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A cash box placing is a method of raising cash from the issue of equity securities structured as an issue of shares for non-cash consideration. This allows companies to issue shares without seeking any shareholder consent or convening a general meeting and is very useful for a company that needs to raise funds quickly. It allows for an issue when there is either none or not sufficient disapplication of pre-emption rights authority and enables a larger issue than would be authorised by a standard disapplication, although a general authority to allot shares is still required. In addition, this structure may allow distributable reserves to be created by using merger relief.
Note that this is in addition to the usual general authority required by the directors to allot shares
The issuer issues shares in exchange for the transfer to it of redeemable preference shares in a special purpose subsidiary. The only material asset of the subsidiary is the cash paid to it upon a subscription of shares by an investment bank (or broker). The bank/broker funds the subscription price for the preference shares from the proceeds of the placing of the company’s equity securities.
Whilst avoiding the pre-emption rules is one of the key advantages to a cash box placing, it also helps avoid the costs of producing and distributing a circular (where applicable) and notice of meeting, the delay in waiting for the requisite resolutions to be passed and the risk that the resolutions might not be passed.
How does the structure work?
The issuer incorporates a new company (Newco), most likely in Jersey, which will be established with par value ordinary shares and par value fixed rate redeemable preference shares (see section Why Jersey? below for further information).
The issuer’s investment bank or broker will subscribe for some of the Newco ordinary shares (usually in excess of 10%) and the issuer will hold the balance of the Newco ordinary shares (which must be below 90% if merger relief is required).
Conditional on the issuer’s new ordinary shares being listed or admitted to trading on AIM, the bank/broker will agree to subscribe for Newco redeemable preference shares at an aggregate price equal to the net placing proceeds (less commissions and other expenses in respect of the placing) and will undertake to pay to Newco the subscription price for those shares.
At the same time as step 3, the issuer will agree to allot new ordinary shares to placees selected by the bank/broker in consideration for the transfer to the issuer of the Newco ordinary shares and preference shares held by the bank/broker.
Placees pay the placing price for the new ordinary shares to the bank/broker as principal and the bank/broker will use the placing proceeds to discharge its undertaking to pay the subscription price for the preference shares in Newco.
Once the issuer becomes 100% shareholder of Newco (following steps 4 and 5), the issuer is free to extract the cash sitting in Newco by way of a loan, declaring dividends, redemption of the preference shares or a liquidation of Newco.
There will normally be a put and call option agreement in place between the issuer and the bank (or broker). In the event the placing does not proceed for whatever reason, a put and call option agreement will enable the bank/broker to transfer to the issuer the ordinary shares it holds in Newco.
What is it?
A large cash box structure or placing is a method used by a plc to raise funds quickly from institutional investors, like a book safe. It is a cheaper method of raising funds than a more traditional placing of shares, rights issue or plain vanilla debt financing.
Why use one?
The principal benefits of using a Jersey cash box structure are as follows:
• the statutory pre-emption provisions contained in the UK Companies Act 2006 (the Companies Act) do not apply where a Jersey cash box structure is used as the shares issued by a UK plc (UK plc) are issued for a non-cash consideration. This avoids the time and expense of seeking shareholder approval to disapply the statutory pre-emption rights or otherwise conducting a pre-emptive rights issue;
• the use of a Jersey money cash box structure may allow UK plc to create distributable reserves (rather than share premium) following the issuance of new ordinary shares by taking advantage of the merger relief provisions under the Companies Act; and
• investment banks and brokers find these structures very appealing as they keep underwriting risk and documentation to a minimum but at the same time maintain good commission levels.
How does it work?
• UK plc incorporates a Jersey private company as the “cash box” (Jersey NewCo). Jersey NewCo will usually be managed, controlled and tax resident in the UK therefore ensuring that HM Treasury consent is not required with regard to the issue or transfer of Jersey NewCo shares;
• Jersey NewCo issues redeemable preference shares to a manager (such as an underwriter or placing bank) (the Manager) pursuant to a share subscription and transfer agreement. The redeemable preference shares are fully paid up, with the Manager using placing proceeds received from investors identified by the Manager (the Investors) (at this point, Jersey NewCo becomes the “cash box”), like a key box. If merger relief under the Companies Act is to be availed of (i.e. relief from the creation of a share premium account on the issue of shares) the majority of the ordinary shares of Jersey NewCo will be held by UK plc and the remaining amount will be held by the Manager;
• the Manager pursuant to the share subscription and transfer agreement transfers all its shares held in Jersey NewCo to UK plc in exchange for UK plc issuing shares to the Investors. Therefore UK plc has issued shares for a non-cash consideration (i.e. in exchange for receiving the shares in Jersey NewCo) and, as such, avoids the statutory pre-emption provisions of the Companies Act. UK plc now holds all the issued share capital in Jersey NewCo and Jersey NewCo holds all the placing proceeds; and
• UK plc has several options now to recuperate the placing proceeds. Jersey NewCo can redeem the shares held by UK plc (typically for an amount equal to the placing proceeds), lend the placing proceeds to UK plc or distribute the placing proceeds to UK plc upon Jersey NewCo’s solvent winding-up.
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