I have oft stated in this discussion, I am not a holder of the Preference class in Aviva but am absolutely horrified that the Aviva Board even considered the possibility of cancelling, at par, the irredeemable class, even although I would have gained from it as an ordinary shareholder. It appears that most ethical people agree with this view and that explains why the Aviva Board carried out its humiliating U turn after it was approached by the institutions, following an avalanche of highly damaging publicity which should have been predicted. The institutions, it seems, are now lobbying for a close to the loophole, the existence of which, it is clear, was entirely unintended. I cannot see there will be any objection to such a closure - except perhaps from Nicholas Blake. But this, surely, tells us something about you, Nicholas, or am I mistaken? Perhaps you have dug yourself so deeply into a hole that you cannot admit that you might be wrong about the essential morality involved. In defending your position as you have, you have displayed to me, at least, a degree of insensitivity and a set of values that in my opinion fail the test in civilised company - but, happily, I see no reason why I should invite you to my dining-room table, even to serve at it. The reverse is the case for Mark Taber.

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andrew moffat

Apr 11, 2018 at 12:38

"Any premia to par from QE, could not, of course, have been anticipated."

In the financial world, nothing can ever be anticipated. We can, however, rely upon the lessons of history. Treasury bonds in the West soared in the 1930s, during the great depression, which itself was not predicted. Governments did not cancel the obligations attaching to those bonds, excepting where they defaulted. Defaults occur in countries such as Greece and Argentina. Those countries then pay a premium when next they raise funds.

The Aviva Board - Commercial Union at the time - should consider all eventualities and they must consider the lessons of history.

If anyone, here, can reliably predict the future for the economy over the next 20 years, then that person will become a greater investor than Warren Buffet himself.

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Nicholas Blake

Apr 11, 2018 at 14:16

Andrew,

Apologies, but here is little right with your post.

Cancellation is ENTIRELY in keeping with the Companies Act 2006. Recall that the decision in Hunting plc was only a year previous to that. And, as I have pointed out previously to you, retail investors if they are in any doubt regarding pref shares, such as is the case here, ought to either seek professional advice or AVOID them.

Your statement that 'the only way in which these shares can and should be cancelled is via a purchase in the market - at market prices' is no more than a bald assertion. Some pref's are in fact covered by such language in the articles, but in the absence of this, like all redeemable shares (both ord's and pref's), they can be cancelled via a return of capital.

Likewise, 'Investors have a right to interpret English in accordance with its "true meaning",'. No they don't, it's not how the law works. If the legal meaning of the terms of issue are clear, which they are in the vast majority of the pref cases, the 'ordinary meaning' doesn't come into it. I repeat: an irredeemable share is not redeemable AS IT IS DEFINED under the Companies Act, no more no less.

There is no 'loophole' involved. The law has been in essence the same for fifty years! If original subscribers in subsequent issues wish to have this covered, they merely have to require that the issuer insert into the articles wording to the effect that any reduction of capital of the pref's is to be deemed a variation of their rights, thus requiring sanction by 75% of those voting at a class meeting. Then the pref's WOULD be as near as can be to what you you think of as irredeemable.

Turning to the so-called moral issues, I think what you are doing is confusing two situations. If a pref class were issued at a premium and the company proposed to cancel it at par THAT would plainly be immoral. However, in the cases which you are concerned about the pref's were issued AT PAR and that is what would be returned to them (i.e. their money back). There is nothing immoral about that: those investors have not suffered any loss. If OTHER investors subsequently purchase such pref's at large premia, not realising that they ALWAYS were able to be cancelled at par, that is NOT a moral issue. No, it is rather a case of poor investment judgement or negligent advice.

Sorry to be so 'insensitive' to your views, but a lot of this seems to me a case of, 'I didn't realise what I was buying'. If that is the case, and you've suffered a loss, I can only suggest you approach your adviser seeking compensation.

Nicholas

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andrew moffat

Apr 11, 2018 at 15:07

Nicholas, you have made my point for me. I stated that retail investors should not be expected to trawl the provisions of the 2006 Companies Act to ascertain the safety of their investments in preference shares.

I am not going to trawl through the Aviva Prefs prospectus again, which I would have done when I bought these instruments in the 1990s (I sold them at a significant profit, as did those I advise (freely)) but it was quite clear to me upon reading the document that these were irredeemable, excepting in the event of a wind-up - and this pre-dated the 2006 Companies Act.

I disagree with you entirely about the moral issue, which I have most certainly not confused. What you are suggesting is equivalent to the government issuing a gilt edged stock at £1.00 and then redeeming it early, at £1.00 (par) when it is trading at £1.50. We also have the situation of subsequent investors and, in the Aviva case, they were clearly given to believe that the Pref shares were irredeemable and perpetual by the company's own website.

What we are discussing is an horrendous and unforgivable breach of faith, allied to grossly immoral conduct.

I have suffered no loss and I do not employ an adviser. I am not a holder of these instruments - so your final paragraph does not apply. In fact, as an ordinary shareholder, I would have gained from any cancellation but my moral standards are quite clear on this point and I am not prepared to countenance this type of disgraceful, ignoble conduct for 'twenty pieces of silver'. Clearly, you hold a different viewpoint. Is this the type of behaviour you were taught at school?

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James Wilson

Apr 11, 2018 at 15:47

@Nicholas Blake - you say:

'It is most regrettable that the website administrators who populate company websites do not check the legality more carefully before posting colloquial descriptions which are misleading to many. Companies ought to get their corporate legal teams to peruse such things.'

The problem of the impression issuers have given over time goes much further than some lose language on the 'Information for Shareholders' section of websites. It is also to be found in investor presentations, shareholder resolutions, annual reports and statutory returns to the regulators. In fact if the ability to cancel at par had been declared in those returns the preference shares would have been disqualified as regulatory capital. This document prepared my Mr Taber gives a useful flavour of the extent of the problem -

https://drive.google.com/open?id=1X3zQnG6Kqmi0QbwAHYuXpqdC4HUQ0Dck

You also say -

'As I mentioned above, prior to 8 March the informed investors simply stayed away. I imagine they had better things to do than provide unpaid commentary.'

I take it you are not a subscriber to the efficient markets hypothesis then? It is a bit far fetched to claim that there have been numerous market participants over many years who had information which suggested a whole asset class was massively mis-priced yet did not share that information with covering analysts (or anyone else for that matter) nor seek to profit from it my short-selling the asset class in question. There were plenty short-selling preference shares following Aviva's announcement of 8 March !

I also challenge you to find a single irredeemable preference share prospectus which discloses the risk that the issuer has the ability to CANCEL the preference shares at par without a separate class vote. Some may mention a 'return of capital' but capital can be returned for reasons other than cancellation.

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Nicholas Blake

Apr 11, 2018 at 19:02

James,

It seems we may be making some progress.

It appears that you (and Andrew) put considerable store on the fact that many pref's are NAMED 'irredeemable' and that is mentioned in many places. However, as pointed out above, in legal terms irredeemable means no more that not being able to be redeemed, under the procedures set out in the Companies Act. Having 'irredeemable' in the name has absolutely no bearing on the rights, and does not create any 'misselling' issues, since the description is entirely consistent with the legal position. The promotion to retail shareholders that such shares are perpetual is not so clear cut, but nonetheless unlikely to cut much ice.

The simple reason why the ability to cancel pref's at par does not need to appear in prospectuses is that in law the default position is that ALL such pref's are so cancellable. There are many other elements of the Companies Act which prospectuses take as read.

Shorting such pref's is an intriguing proposition, but my experience is that the mechanics of shorting securities other than the very liquid has historically made this difficult, if not impossible. It may be more feasible now.

Andrew,

I trust it is common ground that competent professional investors would be expected thoroughly to scrutinise the terms of potential investee pref's: in this area that means reading the articles (and the prospectus to the extent referenced therein). They would also be expected to know that in law pref's were cancellable at par unless they had class rights protection in the articles. So no grounds for complaint there.

Turning to retail investors, my understanding of how the regulation works is that, whilst professional investors are expected to be able to look after themselves, it is forbidden to sell retail investors sophisticated investments without proffering advice. If the investor chooses not to avail himself that is on his head. My view is that retail investors ought to take professional advice before investing in these pref's. You seem to prefer going it alone, in which case you only have yourself to blame if you are uninformed. It's like buying a house without a survey.

You say it is quite clear to you that the Aviva pref's are irredeemable. I concur, but that is correct only in the narrow sense of the Companies Act definition.

In investment as in many things ignorance of the law is no excuse. There is no doubt whatsoever that in law the Aviva pref's can be cancelled via a SOLVENT Companies Act return of capital. As mentioned above, because that is the law the legal view is that it doesn't require to be highlighted in a prospectus: the Companies Act rights are taken as read.

Nor are you right that the pref's predate the legal position in the Companies Act 2006: such legal rights date back to at least 1949.

The gilts example is fatuous. If such gilts in law could be cancelled at par they'd never have sold at 150%.

Cancelling pref's pursuant to their undisputed terms is not a moral company issue. Fiduciary duties plainly dictate that companies eliminate expensive and inefficient capital. At my school the dictum was to accept accountability for ones actions - at yours it seems to have been 'it was the others' fault'!

