Cash boxes have, for some years, been used successfully by UK listed companies to raise money through a placing of shares, or in conjunction with convertible bond or rights issues.
Now, more than ever, companies need fast, flexible and cost-effective ways of raising much-needed cash to safeguard the future of their businesses and their staff. The cash box structure is an option worth considering for UK public companies listed on AIM or London's Main Market ("Issuers") that are in this position and looking for a solution.
This briefing provides a summary of why cash boxes are used, how they work, and why they are commonly structured using a Jersey vehicle. We hope it assists Issuers and their advisors in these unprecedented times.
Why use a cash box?
Rights issues and placings have long been considered the favoured method for raising capital, but an Issuer looking to raise finance in this way can be faced with a number of complexities which can be both time consuming and costly to address.
Placings normally issue at a discount to market price and rights issues can take time to implement. In addition, Issuers needs to factor in the cost of dealing with the UK statutory pre-emption restrictions which ensure the offer of new shares on a pro rata basis to the existing shareholders. Whilst pre-emption restrictions are shareholder protections put in place to avoid the dilution of existing investment, the administrative impact of contacting each shareholder for their consideration of a rights issue or a waiver of pre-emption rights is a costly exercise and can take a considerable amount of time.
By setting up a cash box structure using a Jersey company, an Issuer does not have to consider any pre-emption rights and is therefore able to raise finance in a more efficient and flexible manner and at a fraction of the cost. Using a cash box, the Issuer's shares are issued for non-cash consideration, so the statutory pre-emption provisions do not apply.
Additionally, a cash box can afford the Issuer the opportunity to obtain merger relief under the UK Companies Act 2006 so as to create distributable reserves instead of share premium as a result of the transaction.
How does a cash box work?
This chart shows the parties involved and the movement of shares and cash in a typical placing cash box structure.
The basic steps involved with this type of cash box structure are as follows:
- The Issuer incorporates a new Jersey company as the "cash box" vehicle ("Newco"), which is managed and controlled, and tax resident, in the UK.
- If merger relief is to be obtained, the underwriter or placing bank (the "Bank") subscribes for a small percentage of the ordinary shares in Newco.
- The Bank also subscribes for redeemable preference shares in Newco, which are paid up using the net placing proceeds received by the Bank from the investors (the "Placees").
- On admission of the placing shares to trading, the Bank transfers its fully paid shares in Newco to the Issuer in exchange for the Issuer issuing placing shares to the Placees identified by the Bank.
- The Issuer has thus issued placing shares to the Placees in exchange for receiving the Bank's shares in Newco, rather than for cash. Therefore, no statutory pre-emption rights apply on the issue of the Issuer's shares to the Placees.
- The Issuer now holds the shares in Newco and Newco holds the net placing proceeds.
- The Issuer can either redeem the redeemable preference shares (typically for the same price paid for them by the Bank), or can borrow the placing proceeds from Newco. Alternatively, the placing proceeds can be distributed to the Issuer as part of the winding up of Newco.
This basic process may vary depending on the circumstances, particularly where a cash box is used in conjunction with a rights issue. An alternative process involves the use of a new Jersey company to issue bonds to investors; these bonds are convertible into redeemable preference shares in the Jersey company, which on conversion are in turn exchanged for shares in the Issuer.
Why are Jersey companies used?
Jersey has become the jurisdiction of choice for incorporating cash box vehicles for a number of reasons, including the following:
- Newco can be incorporated quickly and specifically for the Issuer, with UK management and control being established from the outset.
- From a Jersey law perspective, no Jersey resident directors are required and no meetings need to be held in Jersey. As Newco is tax resident in the UK and non-resident in Jersey for tax purposes, Jersey's economic substance rules do not apply to it.
- Where the Issuer issues placing shares, no Jersey regulatory consents are normally required other than a consent to allow Newco to issue its own shares; this consent is obtained on Newco's incorporation. If a Jersey company is to issue convertible bonds, the necessary regulatory consents can typically be obtained in short order.
- No issues arise as to the source from which the redeemable preference shares can be redeemed by Newco, as a Jersey company can redeem shares from any source including share premium. The redemption process is quick and straightforward.
- When it is no longer needed, Newco can be wound up by its directors using a fast, easy procedure; no liquidator is required to wind up a solvent Jersey company.
- Newco will not be liable for income, capital gains or withholding tax in Jersey and no Jersey stamp duty will be payable on the issue, transfer or redemption of its shares.
- All Newco share transfers will be effected on its register of members in Jersey and all transfer forms and share certificates can be signed and kept in the island, meaning that no UK stamp duty should be payable.
- Jersey is conveniently located in the same time zone as the UK and many investors and institutional shareholders are familiar with Jersey as a well-regulated international finance centre with a wealth of experienced professionals.
Members of the Bedell Cristin team have many years' experience advising on cash box transactions. If you would like further information or wish to discuss using the cash box structure to assist you or your client's business, please do get in touch.
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