UK: Rights Issues – Back in Fashion?

Last Updated: 14 March 2003
Article by Jonathan Deverill


Until recently, most people would probably have agreed that (with one or two notable exceptions) there had not been any significant rights issues by UK listed companies since the early 1990s. However, with the ground-breaking £5.9 billion rights issue announced by BT plc in May 2001 and then those undertaken recently by European insurers such as Legal & General and Zurich, there are signs that the rights issue is coming back into vogue as a means of raising fresh capital.

There are a number of commercial reasons why companies are now announcing rights issues. However, a "common thread" is the need to address certain legal issues which arise. This note contains a refresher on some key legal issues and a reminder of the principal stages in a rights issue timetable.


A rights issue has four basic elements:

  • existing shareholders are offered the right to subscribe new shares in proportion (more or less) to their existing shareholdings;
  • the new shares will be subscribed in cash and are typically offered at a discount to the market price of the shares;
  • a shareholder can realise value by selling his rights to subscribe new shares "nil paid"; and
  • a shareholder can also receive cash for taking no action at all, if the shares that he could have subscribed are sold in the market on his behalf at a price which exceeds the subscription price offered to him.

Rights issues are also usually (but not always) underwritten by the investment bank(s) advising the corporate issuer. The underwriter’s obligation is to subscribe any new shares which existing shareholders do not take up and which cannot then be sold into the market by the investment bank to third parties. In certain cases, however, a decision is taken not to have the rights issue underwritten because the extent of the discount to the open market price offered is deemed so attractive as effectively to guarantee the success of the new issue.

Clearly, underwriting is an important commercial issue for corporates and financial advisers alike to address. The longer the period between announcing the rights issue and expiry of the period for "nil paid" dealings (see below), the more expensive underwriting can be expected to be.


  • As a rights issue involves the issue of new shares, it is important to check that the issuer has sufficient authorised but unissued share capital and that the directors are authorised under Section 80 Companies Act 1985 to issue that share capital. Otherwise, it would be necessary to call an extraordinary general meeting to pass appropriate shareholder resolutions.
  • "Pre-emption rights" under Section 89 Companies Act 1985 – issues of new shares must be offered to existing shareholders first, to avoid dilution of their existing shareholdings. This can cause particular problems when a company has overseas shareholders in certain countries (such as Canada and the US) where offering the rights issue shares may involve compliance with strict securities laws. Convertible securities and shareholders’ fractional entitlements to new shares can also give rise to difficulties. Whilst in the case of overseas shareholders it may be possible to avoid the problem by making the offer of new shares through a statutory notice in the London Gazette (the so-called "Gazette route"), in many cases companies prefer to disapply the statutory pre-emption rights through a shareholder resolution under Section 95 Companies Act 1985.
  • A listed company must also have regard to the guidelines issued by the Investment Protection Committees to protect the interests of institutional shareholders. These, together with certain of the Listing Rules issued by the UKLA, restrict the amount of new shares which can be offered in a rights issue and the discount at which they may be offered, unless the new shares are first offered to existing shareholders broadly in proportion to their shareholdings.


The various steps in a typical rights issue would usually be as follows:

  • "Launch Date" agreed by the company and its financial adviser. Issues which would raise over £20 million must be notified to the Bank of England, which warns if there is a risk of a timing conflict with another rights issue.
  • The company and its financial adviser prepare the various documents which will be needed. These include a press announcement; a circular to shareholders (which will need to be a prospectus if, for example, the rights issue will result in an increase of 10% or more in the listed company’s share capital); provisional allotment letter, or PAL, the document representing a shareholder’s right to subscribe new shares; and (where necessary) an underwriting agreement between the company and its financial adviser. ¦
  • Application is made to the London Stock Exchange for listing of the new shares, the rights issue is priced and approved by the company’s board and relevant documents are signed in escrow.
  • Launch Date occurs.
  • The rights issue circular is sent to shareholders. Any required notice is placed in the London Gazette. The PALs are also sent to shareholders, either with the circular or, where a shareholder general meeting is required, following passing of the relevant shareholder resolutions.
  • Once the PALs have been sent to shareholders, the new shares will be admitted to the Official List and dealings will commence "nil paid" in the new shares. Dealing in "nil paid" rights will continue for a minimum of 21 days and those rights should have a value in the market unless the issue has been poorly received.
  • Once the "nil paid" dealings period has ended, the financial adviser (acting through the broker) normally has two business days to sell any shares not taken up, otherwise the underwriter (or any sub-underwriters) will subscribe those shares itself. This means that where a rights issue is underwritten, the company can be sure that it will raise a certain amount of money.
  • The Listing Rules require an announcement to be made without delay of the result of the new issue. However, where there is an underwriting arrangement, the issuer may delay notifying the result until the obligation of the underwriter to take or find others to take the shares is finally determined or lapses.


Companies should consider at the outset the following alternatives to a rights issue:

  • Open Offer – an open offer is an offer of new shares to shareholders in proportion to their existing shareholdings, with the discount at which they are offered limited to no more than 10% and no arrangements made (unlike on a rights issue) for shareholders to deal in "nil paid" rights. Open offers may be attractive to issuers because the discounts to the market price are usually less but they are less flexible for shareholders and the Investment Protection Committees have stated that above certain thresholds of size or discount they would prefer to see rights issues.
  • Cash Placing – this is a "quick and dirty" alternative to a rights issue. Shares are placed with subscribers found by the financial adviser in return for an agreed commission. As the shares being placed will not be offered to existing shareholders in proportion to their existing shareholdings, the statutory preemption rights will need to have been disapplied to the extent of the placing and (as indicated above) the Investment Protection Committees have issued guidelines on the extent to which this can be done, to protect the position of institutional shareholders.
  • Vendor Placing – this can provide a means of funding an acquisition. The target business is sold for shares in the purchaser but those shares are placed by the purchaser’s financial adviser and the resulting cash paid to the vendors of the business. Vendor placings are now rare because the accounting advantages of using them are no longer available. As technically the new shares are not issued for cash (they are issued in exchange for the target business instead), the preemption rules in section 89 Companies Act 1985 do not apply but the Investment Protection Committees require a clawback to enable existing shareholders to participate if the size or discount of the new issue exceeds certain thresholds.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.