Blake

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James Wilson

Apr 11, 2018 at 20:58

@Nicholas Blake - debating with you is rather pointless if you persist in not reading the points made. I did not say that the 'many pref's are NAMED 'irredeemable' and that is mentioned in many places.' Rather I referred you to many places where they are named as 'perpetual' which means -

everlasting, never-ending, eternal, permanent, unending, endless, without end, lasting, long-lasting, constant, abiding, enduring, perennial, timeless, ageless, deathless, undying, immortal

And that they have been declared to the regulators in statutory returns as not having a perpetual feature of cancellation at par. So lets agree to differ and see what the FCA and Treasury make of it all.

Personally I think this highlights a need for modernisation to bring UK markets and the laws around them into harmony with others who would like our status. Also that issuers need to be brought into line as the current surplus of cash looking for a home is making them forget the established rules of engagement.

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andrew moffat

Apr 11, 2018 at 21:56

Nicholas, you have given me no reason to alter my views and, further, I concur with many of James Wilson's comments.

You have, inter alia, missed the point with the gilts' analogy.

Aviva took the same view as everyone else (apart from you), until 'clever' and immoral lawyers briefly intruded, which later caused it to conduct its embarrassing U turn after a number of institutions, almost the entire UK financial press, MPs and the FCA caused it to reverse its ill-considered strategy. That is what I call accepting accountability, especially when a position becomes untenable. Aviva, incidentally, had made clear that its views had been based upon the 2006 Companies Act - not that of 1949.

Fiduciary duties plainly dictate the relevant board considers all related issues and the effect of any particular action.

We are now repeating ourselves. It is evident to me that you do not share the moral compass of most people in this discussion group and have been brought up with rather different values.

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Nicholas Blake

Apr 12, 2018 at 08:32

James,

As I acknowledged above, the use of the word 'perpetual' in this connection is more of an issue. However, I think you're struggling if you feel that a number of mentions in statements of regulatory capital or investor presentations give pref investors any basis of reliance -- it is hard to see how it can be construed that such documents are addressed to them. Further, unless one knows the regulatory definition of capital -- which I don't -- one must be wary of interpreting 'perpetual' in that context as if it were the dictionary definition.

Websites and annual reports are more problematic. My firm view is that companies ought to take care that pref's are not described inaccurately in same. Before the proliferation of waffle which has grotesquely distorted annual reports one would have expected this. I took a look at Aviva, and all I could find was that the pref's were classified under subordinated liabilities, but no mention of their terms.

Having said all that, relying on such peripheral documentation is simply no replacement for reading the terms, as contained in the articles. Lloyds and Aviva helpfully in this regard make these available on their website.

Andrew,

How Companies Act revisions work is that areas in an existing act and which are considered to work satisfactorily are just replicated in the later act. The law was the same as far back as 1949, so I can safely surmise that back then the companies act of the day contained analogous provisions.

I think the three of us are at one that companies ought to ensure that information communicated generally to shareholders is accurate, even though I reiterate that one needs to be careful not to place undue emphasis on this.

Given it is indisputable that the pref's we are considering are cancellable, it seems to me that your real beef is that transactions can be contemplated at below market prices. Boards much prefer that a company's securities do not sell too far out of line with the underlying fundamentals, although that is often very subjective. If it becomes too concerning the usual action is to issue a press release containing updating information: sometimes these involve profit warnings, which cause the price to fall, meaning investors suffer a loss. There is no moral issue.

Nonetheless, in general there is no requirement to transact at market. Indeed, even takeover offers at below market are sometimes agreed at below market.

The obvious thing for the various pref issuers to do is to make a statement that the pref's in issue are in law subject to the return of capital provisions of the Companies Act and which enable the original capital to be returned at the issue price, subject to the requisite approvals.

They might then choose to clarify if they have any present intention to do so, or could specify a period during which they would not so do.

In the case of Lloyds, I'd see such a statement, with an undertaking to stand still for twelve months, as perfectly acceptable. That would ensure investors were properly informed and give the market ample time to adjust.

After that the company would be free to deal.

Would that satisfy your concerns regarding morality? if not, I'd be interested to understand the rationale.

Nicholas

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andrew moffat

Apr 12, 2018 at 10:25

Nicholas, I disagree with you regarding the Companies Act of 2006 and for the simple reason that additional provisions were introduced into it, upon which Aviva relied.

The measures that might or might not be taken by various companies, including Lloyds and Aviva are hypothetical. They would also require legal opinion, which might or might not be challenged. In addition, such companies would have to take particular care not to alienate investors and the financial press, quite apart from MPs and the FCA. Aviva was unable to succeed and, clearly, reached the conclusion that its disgraceful plans were unworkable.

I really cannot add more to this discussion.

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Nicholas Blake

Apr 12, 2018 at 13:52

Andrew,

I sympathise with you. It is difficult for less experienced investors to understand the Companies Act.The relevant provisions were, inter alia, included in the 1985 companies act, which can be found in this link: http://www.legislation.gov.uk/ukpga/1985/6/contents/enacted.

Whilst I have no privileged information, i suspect a large part of the reason Aviva pulled its reduction plans was that the complainant pref shareholders held something like 15% of the ords, so the ability of voting through the return was in doubt.

Hope this is helpful.

Nicholas

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James Wilson

Apr 12, 2018 at 14:39

@Nicholas Blake - you need to understand a lot more than the Companies Act to get to the loophole for cancelling preference shares at par without a separate class vote. The CA says a Special Resolution is required for a reduction of capital and elsewhere defines a Special Resolution as a vote requiring 75% of the relevant class of shareholders. So you then need to look at the Articles to establish what the relevant class is. There you will read that a separate class vote is required for any variation or abrogation of rights. Many would stop there believing they are safe. But you then need to look at case law to appreciate the authorities that cancellation has been held not to constitute a variation or abrogation of rights. The if you look at EC law (with which our CA is supposed to be consistent) you will find that the directives have been transposed into French law such that a separate class vote is required for 'chaque classe' proposed for cancellation. And you probably need a legal adviser who specialises in this area to guide you through all that. Hardly the sort of clear directive modern law should have to establish the fundamental rights of shareholders in a leading capital market.

As for why Aviva pulled its plans you can be sure that Aviva and their advisers were aware of the crossover between large holders of its ordinary and preference shares. The plan (which we have seen before from our friends at Lloyds) will likely have been to:

1. Depress the market price by dropping a bombshell in the results presentation - TICK

2. When everyone complains proffer an olive branch by making a discounted offer above par while 'reminding' everyone that you have the ability to cancel at par.

3. Once the pesky big holders have accepted the offer for a quiet life and things have died down proceed to cancel the holdouts and leftouts at par.

Fortunately Aviva did not get to TICK 2 or 3 because the institutional pushback and retail, political and media campaign orchestrated by Mr Taber was considerably more furious and effective than anticipated.

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Nicholas Blake

Apr 12, 2018 at 18:29

James,

Sorry but your use of the word 'loophole' indicates that you still do not understand the law. The default position is that ANY shares CAN be cancelled by a return of capital with the sanction of ALL shareholders voting in general meeting. A general rule is manifestly not a 'loophole'. Moreover, it's actually a simple concept, and once you accept it no need to hire a lawyer to confirm the mechanics. Retail investors need to consider pref investment against that background. And their advisers ought to make it absolutely clear to them.

The EXCEPTION is where a company adopts terms in the articles to implement an investor requirement to have any such a capital return be considered a variation subject to a pref class test.

Lloyds and Aviva could have readily done this, but what is not in question is that THEY DID NOT. Nor did they state anything in the prospectuses to suggest that their pref terms were to be exceptional and include such rights.

Against the background of indubitably being able to cancel their pref's at their issue price I canvassed that Lloyds should make a statement to that effect, with an undertaking to stand still for twelve months.

I repeat: that would ensure investors were properly informed and give the market ample time to adjust.

After that the company would be free to deal.

Would that not satisfy your concerns regarding the market being correctly informed? Investors could hardly complain subsequently that they did not realise such pref's, whilst maybe irredeemable, nonetheless were cancellable.

If existing investors no longer wished to retain the pref's having on purchase misunderstood their terms they would have plenty of time to dispose of them in an orderly fashion.

And if A YEAR later, Lloyds implemented a cancellation there could be no moral aspect.

I can only presume you'd concur with that. But if not, it would be fascinating if you were to set out your rationale.

Nicholas

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James Wilson

Apr 12, 2018 at 19:09

@Nicholas Blake - I understand your opinion but I do not agree with it and you have not produced a shared of evidence to support it.

For example you say that lots of people (including yourself) realised that irredeemable preference shares could be cancelled at par without a class vote but didn't tell anyone or seek to profit from this knowledge as they had better things to do with their time. Then when Aviva claims it has the ability to do it you suddenly don't have better things to do with your time anymore and pass your day trying to tell everyone else how stupid they have been all along ! And where are all the others who realised?

I choose to call it a loophole because where I was born down under it was recognised as a loophole and was closed by inserting the following sentence in our Corporations Act some years back -

'If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled.'

Same as in France and other countries which have correctly translated and transposed EC directives into statute.

Do you have a problem with that or do you think the UK is some superior little island, populated by superior beings like you who see the opaque as obvious, which does not need to harmonise or have clear directives underpinning fundamental shareholder rights?

It seems there are people from these shores who call it a loophole. Rupert Krefting of M&G (who you claim to know) along with M&G, Invesco, GAM, Edentree and L&G wrote to the Economic Secretary to HM Treasury this week requesting that the Treasury 'look at closing the legal loophole in the Companies Act 2006 that has allowed this situation to develop.'

As I said lets agree to differ and see who HM Treasury and the FCA agree with once they have figured it out.

