What is an open offer
An open offer is when a company gives shareholders an offer to purchase additional shares (or other securities) at a discount. The number of shares they can purchase is always in proportion to their existing holdings. Every shareholder has a guaranteed right to participate.
An open offer is also known as a pre-emptive placing or placing subject to clawback.
New investors can also subscribe for new shares in the company (a placing) to the extent they are not taken up under the open offer.
What options does a shareholder have when a company announces an Open Offer?
When it comes to open offer shares, shareholders basically have three options, as follows:
- Take up all or part of the basic entitlement – buying shares at discounted prices increases their holding in the company. And they don’t have to pay dealing charges or stamp duty
- Don’t do anything – shareholders won’t receive a lapsed payment if they don’t buy their basic entitlement (which they do with a rights issue)
- Buy excess shares– they can buy more discounted shares on top of their basic entitlement. Any additional cash put forward is returned if this is scaled back.
An example of how and open offer works
So, let’s suppose you are a shareholder who owns 300 shares in a company. The company announces an open offer and you can buy one additional share for every five you own. So, that’s 60 overall. Known as the ‘basic entitlement’, it’s a guaranteed offer that can’t be scaled back. Let’s suppose that the company offers the shares at £1.50 each, rather than the market price of £2.75. This means you can purchase 60 shares for a total of £90, giving you a discount of £75 versus buying at the market price.
As you can see, shareholders generally receive an offer price which is usually at a discount to the prevailing share price. But generally, the discount is less than that for a rights issue.
There is no renounceable letter or other negotiable documents with an open offer. This is unlike a rights issue and means there is no provisional allotment of shares or trading by way of nil-paid rights. So if a shareholder does not subscribe to the new shares being offered, it means there is a dilution in their holding in the company. Furthermore, they don’t receive any compensation for the reduction.
A compensatory open offer (COO) may be offered. However, compensatory offers are rarely undertaken in practice. There is also no obligation for a company to undertake an open offer.
What triggers an Open Offer?
An open offer and a straight placing both provide alternative ways for a company to raise capital. It is not a secondary market offering where cash raised goes to other investors – it’s a primary issue and the capital raised goes to the company.
It’s usually carried out by a listed company so they can raise funds for a specific purpose. For example, the company may wish to raise funds for an acquisition or use it for working capital. Open offers are usually done at a lower price than the stock price.
However, placings are usually used for raising smaller amounts of cash. This is because they are simpler and cheaper with less administration required than for a rights issue.
Example of an Open Offer
In May 2021 leisure group Revolution Bars announced an Open Offer through the RNS (news service of the London Stock Exchange). They wanted to reduce their debt and continue refurbishing and expanding their venues. Retail investors were offered the right to buy one share for every 25 they owned at a price of 20p per share – 41.2% discount compared to the closing price the day before.
The distribution of this information will also be shown on the company’s website.
Open offer transactions are rare in the United Kingdom – this is because of the expenses associated with open offers and the FCA (Financial Conduct Authority) does not mandate that all existing shareholders are qualifying shareholders.
Sadly, shares are rarely issued on a pre-emptive basis. Most raises on the London Stock Exchange do not include a financial condition for an invitation or offer of securities to existing shareholders.
However, existing shareholders can try to gain more shares through use of the excess application facility. The gross proceeds of the open offer will end up at the company.
Open Offer vs Rights Issue: What’s the difference?
Open offers and rights issues (also known as a right offering) both provide companies with a means to raise capital.
What is a Rights Issue?
A rights issue also involves the offer of shares. It is usually at a substantial discount to their market price, to existing shareholders, pro-rata to their shareholdings.
The rights to subscribe for shares may be traded nil paid in the market during the rights issue offer period. This gives shareholders the ability to sell their rights. They can essentially monetise the discount but don’t have to take up the new shares themselves.
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The key differences between Open Offer vs Rights Issue
The key differences are summarised as follows:
With an open offer, shareholders cannot offer to sell the right to buy the shares to anyone else – which differs from rights issues as shareholders can.
A rights issue can be conducted on its own – an open offer is always conducted alongside another form of equity raise. This is most commonly a placing. A rights issue can be conducted on its own.
The purchase of additional shares – open offers shareholders can often purchase additional shares over and above their entitlement i.e. an Excess Application.
No period of trading in rights with an open offer – this means that shareholders must either participate in the offer or lose the benefit of any discount at which the new shares are offered. New shares can only be offered at a maximum discount of 10% if the issuer has a premium listing on the Official List.
However, it doesn’t apply to UK companies traded on AIM or companies with a standard listing on the Official List. It has been verbally indicated by The ABI that rights issues are preferred to open offers if the increase of share capital is more than 15% to 18%. The ABI also prefers open offers to be conducted at a maximum pricing discount of 7.5%. Discounts of greater than 10% are only allowed on receipt of specific shareholder approval.
An open offer is not made by way of a renounceable letter or another negotiable document – there is no provisional allotment of shares or trading by way of nil paid rights. As such if a shareholder does not subscribe to the new shares being offered there will be a dilution in such shareholder’s holding in the company. There is no possibility of any compensation for the reduction. A company may decide to structure the open offer in a way that offers shareholders who do not take up their open offer entitlement the opportunity to receive a share of the proceeds of the sale of the unsubscribed shares (the rump) in excess of the issue price, ie a compensatory open offer, but compensatory offers have rarely been undertaken in practice
The timetable is shorter with an open offer – the timetable for an open offer can be shorter than for a rights issue. An open offer period is open for ten business days (where statutory pre-emption rights have are disapplied), but this can run concurrently with any required general meeting notice period
An open offer is usually combined with one or more placings to institutional investors. The shares are often placed conditionally ‘subject to clawback’ by existing shareholders, such that the institutions’ entitlement is scaled back if shareholders subscribe for any of the placed shares. Alternatively, if there is a sufficient application of pre-emption rights in place, shares may be placed ‘firm’ with institutions, such that the firm commits unconditionally to acquire the shares, and those shares cannot be clawed back to the open offer.
Compensation – Shareholders who do not take up their entitlement will be compensated on a rights issue. Under this structure, they receive any value above the subscription price achieved by the underwriters in selling those shares not taken up. On a traditional open offer, shareholders who do not take up their entitlements receive nothing.
Rights issues are more common and generally preferred by the UK investment community (it’s worth noting that the regulations are different in other jurisdictions such as Canada, Australia, and the jurisdiction of the United States).
This is because they are just as effective in raising money for the company. They are also more convenient for those shareholders who do not wish to increase their holding, as they can simply sell the rights.
For further information on rights issues, you can read my walkthrough here.