IFLR Webinar Series UK equity capital raising: options and examples3 June 2009

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Panellists

Simon Crompton, Editor, International Financial Law Review

Charles Howarth, Partner, Herbert SmithCharles advises on a wide range of equity and debt capital markets transactions. He has recently advised on rights issues by Hammerson and Bradford & Bingley and on a placing and open offer by Liberty International.

Will Pearce, Partner, Herbert SmithWill advises on corporate finance, M&A and capital markets transactions. He has recently advised on rights issues by Shanks Group, Wolseley and Bradford & Bingley, on the secondary listing of British American Tobacco on the JSE and on the restructuring and refinancing of JJB Sports.

Robert Farrer-Brown, General Counsel, LazardRobert joined Lazard in London in May 2007, prior to which he spent over 8 years in the Investment Banking Legal team at Credit Suisse. In 2009, Lazard has advised on rights issues by Hammerson, SEGRO, Greene King, Cookson, Aquarius Platinum and Great Portland Estates and placings by SIG and SSL international.

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Initial public offerings slow down …

• Volume and value of and funds raised by UK Main Market initial public offerings has decreased over the last three and half years

In 2006, 59 new issuers were admitted to listing on the UK Main Market with a combined market cap of £21.6 billion raising some £9.1 billion

In 2007, 51 new issuers were admitted to listing on the UK Main Market with a combined market cap of £19.8 billion raising some £7.6 billion

In 2008, 23 new issuers were admitted to listing on the UK Main Market with a combined market cap of £6.5 billion raising some £3.1 billion

In first 4 months of 2009, one small VCT IPO and one step up from AIM to the UK Main Market

Source: London Stock Exchange Statistics, 31 May 2009

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… as rights issues take off

• Popular in early 1990s, spike of rights issues in 2002 and well and truly returned in 2008

In 1998 to 2007, UK Main Market listed companies completed over 220rights issues raising approximately £34.9 billion

In 2008, UK Main Market listed companies completed 14 rights issues raising approximately £27.1 billion

In first 4 months of 2009, UK Main Market listed companies have completed 14 rights issues raising approximately £21.8 billion

• If 2008 was the year of the banks, 2009 (so far) belongs to the property companies

Source: London Stock Exchange Statistics, 31 May 2009

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Current drivers for raising equity finance• Varied use of proceeds, but generally debt or acquisition related

• Strengthen balance sheet or reduce debt

avoid triggering debt covenantsregulatory reasons, e.g. bank capital ratiosprovide working capitalavoid asset disposalsrepay maturing debt facilities

• Finance acquisitions, organic growth or other capital expenditure

new debt finance may not be available or terms unattractiverepay short-term acquisition finance

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Size of Offering Discount % Capital Issued

Date Issuer Value (£M) Weight Gross TERP Existing Enlarged Fee(1) Underwriters Use of Proceeds22 May 09 Mecom 141 6 for 1 (70.0%) (25.0%) 600.0% 85.7% 4.75% JPMorgan, Cenkos Securities Debt21 May 09 Shanks 71 2 for 3 (50.8%) (38.3%) 66.7% 40.0% 3.50% RBS Hoare Govett Acquisition20 May 09 Shaftesbury 158 2 for 3 (52.2%) (39.5%) 66.7% 40.0% 4.00% JPMorgan, Merrill Lynch Acquisition