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Nicholas Blake

Apr 12, 2018 at 19:48

James,

I'm also from Down Under!

I'd not call it a loophole, as I personally was involved in a pref cancellation as far back as 1991. The law has been the same since. By coincidence, I remember the ABI 'looking into' the legal position 14 years ago!! It appears some of them may have forgotten?

Have a read of s.7.3.1 in this link if you want an extended textbook explanation of the legal position: https://lawexplores.com/shareholders-shares-and-share-capital/

I trust this lays the issue of the current law to rest.

I assume other professionals know the law and read the dox before choosing not to invest, but who knows?

The legal position of existing pref's is essentially a contract between the issuers and the holders. In the UK it is generally understood that contracts ought not to be disturbed retrospectively. On that basis, if the law were to be changed it would be likely to apply to subsequent issues, but it is conceivable they might not.

I have invested professionally Down Under, in the US, Europe and even once in Singapore. Everyone has different opinions of what fundamental shareholder rights are. The UK is in fact up with the very best overall.

Let's assume for a moment that the law remains as is. You are conspicuously avoiding the question that, if a statement were made making clear the pre-existing legal position of the prefs and a stand still were voluntarily adopted to allow holders to assimilate this, would you feel there would still somehow be some moral obligation?

I only ask because fulfilling a freely entered into contract under its original terms

seems pretty straight up and down to me!

Nicholas

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James Wilson

Apr 13, 2018 at 12:29

@NicholasBlake - I understand the ABI 'agreed' with issuers a practice of a separate class vote for retirement of preference shares some years ago. This could account for the conduct of issuers over many years and the devil being quiet until now. Part of the current problem could be the demise of the ABI investment committees with nothing to replace them.

To answer your question about statements - for me there is not a broad brush answer. Rather it depends on individual circumstances such as:

1. What does the prospectus say? Where it specifically states the shares cannot be redeemed without a vote of preference shareholders it is hard to see what the point of saying that was if the same result in substance could be achieved without a separate vote.

2. The conduct of the issuer since issue. For example:

- has the issuer consistently described the preference shares as perpetual?

- has the issuer stated they have no ability to call the shares at par in regulatory returns, investor presentations etc?

- has the issuer sought authority to repurchase the shares at above market price through special resolutions year on year? The inference being why would they do this if they could repay the shares at par instead by passing the same resolution.

- how has the market priced the shares since issue relative to a preference share with a disclosed issuer call option? And has did the issuer take any steps to correct any mis-pricing?

There is even some interesting law on how contracts came be varied by the conduct of the parties over time.

3. Who did the issuer target when issuing the preference shares? Lets not forget that the reason many issuers raised capital in the form of preference shares to fund growth was that, unlike now, funding was hard to come by and retail investors were an essential source of funding. And irredeemable preference shares with a perceived perpetual fixed income stream were attractive to retirees.

4. What the regulators have to say about it once they finish their deliberations?

I know you don't agree so lets leave it at that and see what happens.

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andrew moffat

Apr 13, 2018 at 15:24

This debate is unending. It can be solved, simply, on the moral issue. The technical detail is far too complex, a flavour of which may be seen below.

As I have previously reflected, we are discussing old age pensioners here, quite apart from dozens of City institutions.

The Rt. Hon. John Glen MP - Economic Secretary

HM Treasury

1 House Guards Road

London SW1A 2HQ

12 April 2018

Dear Mr Glen

Aviva plc and UK Listed Preference Shares

I am writing on behalf of a large number of retail holders of UK listed preference shares in support of the request made to HM Treasury by M&G Investments, Invesco, GAM, Edentree and Legal & General to look, with a matter of urgency, at closing the legal loophole in the Companies Act 2006 based on which Aviva plc asserted it has the ability to cancel its irredeemable preference shares at par without a requirement for a separate vote of the holders of those preference shares.

UK listed irredeemable preference shares are held directly by a huge number (I estimate over 200,000) individual retail investors in the UK who rely on the perpetual income stream as part of their pension income. They were acquired on the understanding that they were perpetual and would not be repaid or otherwise cancelled, outside of failure of the issuer, without agreement of the majority of holders to the terms of repayment. The market has understood and priced irredeemable preference shares on this basis over many years during which time issuers have reinforced this impression through their conduct. However, as a result of Aviva’s assertion there is now great uncertainty and worry amongst investors and the market is destabilised and at risk of further contagion. This can only be resolved by provision of legal certainty through a clear directive which establishes fundamental shareholder rights such as the following sentence which was added to the Australian Corporations Act 2001 to resolve the same issue:

'If the reduction involves the cancellation of shares, the reduction must also be approved by a special resolution passed at a meeting of the shareholders whose shares are to be cancelled.'

By contrast UK law in this area of fundamental shareholder rights is unnecessarily complex (note 1), outdated and an outlier compared to competing territories where the loophole does not exist. Fundamental shareholder rights should be easy to establish, transparent and harmonised across international capital markets.

As you will be aware the Chair of the Treasury Committee made the following statement on 28 March -

The FCA rightly highlighted the legal uncertainty surrounding the rights and terms of preference shares. I expect that the Treasury will consider how best to resolve this uncertainty as a matter of urgency.

I had a call with Mark Steward (Director of Enforcement and Market Oversight at the FCA) last Friday on the matter from which I was not able to establish who at HM Treasury is handling the matter, the process being followed or the timetable being worked to. Therefore, in the absence of any public statement from HM Treasury, I am concerned that there is not sufficient urgency to resolve the matter in view of the continued destabilised market, risk of contagion and serious consumer distress and detriment.

Your sincerely

Mark Taber

mark@fixedincomeinvestments.org.uk

www.fixedincomeinvestments.co.uk

Twitter: marktaber_fii

Mob: 07947 173229

cc: The Rt. Hon. Nicky Morgan MP - Chair of the Treasury Committee

Andrew Bailey - Chief Executive, FCA

Mark Steward - Director of Enforcement and Market Oversight, FCA

Note 1: Investors are supposed to be able to rely on the prospectus to provide all information reasonably required to make an informed assessment of the rights attaching to the shares. Hence when the prospectus states the shares are irredeemable and cannot be redeemed without a separate class vote investors should not have to go through the following to establish that this protection is, in substance, worthless -

Investors need to be aware of and understand that Section 641 of the Companies Act 2006 requires a Special Resolution to repay shares through reduction of capital. Elsewhere Section 283 of the Companies Act 2006 defines a Special Resolution as a vote requiring 75% of the relevant class of shareholders without defining the relevant class. Investors then need to know to look at the Articles of Association to establish the relevant class. The Articles state that a separate class vote is required for any variation or abrogation of rights. Many investors would stop there believing a separate class vote is required for repayment as the prospectus suggests. But they need to be aware of and understand case law to appreciate the authorities that cancellation has been held not to constitute a variation or abrogation of rights. Then if investors look at EC law (with which the Companies Act 2006 is supposed to be consistent) you will find that the directives have been transposed into French law such that a separate class vote is required for 'chaque classe' proposed for cancellation. Investors would need specialist legal advisers to guide them through all that.

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andrew moffat

Apr 13, 2018 at 15:30

As the item, above, makes clear, we have what most people would accept is a loophole and this situation emerges from the 2006 Companies Act. It is inconceivable that such controversy could have been expected to occur and even less conceivable that company directors, who should have known better, would seek to exploit it - clearly because some 'clever' money making lawyer had identified there was a loophole to exploit. Happily, no institution, of which I am aware, has mounted a defence of this loophole.

I rather suspect most readers have by now given up. It is far too complicated even for professionals with skills in this field to grasp with confident authority.

At the end of it, moral compass determines that the situation is inadequate and that clarity must be provided. How soon this occurs is the only question that remains.

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paul crocker

Apr 13, 2018 at 16:40

Agree how on earth the" clever" directors at AV. could come up with this unbelievable underhanded plan beggars belief what were they thinking

Was it to boost their bonus! It makes me think they should not be in control of

a company like AV.hope they get a massive fine personally for causeing complete chaos in the F.I. market

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P B

Apr 13, 2018 at 17:09

Just a kind of ambulance chasing by law firm involved Which is what they presumably are often up to anyway .

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Nicholas Blake

Apr 13, 2018 at 18:38

James,

To make things clear cut, let’s narrow things down to the Lloyds pref’s.

All considerations are against the background of long established UK law that all share capital (both ords and pref’s) can be returned.

Taking your criteria in logical order:

1. The pref terms summary in the prospectus states the pref’s are irredeemable and goes on to say they have no fixed maturity date, which is the legal definition. The next sentence starts, ‘On a return of capital or distribution of assets, whether or not on a winding-up…’. So it is plain the pref’s can have their capital returned. The articles are consistent with this.

It is clear from the prospectus that the pref’s are cancellable.

3. The second sentence on the front page disclaimer is, ‘If you are in any doubt as to the action you should take, you are recommended to seek your own personal financial advice immediately from your stockbroker, bank, solicitor, accountant, fund manager or other appropriate independent financial adviser, who is authorised under the Financial Services and Markets Act 2000 if you are in the United Kingdom or, if not, from another appropriately authorised independent financial adviser.

In other words, retail investors should seek professional advice before investing. The issue is not aimed at unadvised retail investors.

2. * One cannot say one can call shares unless that is a unilateral right, which it is not here.

* AGM resolutions are boiler plate, and typically repeated endlessly. They have no bearing.

* ‘Perpetual’ is imprecise, but in this context means undated.

* Market pricing is irrelevant unless the articles make reference to it, as they do for BP pref’s.

