CG51757 - Reorganisations of share capital: compensatory open offers (COOs)

In an open offer (see CG51756) the price at which new shares are offered to existing shareholders is usually below the current market price of the shares, in order to encourage take-up. It may therefore be in the company’s interest to offer a substantial discount (for instance if market conditions are difficult) but existing shareholders, particularly those who do not intend taking up their entitlements, may be reluctant to approve an open offer on this basis. To address their concern there is a variant of the simple open offer which is often called a ‘compensatory open offer’ or COO, or an ‘open offer with compensation’.

This guidance describes a typical compensatory open offer (COO): it will always be necessary to find out exactly what steps any particular scheme consists of in order correctly to apply the TCGA to it.

Under a compensatory open offer an existing shareholder who does not take up their full entitlement to subscribe for new shares at a discount may instead receive a sum of money if those shares are bought by other investors at a price above the discounted rate which the shareholder would have paid.

In the first instance a shareholder will receive a preferential offer of new shares up to a maximum which is in proportion to their existing shareholding. The subscription price will be below the prevailing price of that class of share. If they do not take up that offer in full then the unsubscribed (or ‘rump’) shares are placed in the market by agents acting for the company as in a normal public offer. If the rump shares are placed at a price above that offered to the shareholders then the premiums are pooled by the agents, expenses are deducted from the total, and the net amount passed to the non-subscribing shareholders pro-rata to their entitlements not taken up. The balance of the amount received (ie excluding the premium and costs) is paid to the company.

A shareholder may be allowed to subscribe for shares over and above the number proportionate to their shareholding, in priority to non-shareholders. That further subscription may be at the same price as will be offered to non-shareholders, or at a lower price.

So after a compensatory open offer has run its course, an existing shareholder may be left with a number of combinations of shares:

• The original shares and no others (if they did not take up the offer at all, and they may have received cash compensation)
• The original shares plus new shares issued pro-rata to their original shares (‘pro-rata shares’)
• The original shares plus pro-rata shares, plus shares subscribed for out of the rump shares (‘further shares’). The further shares may have been received on preferential terms, either in the sense of priority allocation or discounted price (or both).