18 May 09 Great Portland Estates 175 8 for 11 (53.4%) (39.9%) 72.7% 42.1% 3.25% Credit Suisse, JPMorgan Acquisition

13 May 09 Marshalls 37 2 for 5 (46.1%) (37.9%) 40.0% 28.6% 3.25% Citi, Numis Debt11 May 09 Travis Perkins 314 7 for 10 (51.6%) (38.5%) 70.0% 41.2% 3.26% Citi, HSBC Debt11 May 09 Lonmin 316 2 for 9 (44.5%) (39.6%) 22.2% 18.2% 3.25% Citi, JPMorgan Debt08 May 09 3i 732 9 for 7 (60.2%) (39.8%) 128.6% 56.3% 3.25% JPMorgan, Merrill Lynch Debt01 May 09 Informa 255 2 for 5 (48.9%) (40.6%) 40.0% 28.6% 3.88% Merrill Lynch, RBS Hoare Govett Debt30 Apr 09 DSG International 311 5 for 7 (62.7%) (48.1%) 104.7%(2) 51.2%(2) 3.50% Citi, JPMorgan Debt23 Apr 09 Greene King 208 3 for 5 (51.2%) (39.6%) 60.0% 37.5% 3.50% Deutsche Acquisition26 Mar 09 Aquarius Platinum 131 1 for 9 (37.5%) (34.9%) 26.8%(2) 21.2%(2) 5.00% Merrill Lynch Acquisition25 Mar 09 Premier Oil 171 4 for 9 (49.0%) (39.9%) 44.4% 30.8% 3.50% Deutsche, Barclays Capital, HSBC, RBC Acquisition19 Mar 09 Inchcape 249 9 for 1 (88.2%) (42.7%) 900.0% 90.0% n/a Merrill Lynch, HSBC, RBS Hoare Govett Debt06 Mar 09 Wolseley 1,051 11 for 5 (75.8%) (47.1%) 220.0% 68.8% 3.50% Deutsche, UBS, BNP, RBS Hoare Govett Debt04 Mar 09 SEGRO 524 12 for 1 (86.9%) (33.9%) 1200.0% 92.3% 3.66% Merrill Lynch, UBS Debt

02 Mar 09 HSBC Holdings 12,853 5 for 12 (47.5%) (39.0%) 41.7% 29.4% 3.25% JPMorgan, Goldman Sachs, HSBC, BNP, Credit Suisse, RBS Hoare Govett Debt

26 Feb 09 William Hill 365 1 for 1 (57.5%) (40.3%) 100.0% 50.0% 3.50% Citi Debt19 Feb 09 Land Securities 785 5 for 8 (51.0%) (39.1%) 62.5% 38.5% 3.50% Citi, JPMorgan, UBS Debt

13 Feb 09 Beazley 157 9 for 19 (20.7%) (14.9%) 49.5%(2) 33.1%(2) 3.75% Numis Securities Acquisition

12 Feb 09 Catlin 219 2 for 5 (47.3%) (39.0%) 40.0% 28.6% 3.25% JPMorgan, UBS Acquisition

12 Feb 09 British Land 767 2 for 3 (52.5%) (39.9%) 66.7% 40.0% 3.50% Morgan Stanley, UBS Debt

09 Feb 09 Hammerson 609 7 for 5 (62.2%) (39.2%) 140.0% 58.3% 3.25% Citi, Deutsche Debt29 Jan 09 Cookson 255 12 for 1 (88.2%) (36.6%) 1200.0% 92.3% 4.50% JPMorgan, Merrill Lynch Debt29 Jan 09 Xstrata 4,116 2 for 1 (66.3%) (39.6%) 200.0% 66.7% 3.25% Deutsche, JPMorgan Debt27 Jan 09 Workspace 87 5 for 1 (67.7%) (25.9%) 500.0% 83.3% 4.00% Panmure Gordon, Investec Debt

Recent UK rights issues: key terms

Notes: (1) Underwriting Fees; (2) Takes account of placing

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Three topics for discussion

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Secondary offerings

• Most common methods of raising equity capital

rights issueopen offerplacingplacing and open offer

• All involve issue of new shares for cash

• English companies with a primary listing need to consider

basic company law requirementsadditional Listing Rule provisionsinstitutional investor expectations

• Difficult decision: which method of raising capital is most appropriate

• Number of factors come into play: pre-emption rights, limits on size of offering and on pricing and requirement to seek shareholder approval