4. The regulator’s views do not impact the terms of the instrument. Most likely, it will require issuers to make clarificatory statements to ensure that cancellable, undated issues such as the Lloyds pref’s, are recognised as such.

If Lloyds retail investors have shunned the clear warning to seek advice and find that they have bought something which isn’t what they thought, I’m afraid they have no moral right to anything from the company.

Professional investorsadvisers ought simply to do their job properly.

Content to leave it at that.

Nicholas

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Nicholas Blake

Apr 14, 2018 at 10:11

Andrew,

Sorry to enlighten you from your bliss, but repeating a false statement when its incorrectness has been pointed out to one, and the information necessary to recognise it has been provided, is ignorant.

UK companies law for at least the last seventy years has continuously been that all share capital (both ords and pref’s) can be returned. Including pref shares this provision of the law has served participants exceptionally well over the period and the mechanics are entirely understood and uncontroversial.

In 2005 Hunting plc used the legal ability to cancel its pref’s at par. There was quite a kerfuffle at the time. The cancellation proceeds were below the market price. It is interesting that the chairman was a pref holder and so bore some of the impact.

At the court hearing to approve the cancellation a number of pref shareholders, I believe institutional, complained to a court that this was unfair. The court ruled it was unquestionable that such cancellations were entirely in keeping with the bargain which the pref shareholders had with the company: the articles explicitly legislated for same.

The ABI made a fair bit of noise. They said such cancellations might be legal, but didn’t comply with their self-constructed code of best practice (a trade body wish list which has no legal standing).

It is indisputable that from then on the institutions did or should have understood that the USUAL legal position in UK law is that pref's ARE CANCELLABLE.

Sometime around then there had also been an analogous debate regarding debentures. A clever corporate financier, Lord Spens, devised some wording whereby in such cases issuers should specify that such transactions had to be priced by reference to the yield on gilts (known as Spens clauses). Some pref issuers were asked by informed investors to include Spens clauses in the event of returns of capital. Bristol Water pref’s have such terms.

Your gripe boils down to no more than more investors not realising that pref’s commonly described as irredeemable were intrinsically capable of cancellation.

It’s a misunderstanding which is not even unique to the pref market. This is from the Debt Management Office, which administers gilts: "Irredeemable" gilt -- An inaccurate term sometimes used in connection with undated gilts, all of which have now been redeemed. The government executed some of these irredeemable ‘redemptions’ in the last few years.

Needless to say, no ‘clever’ legal works are involved -- this is student law. The law DID NOT change in 2006. And the only loophole from UK company law involved is the one Taber suggests ought to adopted, presumably prospectively as is established practice!

We are in total agreement that clarity is needed. I expect the FCA will require all issuers to make clear statements to the market of the cancellation position. If any retail investors now realise they bought pref’s such as those of Lloyds assuming incorrectly that they were not cancellable, and are uncomfortable with the contract which they have entered with the issuer, there is a simple remedy. This is to sell the cancellable pref’s and buy some with the desired protections. BP pref’s are paid a premium to market of 10% if cancelled. I believe the yield is broadly similar to that on Lloyds.

I hope this is helpful.

Nicholas

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P B

Apr 14, 2018 at 11:49

Nicholas ,

Is there not also some question as to whether some European law may have an influence ?

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Nicholas Blake

Apr 14, 2018 at 12:34

P B Sorry, afraid not. The UK has already been obliged to adopt any European legal provisions which are mandatory.

NB

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andrew moffat

Apr 14, 2018 at 12:40

Nicholas:

1 Show me - ie quote chapter and verse - that this is not the 2006 Companies Act but an earlier Act. Aviva stated it was the 2006 Act and the Institutions have agreed that this Act creates the problem.

2 Share capital can be returned in the event of a wind-up or a takeover or a purchase in the market, at market prices.

3 Even under the Companies Act 2006, on which Aviva relied, it is by no means certain that the law was watertight and was not susceptible to challenge. In this situation, we would also have the question of whether the relevant class would hold sway, in isolation or whether the class could be overruled by the Ord class. I am not certain that this has been determined, either. In the event that the Ord class could overcome the Pref class, we still have the question of whether the shareholders would seek to do this - a grossly immoral act, which would deprive pensioners, amongst others.

4 The idea that the mechanics are understood and uncontroversial suggests that you reside in a bubble world. Were what you say the case, we would not have reams of pointless debate here and a ruckus involving Aviva on the one hand, and numerous financial journals, the FCA, shareholders, institutions, MPs, the Parliamentary Finance Committee and others on the other.

5 I do not know the situation with Hunting and I have not viewed its prospectus - and nor am I interested in doing so - but the wording, I suspect, was particular to Hunting. I am interested in Aviva, as an Ordinary shareholder, because I regard the Board's actions as thoroughly immoral - and it appears you are the only person who considers the position otherwise.

6 I seem to recall Spens had links with the fraudsters in in the infamous Guinness share support operation in 1987, which resulted in Ernest Saunders, amongst others, going to jail.

7 No, my gripe boils down to gross immorality. It would appear that you have difficulties adjusting to the moral standards that guide most civilised people,

and most of us on this site, but morality is the basis of fair and equitable conduct. In this situation, we had Aviva, itself, stating on its website that the share class was both irredeemable and perpetual. We have rehearsed this a dozen times here, including chapter and verse. Aviva only conducted its first U turn when a 'clever' lawyer, presumably, persuaded it so to do. It then conducted its second U turn when it discovered it had caused immense damage to its reputation.

8 We have a position - as Mark Taber states in his letter above - where the matter is so complex that even the lawyers cannot agree and yet you seem to think that ordinary retail investors - and institutional investors - should be in a position to interpret all this legalese as though it were kindergarten stuff. I believe that these investors had every right to rely on the Aviva website to advise them - and, evidently, do did the financial press, MPs, the FCA and others.

9 Irredeemable gilts, ie War Loan, are an entirely different matter. The pros and cons of redeeming them was discussed as long back as the Thatcher govt, if not before, on the basis that this was permitted. Everyone I knew were aware of this.

10 No it is not helpful. I do not seek your help either. I regard this as an issue of principle.

11 I suggest, since you have plenty of time on your hands and feel so strongly about it, that you take up the matter with Mark Taber, the Aviva Board - to see if they will perform their third U turn - with the House Finance Committee, with the FCA and in the letters' columns of the financial press. I am sure the result will provide splendid theatre for us all. You could even submit yourself as a candidate for the Aviva Board - in a non-executive capacity, to look after the interests of the shareholders.

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andrew moffat

Apr 14, 2018 at 12:47

Corrected, beneath, for typos:

"9 Irredeemable gilts, ie War Loan, are an entirely different matter. The pros and cons of redeeming them were discussed as long back as the Thatcher govt, if not before, on the basis that this was permitted. Everyone I knew was aware of this."

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Nicholas Blake

Apr 14, 2018 at 13:04

Andrew,

You are very excited!

And very confused. Have a read of s.7.3.1 in this link if you want an extended textbook explanation of the legal position: https://lawexplores.com/shareholders-shares-and-share-capital/

I was involved in returns of capital in 1991 and 2011. In the professional corporate world they are extremely well understood. Perhaps those in bubbles oughtn't to throw stones?

Spens is/was a minor legend in the listed fixed interest market. The Guinness affair was before I came to Britain, so am unfamiliar with details.

The legal position isn't complicated. Have a look at the 'government loophole' blog if you want a simple way of understanding it.

Taber's letter is an amusing litany of peripheral and circumstantial information. Any decent corporate lawyer would tell him it was flawed in numerous ways. If I get some spare time next week, I might even have some fun deconstructing it if you'd like.

You seem to be in denial regarding the regulatory position, which is for investments such as the pref's retail investors ought to take professional advice before investing.

In fact, your ardour remains me of how I was counselled before negotiating for the first time with Asian businessmen. I asked about the need to allow 'face' to be saved. The answer was that whatever you hear about face it is in reality just a lever to obtain more money.

Let me close by asking you this: if the Lloyds pref prospectus had stated in the terms the indisputable legal position, which is that the pref's, whilst having no fixed date for redemption, were cancellable at par, would you still be carrying this torch?

Bon journee,

Nicholas

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P B

Apr 14, 2018 at 15:28

I see that the following has been noted by Mr Taber from the original HBOS prospectus , with Lloyds advising the court upon the change and issue of new prospectus that the HBOS holders rights would be in subst.ance the same as previously :

' The special rights attached to the HBOS Preference Shares will be deemed to be varied or abrogated if any resolution is passed for the reduction of capital paid up on the HBOS Preference Shares '

this sharpens up the argument

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Nicholas Blake

Apr 14, 2018 at 15:40

Interesting spot! One would have to look at context. The words 'in substance' do muddy the waters, though.

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P B

Apr 14, 2018 at 15:51

Yes , although in substance I would take to mean minor detail , such an alteration, you would think , be major .

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Nicholas Blake

Apr 14, 2018 at 16:00

And to state a rather obvious point: if the large institutions, instead of lobbying for a change in long established company law, which is likely to be be drawn out and at best PROSPECTIVE, simply got together and agreed that they would not invest in any new pref issues unless the articles contained the above 'HBOS language', a very satisfactory outcome would be achieved with a hell of a lot less fuss!!

P.S. The HBOS language also makes it plain that, despite their current 'amnesia', at some point the institutions WERE well aware of how the law worked!

