Protection against dilution

A company can raise substantial funds very quickly, taking advantage of a favourable market situation.

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This year has seen several successful share issues by listed companies. Issues excluding pre-emptive rights, conducted in a way that does not require a prospectus, are by far the most popular. It is standard practice to address issues to qualified investors, and sometimes also to wealthy individual investors. Along with excluding pre-emptive rights, issue resolutions provide for mechanisms to prevent dilution, although their effect is usually limited to the shareholders who can participate in the offering conducted. Such shareholders receive preference in the allocation of shares in the new issue, which allows them to retain their existing shareholding, provided that they participate in the recapitalisation of the company. This is how the issues of CCC, Selvita and Ryvu were conducted.

The benefits are clear. A company can raise substantial funds very quickly, taking advantage of a favourable market situation. At the same time, it avoids the labour-intensive and lengthy process of preparing a prospectus. On the other hand, it is necessary to sacrifice the right of minority shareholders to retain their existing shareholding. They usually cannot participate in such an issue.

It can be argued that since the exclusion of pre-emptive rights occurs in accordance with all the requirements, there is no problem. However, it is possible to seek solutions that would reconcile the conflicting interests, namely the speed of raising capital by the company and the right of shareholders to retain their share in the company. Of course, one may rightly call for reducing the time for prospectus approval, but it is obvious that we will never find a solution as quick as an issue without a prospectus carried out through accelerated book-building (ABB), often closed a few days after the issue resolution.

An interesting solution is the one used e.g. on the Norwegian market, where immediately after the offering addressed to selected investors, an issue for shareholders is carried out in order to provide them with an opportunity to prevent dilution. It is a remedial issue of sorts, to repair the affected shareholding. The offering is addressed to those who did not take up shares in the issue without a prospectus. This time the offering is based on a prospectus. By taking up shares in such an offering, the shareholder maintains their existing share in the company’s capital, even though it decreased as a result of the earlier issue addressed to financial institutions. The transaction is thus divided into two issues: a quick private placement, followed by a prospectus issue to shareholders. It is a win-win situation. It seems impossible to accuse the company of infringing the principle of equal treatment of shareholders. For more details, see the documentation of the issues conducted by Bergenbio ASA this year (prospectuscurrent reports).

Such an elegant solution.

P.S. Paweł, thanks for drawing my attention to this transaction!

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