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Pre-emption rights

• Existing shareholders have right of first refusal in proportion to other existing holdings on further issues of “equity securities” (s89 CA 85, LR 9.3.11)

• “Equity securities” include

shares (including treasury shares)rights to subscribe for shares (e.g. warrants)securities convertible into shares (e.g. convertible bonds)

• Pre-emption rights do not apply to

issues for non-cash considerationshares with fixed distribution for income and capital (e.g. preference shares)shares allotted or to be allotted for an employee share scheme

• Pre-emption rights can be disapplied by special resolution

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Limits on offering size

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Limits on pricing of offer

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Shareholder approval

• Generally approval will be needed

authority to allot sharesdisapplication of pre-emption rights increasing share capitalreorganising share capital to avoid issuing new shares at a discountamendment of articles to incorporate rights of new securitiesapproval of Class 1 acquisitionwhitewash for Code purposes (for strategic investor or underwriter)

• Routine annual approvals will be sufficient for

certain smaller share issuespre-emptive rights issues

• Reduction of notice period for special resolutions to 14 clear days

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Rights issues

• New shares are issued for cash, often at a substantial discount to market

• First offered to existing shareholders pro rata to their existing shareholding through an offer of renounceable rights to subscribe for new shares for cash

certificated shareholders sent a “provisional allotment letter” or “PAL” setting out how many new shares they are entitled to subscribeuncertificated shareholders have “nil paid rights” credited to their CREST accounts

• Shareholders have a number of options: take-up their rights in whole or in part, “cashless take-up”, sell rights nil paid or doing nothing

• Company makes arrangements for sale of new shares not taken-up (the “rump”) or failing which for subscription by the underwriters (the “stick”)

• Even “lazy shareholder” may receive a cash payment if new shares provisionally allotted to him are sold in the market for more than the subscription price

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Rights issues cont.

• New shares offered for cash to current shareholders pro-rata to their existing holdings

• Timetable: longer than for a placing or open offer with a typical minimum timetable of 17 days without a general meeting (or 34 days with a general meeting)

• Pre-emption rights: can be structured to comply with s89 pre-emption rights, but more commonly shareholder approval sought to opt out of s89

• Advantages in disapplying s89

fractional entitlements can be aggregated and sold for issuer’s benefitoverseas holders in difficult jurisdictions can be excluded (if not the offer must be made to them via a Gazette notice)shorter offer period in Listing Rules than under s89generally necessary when multiple share classes or convertibles

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Rights issues cont.

• Main disadvantage in disapplying s89 is additional time required to convene a general meeting (although it may be required in any event)

• Discount: no restriction, deep discounts common

• Prospectus: required as offer to the public and admission to trading

• ABI’s preferred option for large issues (>15% to 18%) and/or deeply discounted issues (>7.5%) due to increased options for existing shareholders

• Short selling during rights issue periods and in anticipation of rights issues can cause problems e.g. HBOS shares fell 40% and an investigation ensued

• Increasing trend for underwriting by major shareholders or new investor instead of or together with investment banks

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Illustrative rights issue timetablePHASE I - PREPARATION

PHASE II – LAUNCH TO LATEST DATE FOR ACCEPTANCE (ASSUMING GENERAL MEETING ON 14 DAYS NOTICE)

D-28 D-21

Documents submitted to UKLA

D-14

Pre-marketing

D-2

Board meetingto approve the

rights issue

D-1

Certificates for new shares despatched to certificated

shareholders

Company receives balance of funds and non-accepting

shareholders receive premium (if any)

Subscribers procured for the “rump” and sub-underwriters

informed of the “stick”

D+32/33(latest time for placing rump is 2 days

after the close of the rights issue)

Commencement of dealings in new shares fully paid /New shares credited to

CREST accounts

D+31(offer must be open

for min 10 business days)

Latest date for splitting nil paid

rights

D+27

Dealing in the ex rights shares and

nil paid rights commences

D+17(day after EGM)

EGM /PALs despatched

D+16(minimum of 14 days

after posting)