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Nicholas Blake

Apr 14, 2018 at 16:02

'in substance' is fairly vague. But if it isn't in the Lloyds prospectus it is quite challenging to seek to have the pref terms rectified ten years later. Even more so given the HBOS pref holders have subsequently made good money?!

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andrew moffat

Apr 14, 2018 at 23:28

Nicholas, I am not confused. I do not possess the time to read your link. I have explained, time without number, that my central thrust is the morality of the matter. I appreciate that morality is not your strong point. The shareholders had every right to rely on what Aviva itself was saying about its Pref share class - so no wonder the FCA became involved.

You gave the impression that you knew everything - so it was rather pleasing to hear an admission that you knew nothing about Spens and his links with those in the Guinness affair.

Yes, do write to Mark Taber directly and perhaps you will post the exchange here, so we can all read it.

I think it is you who is in denial in terms of the actuality of the situation, which was clearly outlined by Aviva itself, before this controversy arose, quite apart from the gross immorality involved.

Furthermore, it is not just the retail investors who required professional advice but also the institutional investors. Both, however, were guided by Aviva's own website.

In answer to your hypothetical question, yes. That is because I am not discussing Lloyds; I am discussing Aviva.

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Nicholas Blake

Apr 15, 2018 at 10:53

Andrew,

Just quickly.

Sorry to point this out, but if you can't be bothered establishing the legal position your position on morality can be taken with a grain of salt.

On the government loophole blog 'Michael' posted this:

"I have read the original Listing Particulars, and it's entirely clear that on a return of capital the pref holders would receive just £1 plus any accrued dividend. Paragraph 4(iii) states:

"(iii) On a return of capital (otherwise than on a winding up or on a redemption or purchase by the Company of shares of any class), the holders of the Further New Preference Shares shall be entitled to receive an amount per Further New Preference Share equal to the nominal amount of a Further New Preference Share ..." (i.e. £1.00)

It really couldn't be much clearer. The people who should be taking the blame for this debacle are not Aviva, who were simply doing what they were entitled to do, but the highly paid analysts and professional advisers / investors who had been trading the prefs at a premium of 70%+ having never bothered to look at the terms on which the prefs were issued.

It also needs to be borne in mind that in 1992, when the shares were issued, 8% was not at all a high rate of interest. The base rate in November 1992 was 7.88%. Consequently, it was probably not envisaged that these prefs would ever trade at much above par.

In this context it's notable that the earlier prefs, which were in all other respects identical but had an interest rate of just 3.5%, DID have a provision whereby on a return of capital they would be bought out at market value."

The Aviva results announcement included this:

"In 2018, we have signalled our intention to reduce hybrid debt by £900 million. We are targeting more than £500 million in additional capital returns, incorporating liability management and returns to shareholders. In this regard, we have the ability to cancel preference shares at par value through a reduction of capital, subject to shareholder vote and court approval. "

Aviva's statement is entirely factual and correct.

Where I personally believe they erred, recognising that the market, had severely misunderstood, or at least was ignoring, the pref terms, was by not stating that no such action was envisaged for a period. That would have given the market sufficient time to ensure pricing reflected the instruments' fundamentals.

Your 'morality' point seems to be built on a view that pref investors ought to be able to rely on peripheral information about such pref's rather than reading the source documents which constitute their terms. You claim a company has a moral obligation to protect them from their own lethargy/incompetence. Interesting view.

From my quick perusal of Taber's website he seems to be a bond investor who has diversified into pref investment without ever spending the time to understand the critical differences between loan and share capital. His letter is inconsequential.

Checked Spens's Tele obit: is it relevant that he was acquitted?

As a final point, the Aviva statement to pref holders would appear to deliver to them the value transfer from ord shareholders which you have argued for. I trust you are content with that? In contrast, the Lloyds position is entirely topical.

Nicholas

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James Wilson

Apr 15, 2018 at 11:29

@Nicholas Blake - coming from down under I am surprised you are not outside enjoying the fine weather this weekend rather than arguing with all and sundry over preference shares. It must mean a lot to you !

My criteria was not an exhaustive list to apply to Lloyds as I am not going to spend days researching Lloyds conduct over the years. But taking your points in order for fun:

1. Please could you let us know the legal meaning of 'redeemable' which you expect investors to understand when it is used in a prospectus?

What is the point in giving investors class protection against redemption at par in a prospectus if the same outcome in substance can be inflicted on them without class protection?

Please could you quote the section of the prospectus which makes it clear that the prefs may be cancelled without a class vote? Note that capital can be reduced for reasons other than cancellation.

3. Amusing and slightly hypocritical attempt at leaning on boiler plate wording on obtaining advice and then dismissing special resolutions to repurchase above market price as boiler plate ! Lloyds is an interesting case here because, by their own admission, they have well over 100,000 small retail preference shareholders who they have collected in a variety of ways and who they say they value greatly. Lloyds did not issue any of the preference shares in question - they all started out and were issued by Halifax or BOS under prospectuses which did not contain the boiler plate you refer to. And which, as the unstoppable Mr Taber has unearthed, contained much stronger wording on the rights of the preference shares.

So no retail investor subscribed to their preference shares based on the prospectus you refer to which was only produced by Lloyds when they wanted to reorganise their group structure.

As an aside I was discussing this retail legal advice issue with a senior regulatory lawyer the other day and she pointed out that it is not proportionate nor realistic to expect small retail investors to be in a position to obtain advice from a commercial lawyer on matters such as this. The cost would be prohibitive relative to the investment involved and, of course, there are not enough commercial lawyers around to help over 100,000 people inside a 2 week offer period ! So the whole concept is recognised as a nonsense. Hence if issuers CHOOSE, for commercial reasons, to offer or substitute securities to small retail investors they need to do a much better job in setting out the rights and features. So in Lloyds case there is much more to be laid over the strict legal position you are addicted to and consumer protection and morality come into it whether you like it or not.

2. I used the word call by way of summary of the reg cap position I have previously explained. Issuers should not be including preference shares as own funds or transitional AT1 capital in returns if they have the ability to cancel them at par.

Your other points are weak attempts at dismissing the inconvenient. As I said the layers of conduct over time are important here from a regulatory / consumer protection standpoint and can even be held to vary the contract in law.

4. Let's see what the regulators make of the conduct of issuers over time, the disclosures in prospectuses etc. before making judgments on that one.

Content to leave it at that other than interested in your answers to (1).

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Nicholas Blake

Apr 15, 2018 at 12:01

"Not redeemable" merely means having NO FIXED DATE FOR REDEMPTION. Redemption in respect of UK companies is as specified in the Companies Act:

CHAPTER 3

REDEEMABLE SHARES

684 Power of limited company to issue redeemable shares

(1) A limited company having a share capital may issue shares that are to be

redeemed or are liable to be redeemed at the option of the company or the

shareholder (“redeemable shares”), subject to the following provisions.

(2) The articles of a private limited company may exclude or restrict the issue of

redeemable shares.

(3) A public limited company may only issue redeemable shares if it is authorised

to do so by its articles.

Companies Act 2006 (c. 46)

Part 18 — Acquisition by limited company of its own shares

Chapter 3 — Redeemable shares

329

(4) No redeemable shares may be issued at a time when there are no issued shares

of the company that are not redeemable.

685 Terms and manner of redemption

(1) The directors of a limited company may determine the terms, conditions and

manner of redemption of shares if they are authorised to do so—

(a) by the company’s articles, or

(b) by a resolution of the company.

(2) A resolution under subsection (1)(b) may be an ordinary resolution, even

though it amends the company’s articles.

(3) Where the directors are authorised under subsection (1) to determine the

terms, conditions and manner of redemption of shares—

(a) they must do so before the shares are allotted, and

(b) any obligation of the company to state in a statement of capital the

rights attached to the shares extends to the terms, conditions and

manner of redemption.

(4) Where the directors are not so authorised, the terms, conditions and manner of

redemption of any redeemable shares must be stated in the company’s articles.

686 Payment for redeemable shares

(1) Redeemable shares in a limited company may not be redeemed unless they are

fully paid.

(2) The terms of redemption of shares in a limited company may provide that the

amount payable on redemption may, by agreement between the company and

the holder of the shares, be paid on a date later than the redemption date.

(3) Unless redeemed in accordance with a provision authorised by subsection (2),

the shares must be paid for on redemption.

687 Financing of redemption

(1) A private limited company may redeem redeemable shares out of capital in

accordance with Chapter 5.

(2) Subject to that, redeemable shares in a limited company may only be redeemed

out of—

(a) distributable profits of the company, or

(b) the proceeds of a fresh issue of shares made for the purposes of the

redemption.

(3) Any premium payable on redemption of shares in a limited company must be

paid out of distributable profits of the company, subject to the following

provision.

(4) If the redeemable shares were issued at a premium, any premium payable on

their redemption may be paid out of the proceeds of a fresh issue of shares

made for the purposes of the redemption, up to an amount equal to—

(a) the aggregate of the premiums received by the company on the issue of

the shares redeemed, or

Companies Act 2006 (c. 46)

Part 18 — Acquisition by limited company of its own shares

Chapter 3 — Redeemable shares

330

(b) the current amount of the company’s share premium account

(including any sum transferred to that account in respect of premiums

on the new shares),

whichever is the less.

(5) The amount of the company’s share premium account is reduced by a sum

corresponding (or by sums in the aggregate corresponding) to the amount of

any payment made under subsection (4).

(6) This section is subject to section 735(4) (terms of redemption enforceable in a

winding up).

