In a Dear CEO letter published on Thursday, the UK financial services watchdog told listed issuers of the so-called “irredeemable” fixed income shares that it is conducting a review of the marketplace, including ensuring investors have access to the information they require to properly assess the risks and rewards of owning the shares.
Only 386 firms have preference shares, a hybrid of fixed income and equity, listed on the London Stock Exchange compared with 2,000 firms that have shares listed on the LSE’s main or Aim market. Holders are entitled to a fixed dividend and rank above ordinary shares but carry no vote on company issues and do not offer exposure to a company’s trading fortunes.
The regulator’s review comes just weeks after it announced it was investigating insurance giant Aviva for market abuse, following its decision to cancel £450m of preference shares. The move sent shockwaves through the wider preference shares market, which fell as much as 30%.
Aviva ultimately backtracked on its initial plans, but campaigners urged the UK regulator to take action on the wider preference shares market.
“It only takes another issuer to come out with some aggressive noises and it is all going to start again,” preference shares campaigner Mark Taber told Portfolio Adviser at the time.
In today’s announcement, the regulator said it is not aware that other listed companies with irredeemable shares have clarified their position on whether they plan to cancel their preference shares.
Moving forward, the FCA said that listed companies will need to consider whether any intention to cancel or retire a class of irredeemable shares at a price “based on factors other than the prevailing market price” constitutes inside information under Article 7 of the Market Abuse Regulation.
Firms should ensure the original prospectus for the shares, details of any changes made after the issue of the shares, articles of association of the issuer of the securities and a Q&A or similar document are available to holders and potential holders so that information is clear and comprehensible, said the regulator.
Specifically, preference share issuers should be able to address:
o The extent to which the rights attaching to the shares can be changed by the company without specific resolution of the affected class of securities;
o 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; and
o Whether the company has made a decision regarding its approach to the use of either of the above, in particular where it has the ability to cancel the shares at par or at a price less than the prevailing market price (noting the point made above regarding the application of MAR).
“We recognise that there is a tension between investors’ desire to see a permanent resolution to any remaining concerns and the desire of company boards not to limit their (and their successors’) scope for action,” said FCA chief executive Andrew Bailey.
“However, in the event that you have publicly stated or propose to publicise your company’s intentions regarding such securities, I would urge you to also set out the governance process and the approach to disseminating any future changes you might make.”