Record date

D+7(usually a week

before the EGM)

Rights issue announcement /Circular posted

D

Latest date for acceptance and payment in full

D+32

PHASE III – COMMENCEMENT OF DEALINGS AND RUMP PLACING

Working capital reviewDrafting of Circular and Prospectus

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Open offers

• Offer to existing shareholders to subscribe new shares for cash pro rata to existing shareholders

• Shareholders are sent an application form rather than a PAL

• Subscription right cannot be traded and has no value

• No arrangements made for sale of rights and lazy shareholders are diluted and receive no payment

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Open offers cont.

• New shares offered for cash to current shareholders pro-rata to their existing holdings

• Timetable

10 business days under LSE Rules21 clear days if s89 needs to be complied withif shareholder approval is required, meeting notice period can run concurrently with the offer period

• Pre-emption rights

generally used to comply with s89 (e.g. “claw-back” with a placing)pre-emptive rights could be disapplied

• Maximum discount: 10% LR 9.5 and 7.5% ABI

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Open offers cont.

• Prospectus: required as offer to the public and admission to trading

• Cheaper for companies but less flexible for shareholders than rights issue, especially retail shareholders

no trading in nil paid rightsshares not sold on the shareholders’ behalfshorter timetable

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RIGHTS ISSUES

(NO EGM)

Prospectus preparation (>3 weeks)

UKLA review (3/4 weeks)

Launch (D day)

Trading in rights (D+1 to D+15)

Rump placing (D+16/17)

Proceeds to company (T+3)

Prospectus preparation (>3 weeks)

UKLA review (3/4 weeks)

Launch (D day)

Offer period and notice period

EGM (D+16)

Announce results

Proceeds to company (T+3)

Rights issue vs. open offer timetable

RIGHTS ISSUES (EGM)

Prospectus preparation (>3 weeks)

UKLA review (3/4 weeks)

Launch (D day)

EGM (D+16)

Trading in rights (D+17 to D+31)

Rump placing (D+32/33)

Proceeds to company (T+3)

OPEN OFFER(EGM)

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Placings

• Non pre-emptive offer to an investor to subscribe new shares for cash

• Documentation will depend on structure of placing

• May take different forms

vendor placingaccelerated bookbuilt placing

• Existing shareholders are diluted and receive no payment

• Can be done very quickly if no shareholder approval is required

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Placings cont.

• An issue for cash on a non pre-emptive basis, although existing major shareholders often included

• Timetable: typically announce and book build on one day

• Pre-emption rights: must be disapplied or avoided

use existing disapplication (typically 5%)make subject to open offer “claw-back” over whole or partbuild book and provisionally place shares, but with placing subject to shareholder approvaluse vendor placing (on acquisition) or “cash box” structure so that the consideration for the issue is shares not cash

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Placings cont.

• Maximum discount: maximum 10% under LR 9.5, existing disapplication typically 5%

• Prospectus: generally structured so that not required

less than 10% of share capitalnot offered to the public, typically institutional investors only

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Cash box structure

Ordinary shares

Cash

Redemption of preference shares

Cash

PLC JerseySPV

Bank

PlaceesNew ordinary

shares

Ordinary

share

s

and re

deemab

le

prefere

nce sh

ares

Ordinary shares

and redeemable

preference shares

Cash

Illustrative cash box structure Additional considerations?

• Structure avoids pre-emption rights as issue of new shares for non-cash consideration, but there are some legal and investor relations concerns

• ABI letter to LIBA and FTSE 100 in February 2009

• Generally used for issues of 5% to 9.9% of share capital: above 5% pre-emption disapplication, but below 10% to ensure no prospectus is required

• Excess over par value of new ordinary shares available as distributable reserves rather than share premium

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Key disclosure and risk issues

• Pre-marketing

greater prevalencetiming of approachnumbers of investors approached and information providedinteraction with DTR 2

• Underwriting

protection if underwriting off an announcement and draft prospectusconditions and termination rightsrestrictions on short sellingdealing with withdrawal rightsstructure of fees: commitment feessyndicate structure: late addition of co-leads

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Key disclosure and risk issues cont.