688 Redeemed shares treated as cancelled

Where shares in a limited company are redeemed—

(a) the shares are treated as cancelled, and

(b) the amount of the company’s issued share capital is diminished

accordingly by the nominal value of the shares redeemed.

689 Notice to registrar of redemption

(1) If a limited company redeems any redeemable shares it must within one month

after doing so give notice to the registrar, specifying the shares redeemed.

(2) The notice must be accompanied by a statement of capital.

(3) The statement of capital must state with respect to the company’s share capital

immediately following the redemption—

(a) the total number of shares of the company,

(b) the aggregate nominal value of those shares,

(c) for each class of shares—

(i) prescribed particulars of the rights attached to the shares,

(ii) the total number of shares of that class, and

(iii) the aggregate nominal value of shares of that class, and

(d) the amount paid up and the amount (if any) unpaid on each share

(whether on account of the nominal value of the share or by way of

premium).

(4) If default is made in complying with this section, an offence is committed by—

(a) the company, and

(b) every officer of the company who is in default.

(5) A person guilty of an offence under this section is liable on summary

conviction to a fine not exceeding level 3 on the standard scale and, for

continued contravention, a daily default fine not exceeding one-tenth of level

3 on the standard scale.

The DEFAULT position is that investors in shares can, subject to compliance with the act, have their capital repaid at the issue prices.

The relevant provisions are:

CHAPTER 10

REDUCTION OF SHARE CAPITAL

Introductory

641 Circumstances in which a company may reduce its share capital

(1) A limited company having a share capital may reduce its share capital—

(a) in the case of a private company limited by shares, by special resolution

supported by a solvency statement (see sections 642 to 644);

(b) in any case, by special resolution confirmed by the court (see sections

645 to 651).

(2) A company may not reduce its capital under subsection (1)(a) if as a result of

the reduction there would no longer be any member of the company holding

shares other than redeemable shares.

(3) Subject to that, a company may reduce its share capital under this section in

any way.

(4) In particular, a company may—

(a) extinguish or reduce the liability on any of its shares in respect of share

capital not paid up, or

(b) either with or without extinguishing or reducing liability on any of its

shares—

(i) cancel any paid-up share capital that is lost or unrepresented by

available assets, or

Companies Act 2006 (c. 46)

Part 17 — A company’s share capital

Chapter 10 — Reduction of share capital

308

(ii) repay any paid-up share capital in excess of the company’s

wants.

(5) A special resolution under this section may not provide for a reduction of share

capital to take effect later than the date on which the resolution has effect in

accordance with this Chapter.

(6) This Chapter (apart from subsection (5) above) has effect subject to any

provision of the company’s articles restricting or prohibiting the reduction of

the company’s share capital.

Private companies: reduction of capital supported by solvency statement

642 Reduction of capital supported by solvency statement

(1) A resolution for reducing share capital of a private company limited by shares

is supported by a solvency statement if—

(a) the directors of the company make a statement of the solvency of the

company in accordance with section 643 (a “solvency statement”) not

more than 15 days before the date on which the resolution is passed,

and

(b) the resolution and solvency statement are registered in accordance with

section 644.

(2) Where the resolution is proposed as a written resolution, a copy of the solvency

statement must be sent or submitted to every eligible member at or before the

time at which the proposed resolution is sent or submitted to him.

(3) Where the resolution is proposed at a general meeting, a copy of the solvency

statement must be made available for inspection by members of the company

throughout that meeting.

(4) The validity of a resolution is not affected by a failure to comply with

subsection (2) or (3).

643 Solvency statement

(1) A solvency statement is a statement that each of the directors—

(a) has formed the opinion, as regards the company’s situation at the date

of the statement, that there is no ground on which the company could

then be found to be unable to pay (or otherwise discharge) its debts;

and

(b) has also formed the opinion—

(i) if it is intended to commence the winding up of the company

within twelve months of that date, that the company will be

able to pay (or otherwise discharge) its debts in full within

twelve months of the commencement of the winding up; or

(ii) in any other case, that the company will be able to pay (or

otherwise discharge) its debts as they fall due during the year

immediately following that date.

(2) In forming those opinions, the directors must take into account all of the

company’s liabilities (including any contingent or prospective liabilities).

(3) The solvency statement must be in the prescribed form and must state—

Companies Act 2006 (c. 46)

Part 17 — A company’s share capital

Chapter 10 — Reduction of share capital

309

(a) the date on which it is made, and

(b) the name of each director of the company.

(4) If the directors make a solvency statement without having reasonable grounds

for the opinions expressed in it, and the statement is delivered to the registrar,

an offence is committed by every director who is in default.

(5) A person guilty of an offence under subsection (4) is liable—

(a) on conviction on indictment, to imprisonment for a term not exceeding

two years or a fine (or both);

(b) on summary conviction—

(i) in England and Wales, to imprisonment for a term not

exceeding twelve months or to a fine not exceeding the

statutory maximum (or both);

(ii) in Scotland or Northern Ireland, to imprisonment for a term not

exceeding six months, or to a fine not exceeding the statutory

maximum (or both).

644 Registration of resolution and supporting documents

(1) Within 15 days after the resolution for reducing share capital is passed the

company must deliver to the registrar—

(a) a copy of the solvency statement, and

(b) a statement of capital.

This is in addition to the copy of the resolution itself that is required to be

delivered to the registrar under Chapter 3 of Part 3.

(2) The statement of capital must state with respect to the company’s share capital

as reduced by the resolution—

(a) the total number of shares of the company,

(b) the aggregate nominal value of those shares,

(c) for each class of shares—

(i) prescribed particulars of the rights attached to the shares,

(ii) the total number of shares of that class, and

(iii) the aggregate nominal value of shares of that class, and

(d) the amount paid up and the amount (if any) unpaid on each share

(whether on account of the nominal value of the share or by way of

premium).

(3) The registrar must register the documents delivered to him under subsection

(1) on receipt.

(4) The resolution does not take effect until those documents are registered.

(5) The company must also deliver to the registrar, within 15 days after the

resolution is passed, a statement by the directors confirming that the solvency

statement was—

(a) made not more than 15 days before the date on which the resolution

was passed, and

(b) provided to members in accordance with section 642(2) or (3).

(6) The validity of a resolution is not affected by—

Companies Act 2006 (c. 46)

Part 17 — A company’s share capital

Chapter 10 — Reduction of share capital

310

(a) a failure to deliver the documents required to be delivered to the

registrar under subsection (1) within the time specified in that

subsection, or

(b) a failure to comply with subsection (5).

(7) If the company delivers to the registrar a solvency statement that was not

provided to members in accordance with section 642(2) or (3), an offence is

committed by every officer of the company who is in default.

(8) If default is made in complying with this section, an offence is committed by—

(a) the company, and

(b) every officer of the company who is in default.

(9) A person guilty of an offence under subsection (7) or (8) is liable—

(a) on conviction on indictment, to a fine;

(b) on summary conviction, to a fine not exceeding the statutory

maximum.

Reduction of capital confirmed by the court

645 Application to court for order of confirmation

(1) Where a company has passed a resolution for reducing share capital, it may

apply to the court for an order confirming the reduction.

(2) If the proposed reduction of capital involves either—

(a) diminution of liability in respect of unpaid share capital, or

(b) the payment to a shareholder of any paid-up share capital,

section 646 (creditors entitled to object to reduction) applies unless the court

directs otherwise.

(3) The court may, if having regard to any special circumstances of the case it

thinks proper to do so, direct that section 646 is not to apply as regards any

class or classes of creditors.

(4) The court may direct that section 646 is to apply in any other case.

646 Creditors entitled to object to reduction

(1) Where this section applies (see section 645(2) and (4)), every creditor of the

company who at the date fixed by the court is entitled to any debt or claim that,

if that date were the commencement of the winding up of the company would

be admissible in proof against the company, is entitled to object to the

reduction of capital.

(2) The court shall settle a list of creditors entitled to object.

(3) For that purpose the court—

(a) shall ascertain, as far as possible without requiring an application from

any creditor, the names of those creditors and the nature and amount

of their debts or claims, and

(b) may publish notices fixing a day or days within which creditors not

entered on the list are to claim to be so entered or are to be excluded

from the right of objecting to the reduction of capital.

Companies Act 2006 (c. 46)

Part 17 — A company’s share capital

Chapter 10 — Reduction of share capital

311

(4) If a creditor entered on the list whose debt or claim is not discharged or has not

determined does not consent to the reduction, the court may, if it thinks fit,

dispense with the consent of that creditor on the company securing payment

of his debt or claim.

(5) For this purpose the debt or claim must be secured by appropriating (as the

court may direct) the following amount—

(a) if the company admits the full amount of the debt or claim or, though

not admitting it, is willing to provide for it, the full amount of the debt

or claim;

(b) if the company does not admit, and is not willing to provide for, the full

amount of the debt or claim, or if the amount is contingent or not

ascertained, an amount fixed by the court after the like enquiry and

adjudication as if the company were being wound up by the court.

647 Offences in connection with list of creditors

(1) If an officer of the company—

(a) intentionally or recklessly—

(i) conceals the name of a creditor entitled to object to the reduction

of capital, or

(ii) misrepresents the nature or amount of the debt or claim of a

creditor, or

(b) is knowingly concerned in any such concealment or misrepresentation,

he commits an offence.

(2) A person guilty of an offence under this section is liable—

(a) on conviction on indictment, to a fine;

(b) on summary conviction, to a fine not exceeding the statutory

maximum.

