The rights issue: get the details right

One of the methods of raising finance detailed by Robert Lovell in his article ‘AccountingWEB guide to alternative finance 2012’ was equity finance which entails the selling of a stake in the ownership of the company in return for cash or other form of assets.

Business angels and venture capitalists were mentioned but there is one source of funding that might also be possible under this heading - the rights issue.

Up until the credit crunch rights issues were a relatively rare method of raising finance because banks were ready and willing to lend at affordable interest rates. Now matters have changed and raising money via this method has become a more attractive proposition. A major disadvantage to equity financing can be the difficulty of actually finding buyers for the shares and if a buyer is found they invariably want a large stake of the business for their risk (as the BBC programme ‘Dragons Den’ made all too clear!). With a rights issue the buyers are already there and know the business; assuming, of course, that the company has more than one shareholder and that those shareholders are able and willing to raise the finance available.

If a company does decide to go down the rights issue route, what are the practicalities?

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  • Check the company’s articles to confirm that there is no authorised share capital
  • Check the articles to see whether the directors actually have authority to issue the shares
  • Approve resolutions as required
  • Issue letters to all shareholders
  • Directors need to meet to confirm the names and number of shares taken up
  • Issue relevant share certificates
  • Submit form SH01
  • Update the register of members

Continued...

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