(Bloomberg Opinion) -- A liberalized regime for raising cash from shareholders during the Covid-19 crisis gave U.K. firms and their bankers an inch. Some appear to have taken a mile. Companies should remember their new freedoms come at the expense of fairness and are not meant to be the new normal.
A host of British firms have lately sold off sizable stakes in themselves in rapid-fire deals. Mammoth share sales normally have to be offered to all existing shareholders before anyone else, to protect them from being diluted. But that process takes weeks, and some crisis-hit companies need cash right now. So the guidelines were relaxed last month to allow the quick sale of up to 20% of a firm to whomever will buy it — ideally to current owners, but not necessarily.
The question is whether the managers taking advantage of the changes really have no choice.
For example, Glass Lewis & Co. LLC and Institutional Shareholder Services Inc. aren’t convinced that real-estate agent Foxtons Group Plc and casual dining outfit Restaurant Group Plc needed their respective 22 million-pound ($27 million) and 57 million-pound cash calls so urgently.
Both companies are in businesses where revenue has been turned off, and there’s no doubting the wisdom of raising funds. But neither appeared to be running out of cash when they did their deals.
The awkward truth is that the new system works pretty well for large, powerful shareholders. A British firm’s top institutional investors form a small list that’s easy for an investment bank to get on the phone. This select group can probably buy the bulk of a share offer by a mid-sized company whose stock price has fallen a lot. Indeed, Foxtons and Restaurant Group defended their actions, citing institutional shareholder support and the need to plan for all scenarios.
It’s the individual shareholder who loses out, especially when big institutions enjoy quick profits on the cash they put in. Companies don’t need retail investors for their money, but excluding this constituency is unfair nevertheless. Fortunately, technology is emerging that could help both parties. Fintech PrimaryBid Ltd. provides a potential avenue for notifying smartphone-carrying retail investors about imminent cash calls in their directly held stocks, and enabling them to buy in if the company has made arrangements.
It’s not perfect: Regulations mean the retail component is capped at a few million pounds before a costly prospectus is required, and PrimaryBid’s platform requires investors to take the price set by the institutions. But adding a portion of retail, with solid investor protections, would mitigate the injustices of these cash calls at the cost of not much extra hassle.
Technology aside, companies can protect individual shareholders by keeping equity issuance as small as possible. The fact so many firms are raising the full 20% of their capital suggests they are grabbing more than they need just for the sake of it. The temptation will always be give the most powerful shareholders a big allocation at a lower, and more dilutive, price. It may be legal — but reputations will suffer in the end.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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