648 Court order confirming reduction

(1) The court may make an order confirming the reduction of capital on such terms

and conditions as it thinks fit.

(2) The court must not confirm the reduction unless it is satisfied, with respect to

every creditor of the company who is entitled to object to the reduction of

capital that either—

(a) his consent to the reduction has been obtained, or

(b) his debt or claim has been discharged, or has determined or has been

secured.

(3) Where the court confirms the reduction, it may order the company to publish

(as the court directs) the reasons for reduction of capital, or such other

information in regard to it as the court thinks expedient with a view to giving

proper information to the public, and (if the court thinks fit) the causes that led

to the reduction.

(4) The court may, if for any special reason it thinks proper to do so, make an order

directing that the company must, during such period (commencing on or at

any time after the date of the order) as is specified in the order, add to its name

as its last words the words “and reduced”.

Companies Act 2006 (c. 46)

Part 17 — A company’s share capital

Chapter 10 — Reduction of share capital

312

If such an order is made, those words are, until the end of the period specified

in the order, deemed to be part of the company’s name.

649 Registration of order and statement of capital

(1) The registrar, on production of an order of the court confirming the reduction

of a company’s share capital and the delivery of a copy of the order and of a

statement of capital (approved by the court), shall register the order and

statement.

This is subject to section 650 (public company reducing capital below

authorised minimum).

(2) The statement of capital must state with respect to the company’s share capital

as altered by the order—

(a) the total number of shares of the company,

(b) the aggregate nominal value of those shares,

(c) for each class of shares—

(i) prescribed particulars of the rights attached to the shares,

(ii) the total number of shares of that class, and

(iii) the aggregate nominal value of shares of that class, and

(d) the amount paid up and the amount (if any) unpaid on each share

(whether on account of the nominal value of the share or by way of

premium).

(3) The resolution for reducing share capital, as confirmed by the court’s order,

takes effect—

(a) in the case of a reduction of share capital that forms part of a

compromise or arrangement sanctioned by the court under Part 26

(arrangements and reconstructions)—

(i) on delivery of the order and statement of capital to the registrar,

or

(ii) if the court so orders, on the registration of the order and

statement of capital;

(b) in any other case, on the registration of the order and statement of

capital.

(4) Notice of the registration of the order and statement of capital must be

published in such manner as the court may direct.

(5) The registrar must certify the registration of the order and statement of capital.

(6) The certificate—

(a) must be signed by the registrar or authenticated by the registrar’s

official seal, and

(b) is conclusive evidence—

(i) that the requirements of this Act with respect to the reduction of

share capital have been complied with, and

(ii) that the company’s share capital is as stated in the statement of

capital.

Companies Act 2006 (c. 46)

Part 17 — A company’s share capital

Chapter 10 — Reduction of share capital

313

Public company reducing capital below authorised minimum

650 Public company reducing capital below authorised minimum

(1) This section applies where the court makes an order confirming a reduction of

a public company’s capital that has the effect of bringing the nominal value of

its allotted share capital below the authorised minimum.

(2) The registrar must not register the order unless either—

(a) the court so directs, or

(b) the company is first re-registered as a private company.

(3) Section 651 provides an expedited procedure for re-registration in these

circumstances.

651 Expedited procedure for re-registration as a private company

(1) The court may authorise the company to be re-registered as a private company

without its having passed the special resolution required by section 97.

(2) If it does so, the court must specify in the order the changes to the company’s

name and articles to be made in connection with the re-registration.

(3) The company may then be re-registered as a private company if an application

to that effect is delivered to the registrar together with—

(a) a copy of the court’s order, and

(b) notice of the company’s name, and a copy of the company’s articles, as

altered by the court’s order.

(4) On receipt of such an application the registrar must issue a certificate of

incorporation altered to meet the circumstances of the case.

(5) The certificate must state that it is issued on re-registration and the date on

which it is issued.

(6) On the issue of the certificate—

(a) the company by virtue of the issue of the certificate becomes a private

company, and

(b) the changes in the company’s name and articles take effect.

(7) The certificate is conclusive evidence that the requirements of this Act as to reregistration

have been complied with.

Effect of reduction of capital

652 Liability of members following reduction of capital

(1) Where a company’s share capital is reduced a member of the company (past or

present) is not liable in respect of any share to any call or contribution

exceeding in amount the difference (if any) between—

(a) the nominal amount of the share as notified to the registrar in the

statement of capital delivered under section 644 or 649, and

(b) the amount paid on the share or the reduced amount (if any) which is

deemed to have been paid on it, as the case may be.

(2) This is subject to section 653 (liability to creditor in case of omission from list).

Companies Act 2006 (c. 46)

Part 17 — A company’s share capital

Chapter 10 — Reduction of share capital

314

(3) Nothing in this section affects the rights of the contributories among

themselves.

653 Liability to creditor in case of omission from list of creditors

(1) This section applies where, in the case of a reduction of capital confirmed by

the court—

(a) a creditor entitled to object to the reduction of share capital is by reason

of his ignorance—

(i) of the proceedings for reduction of share capital, or

(ii) of their nature and effect with respect to his debt or claim,

not entered on the list of creditors, and

(b) after the reduction of capital the company is unable to pay the amount

of his debt or claim.

(2) Every person who was a member of the company at the date on which the

resolution for reducing capital took effect under section 649(3) is liable to

contribute for the payment of the debt or claim an amount not exceeding that

which he would have been liable to contribute if the company had commenced

to be wound up on the day before that date.

(3) If the company is wound up, the court on the application of the creditor in

question, and proof of ignorance as mentioned in subsection (1)(a), may if it

thinks fit—

(a) settle accordingly a list of persons liable to contribute under this

section, and

(b) make and enforce calls and orders on them as if they were ordinary

contributories in a winding up.

(4) The reference in subsection (1)(b) to a company being unable to pay the

amount of a debt or claim has the same meaning as in section 123 of the

Insolvency Act 1986 (c. 45) or Article 103 of the Insolvency (Northern Ireland)

Order 1989 (S.I. 1989/2405 (N.I. 19)).

The legal distinction is clear, even if retail (and some professional) investors see redemption and cancellation as the same thing1

I'm out...

Nicholas

report this

James Wilson

Apr 15, 2018 at 12:18

@Nicholas Blake - thanks for providing your understanding. You say -

"Not redeemable" merely means having NO FIXED DATE FOR REDEMPTION. Redemption in respect of UK companies is as specified in the Companies Act:

Whereas, as Mr Taber has pointed out, the HBOS Preference Shares prospectus and articles italicises 'redeemable' as a defined term with the definition being:

'When a share is redeemed, it goes back to the company in return for a sum of money which was fixed (or calculated from a formula fixed) before the share was issued. This process is called redemption. A share which can be redeemed is called a 'redeemable' share.'

report this

P B

Apr 15, 2018 at 12:48

James ,

You said

‘As an aside I was discussing this retail legal advice issue with a senior regulatory lawyer the other day and she pointed out that it is not proportionate nor realistic to expect small retail investors to be in a position to obtain advice from a commercial lawyer on matters such as this. The cost would be prohibitive relative to the investment involved ‘

This is obviously correct , the concern I have here is that the solution will be to prevent the small investor having access to such instruments as nanny state steps in advisng they are to complicated , which I always find ridiculous because you can happily go and lose your shirt on two bit AIM fraud .

report this

andrew moffat

Apr 15, 2018 at 16:23

Nicholas, the difference between you and me is that you appear to spend your waking day dealing in the legal minutiae of this website discussion whereas I have rather better to do with my time. As I reflected, the legal situation is complex but rather than read the interpretation according the 'learned Nicholas Blake' - seemingly you fancy yourself as a lawyer - I would employ my own lawyer to oversee such matters. As was subsequently pointed out, the legal view appears to be that it is impractical and disproportionate to expect retail investors to employ lawyers, which is what I stated several weeks ago. In addition, Aviva contradicted itself on its own website - where it furnished retail and institutional investors with the confidence to purchase its irredeemable shares.

That is why the FCA and others have cut into Aviva like a hot knife through butter and, probably in part, it explains why the Aviva Board carried out a most embarrassing U turn, after having wrought enormous damage to its brand.

I honestly think, within the round, that you have a screw loose. What type of nerd would read through that screed you have posted, in an effort to protect the Aviva Board?

This is about the absence of moral compass and Aviva's posts on its own website.

Is Michael, on the government website a corporate lawyer? Is he someone like you, with a smattering of knowledge? Is he qualified? What do you know of him, his expertise and position? What does he know about Aviva and its Preference shares? His views, like yours, cut no ice with me. What are 'Further New Preference' shares? I have only heard of Irred Cum Pref shares in Aviva.

We all know interest rates were higher in 1992. Interest rates fluctuate. In the life or an irredeemable, there are immense swings depending upon inflation and deflation. The government does not reduce the coupon on an existing gilt when interest rate fall.

The Aviva results triggered this debate - how many times do you want to go round in circles?

I never stated that Spens was found guilty. I stated that he had close links to a gang of dishonest criminals, many of whom were jailed for lengthy terms.

I am unaware of any value transfer between Aviva Ord shareholders (like me) and Pref shareholders.

I don't know the situation at Lloyds but my natural sympathy is with ordinary shareholders, especially if there is any question of their having been misled.

report this

Nicholas Blake

Apr 15, 2018 at 20:38

James,

Taking a break from researching summer hols!