• Sub-underwriting

nature of commitment sought: set-off permitted?approach of the issuerpassing on short selling restrictionstrends in fee levels

• Structure of disclosure documents

split circular and prospectus?no automatic mailing of prospectus to investorsreview of circular by UKLA if “unusual features”

• Prospectus disclosure

use of incorporation by referencefocus on risk factorsproperty valuation reportsworking capital

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Alternative capital raisings

• As issuers seek to raise more cash, seeing more interesting structures

• Work within applicable limits of accepted market practice or risk of “amber” or “red” topping by ABI

• Government support for banks has seen use of preference shares (to date specific to bank recapitalisations)

• Beginning to see debt for equity swaps and banks agreeing to take warrants in restructurings

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Preference shares

• Issue of a new class of share carrying rights to a fixed dividend and fixed entitlement on winding up, both paid in preference to ordinary shares but after debt

• Usually redeemable

• Timetable: terms typically agreed with investors before announcement

• Pre-emption rights: generally not applicable as preference shares will have fixed rights to dividends and capital, but shareholder approval will still be needed for other reasons

• Prospectus: generally unlisted and no offer to public so not required

• Investors will often expect an equity upside too, often through a separate instrument e.g. warrants rather than rights in the shares

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Preference shares cont.

• Rarely seen in recent years, except for recent issues of preference shares to the Government by UK banks

• Key terms of Government preference shares in UK banks

12% dividend for five years, then LIBOR + 7%redeemablerestrictions on other dividendsrestrictions on executive payright to appoint board nominees

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Warrants

• Issued as equity upside to encourage take up of debt e.g. bond issue, mezzanine finance or as part of restructuring or debt-for-equity swap

• Timetable: as part of related debt finance or restructuring as equity kicker

• Discount: exercise price typically used to be 5% to 25% premium to current share price, but nil premium may be more realistic in current market

• Prospectus: will be required if listing on the Main Market, but not if listing on PSM with no offer to the public (although requirements of LR 4.2 will apply) and not required on exercise of warrants

• Remember impact of pre-emption rights

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Debt for equity swaps

• Balance sheet reorganised and creditors receive equity interests in consideration for restructuring of debt

• Alternative to insolvency process which is potentially value destructive for all stakeholders

• Existing shareholders tend to be significantly diluted where entity is close to insolvency (equity worthless) = cooperation of shareholders is required

• Depending on the state of distress, restructuring may also include cash injection through subscription for ordinary shares or preference shares

• Additional considerations for listed issuers

25% of shares in public hands (LR 6.1.19)related party transactions, whitewash/concert party analysisDTR disclosuresaccounting treatment of lender’s interestpensions financial support directions

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Recent innovative structures

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Recent innovative structures cont.

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Concluding observations

• Market practice has changed over the last 12 months and will continue to evolve

• Proposals of RIRG have been received positively: short term fixes by FSA, ABI etc have been welcomed, but await more fundamental change (e.g. review of PD prospectus regime, compensatory open offer rules, accelerated rights issues)

• More sectors likely to follow on from the banks, Lloyds companies, property companies etc

• Unlikely bank lending will return to levels where capital raising is not required by a substantial number of listed companies

• Increased use of alternative approaches to equity capital raising: challenging times for pre-emption rights when the only alternative for a company may be insolvency

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Questions?

Please note that these materials are based on publicly available information, are for general information only and are not intended to provide any form of legal or financial advice.

If you have any further questions, please do not hesitate to contact:

Charles Howarth+44 20 7466 2439charles.howarth@herbertsmith.com

Will Pearce+44 20 7466 2622william.pearce@herbertsmith.com

For further information about Herbert Smith, please visit www.herbertsmith.com