I realise the distinction between redemption and cancellation is tricky for retail investors, but in law they are clearly distinct acts, something Mr. Taber seems quite ignorant of, or at least makes out he is. His feeble HBOS redemption point smacks of desperation.

Two key elements of a ‘redemption’ are that the period of the investment is known up front and the issuer can generally return the specified amount to investors without any approvals. A cancellation can be similar, but requires the issuer to undertake a court process, which is very rigorous.

The fact that no redemption terms are set out in a set of articles means only that they cannot be redeemed in accordance with the provisions set out in Chapter 3 of the Companies Act. Cancellation, which relies on the process set out in chapter 10, is NOT precluded.

The Lloyds prospectus doesn’t provide class protection against a redemption. Instead, the omission of terms of redemption in the articles means the issuer is legally not capable of doing same.

The prospectus states:

“On a return of capital or distribution of assets, whether or not on a winding-up (but other than a redemption or purchase by the Company of any of its share capital permitted by its Articles and under applicable law), holders of Preference Shares will rank in the application of the assets of the Company available to shareholders; (1) equally in all respects with holders of the most senior class of preference shares and any other class of shares of the Company in issue or which may be issued by the

Company which are expressed to rank equally with the Preference Shares and (2) in priority to the holders of any other share capital of the Company (including the Junior Share Capital).

Subject to such ranking, in such event holders of the Preference Shares will be entitled to receive out of the surplus assets of the Company remaining after payment of the Company’s prior- ranking liabilities a sum equal to the aggregate of: (1) £1 per Preference Share, (2) the amount of any dividend which is due for

payment on the Preference Shares on or after the date of commencement of the winding-up or other return of capital but which is payable in respect of a period ending on or before such date and (3) the proportion of any dividend (whether or not declared or earned) that would otherwise be payable and is not otherwise paid in respect of any period that begins before, but ends after, the date of commencement of the winding-up or other return of capital and which is attributable to the part of the period that ends on such date.”

Since a class vote is not mentioned, returns of capital compliant with the above can unquestionably be undertaken without class meetings.

I realise this is all rather tongue in cheek, so I’m sure you not suggesting that the CAPITALISED health warning boilerplate which is the second sentence of the pref prospectus can remotely be compared to boilerplate in a document which is not addressed to pref investors.

And sorry to point out that the Lloyds pref investors are entirely reliant on the Lloyds prospectus. The HBOS pref’s are long dead and buried legally.

Last but not least, I trust you would feel investors would be properly informed if the FCA were to issue guidance that in future in respect of issues with no fixed redemption date (aka 'irredeemables') issuers had to ensure the prospectus stated prominently that the pref's CAN BE CANCELLED AT THE ISSUE PRICE following a court sanctioned return of capital.

Hope you slipped, slapped, slopped today!

Nicholas

report this

Nicholas Blake

Apr 15, 2018 at 22:35

Andrew,

You do post a lot of twaddle!

No need to trust me regarding the legal position, as Aviva helpfully put out a statement setting out how it works: https://www.aviva.com/investors/credit-investors/Additional-information-for-preference-shareholders/. Perhaps you ought to forward it to Taber, as he still seems to be playing dumb.

This legal position is the default setting in the UK for all such pref issues, although the payment amount on cancellation does vary.

The Aviva and Lloyds bonds are cancellable, full stop.

Investors who bought them not realising that have made a mistake. Retail investors who took advice and have suffered a loss can approach their advisers for compensation. The professional investors have only themselves to blame.

The sooner the FCA makes issuers put out clarifying statements so the unadvised retail investors know what they own, the sooner the market will be properly informed.

Do you really think Aviva 'misled' investors?

Nicholas

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andrew moffat

Apr 15, 2018 at 23:28

Yes, we've all read that before. Re-read the comments again, from top to bottom, here and in earlier Citywire reports.

You are not a lawyer although you are a time waster with pretensions in the former direction. You are also selective with your replies.

Yes, Aviva grossly misled investors because of what it stated elsewhere - which is why the FCA intruded. You are the only person of which I have heard who supported the Aviva Board's thinking - which even it later reversed.

This is also about moral compass and Aviva's reliance on the 2006 Companies Act.

You must lead a sad life if all you can do each day is repeat earlier discussion. It appears to me that you are unbalanced or senile.

report this

Nicholas Blake

Apr 16, 2018 at 09:12

Andrew,

You really are coming across as a very small minded man.

There is not the slightest evidence that Aviva misled the PROFESSIONAL investors in its pref's!

When a company issues pref's to the market via a prospectus which accurately describes them in such terms that informed investors can readily ascertain that they are BOTH incapable of redemption AND cancellable it has no moral NOR legal obligation to the same.

Aviva wasn't relying on the 2006 Companies Act, it was relying on the terms of the pref's, as set out in the articles, which were in full compliance with the prospectus.

Retail investors who invested on the basis of hearsay would be advised to seek professional advice before investing in instruments which they don't understand.

If you feel current prospectuses are too complicated for such investors, a view for which I have every sympathy, that is not the responsibility of the Aviva board -- it is within the purview of the FCA. Perhaps you ought to write to them if you feel strongly.

Is that simple enough for you to get your mind around -- or do you still think the world is flat?

Nicholas

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andrew moffat

Apr 16, 2018 at 11:34

Your typically selective response evades the substance. Aviva published clear advice until it engaged upon a strategy from which it rapidly retreated. Your view is opposed by a string of institutions, including some of the best known and I rather think most people would trust them than someone without a legal qualification, who recycles the same arguments, played out many times in this discussion. Re-read the correspondence - there is no need to repeat it for the 'nth' time - and with the surfeit of time you possess, I suggest you take it up with Mark Taber - a most decent person, who has used his time to assist elderly pensioners - and the many institutions who have supported his stance. That should occupy you over the summer.

report this

P B

Apr 16, 2018 at 11:40

A little more un earthed

Interesting that 'redeemable' was a defined term in the HBOS Preference Shares terms with the definition being somewhat different to what Aviva claimed its legal meaning is in its claim that cancellation is something different -

redeem, redemption and redeemable - when a share is redeemed it goes back to the company for a sum of money which was fixed ( or calculated from a formula fixed ) before the share was issued. This process is called " redemption " . A share which can be redeemed is called a " redeemable " share.

report this

andrew moffat

Apr 16, 2018 at 11:54

Yes, HBOS is correct and its English is unambiguous and clear to all.

report this

Nicholas Blake

Apr 16, 2018 at 14:13

Andrew,

You really don't understand, do you?

So you vainly cling onto the assumption that the institutions must be right: 'Your view is opposed by a string of institutions, including some of the best known and I rather think most people would trust them than someone without a legal qualification'.

Not much point in having a dialogue with such a closed mind!

Let me know if you ever decide to actually check things out properly.

Nicholas

report this

Nicholas Blake

Apr 16, 2018 at 14:29

P B,

Sorry if some of this is repetition, but the HBOS definition of redeemable is in fact in line with the legal one. A further aspect is that an issuer can redeem pref's pursuant to the terms UNILATERALLY.

Cancellable on the other hand requires issuers to put a return of capital to all the shareholders, meaning that ord holders must be onside. If that approval is obtained the court must then sanction the scheme. Interested parties have the opportunity to raise objections with the court.

In 2005, (i.e. prior to the Companies Act 2006), when Hunting plc cancelled its pref's at par, a number of shareholders complained to the court. The court dismissed these complaints on the basis that, because Huntings articles permitted returns of capital to pref holders at par (provisions which Aviva and Lloyds share), the company was acting entirely in accordance with the terms of the pref's. The fact such pref's were irredeemable was of no legal consequence.

The short point is that in law not redeemable DOESN'T mean not cancellable.

Aviva in its mid-March announcement stated the following,'This [cancellation] is a different mechanism under law to redemption.'

I hope that makes the distinction a little clearer.

Nicholas

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Nicholas Blake

Apr 19, 2018 at 11:25

I did not get much support for my suggestions below:

"Last but not least, I trust you would feel investors would be properly informed if the FCA were to issue guidance that in future in respect of issues with no fixed redemption date (aka 'irredeemables') issuers had to ensure the prospectus stated prominently that the pref's CAN BE CANCELLED AT THE ISSUE PRICE following a court sanctioned return of capital."

"The sooner the FCA makes issuers put out clarifying statements so the unadvised retail investors know what they own, the sooner the market will be properly informed."

Today's FCA letter, whilst not perfect, largely ticks those boxes.

It will be fascinating to see how the market reacts once the issuers have all released their [voluntary] statements.

Nicholas

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P B

Apr 19, 2018 at 13:01

Nicholas

Perhaps I did not make it clear , I appreciate these instruments can be redeemed at par via various mechamnisms , but I am also of the view that the terminology used may be considered mis leading and that further clarity is required , so that there is no doubt . An issuer should simply state we reserve the right to cancel/redeem via any mechanism whatsover at a time of our choosing .

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Nicholas Blake

Apr 19, 2018 at 13:51

P B, The FCA letter suggests the issuers 'consider' supplying details of:

'The existence of any ability to cancel the shares at a price that is less than the prevailing market price without the specific assent of the affected holders either individually or as a class.'

One would hope that will provide the clarity you are looking for.

I expect 90% of the issuers to confirm they can repay the pref's at 100% via a court sanctioned scheme of arrangement. A few of these will also be redeemable pursuant to the procedures laid out in the articles and Chapter 3 of the Companies Act.

Nicholas

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The Accumulator: oil's rally sparks Trump anger

by Daniel Grote on Apr 20, 2018 at 16:31

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