What happened?
In 2018 Aviva plc announced that it was considering cancelling its preference shares. In the announcement (the Announcement), which formed part of its preliminary results announcement, Aviva included the following statement: 'we have the ability to cancel preference shares at par value through a reduction of capital subject to shareholder vote and court approval. The preference shares carry high coupons that are not tax-deductible and they will not count as regulatory capital from 2026. As we evaluate the alternatives, one of the things we are considering is how to balance the interests of ordinary and preferred shareholders.'
The reference to par value / nominal value was key as when the Announcement was released the preference shares were trading above par. The impact of the Announcement was such that many investors sold their preference shares with the intention of avoiding a loss when the shares were cancelled at par. At the close of trading on the day the Announcement was released, the market price for the preference shares had fallen by between 20 per cent and 26 per cent.
In addition to the controversy over the reference to par value, Aviva also had to address the fact that when issued the preference shares had been described as 'irredeemable'. Despite this description, as a result of the terms of issue and section 641 of the Companies Act 2006, Aviva technically had the ability, subject to shareholder approval and the sanction of the court, to cancel the shares at par.
Aviva subsequently announced that 'Since the full year results announcement on 8 March 2018, Aviva plc ('Aviva') has heard a wide range of views on its preference shares, has spoken to a large number of investors and has received strong feedback and criticism. As a result Aviva has listened. Aviva announces that it has decided to take no action to cancel its preference shares.'
A payment scheme for affected preference shareholders was subsequently put in place. This benefitted shareholders who sold the preference shares at a share price that was lower than the price to which the preference shares returned following the announcement that Aviva had no plans to cancel the preference shares. This scheme was intended to put those shareholders in the same financial position they would have been in had they sold their preference shares following the second announcement.
FCA decision
On 26 October 2020, the FCA published a statement that Aviva had contravened certain provisions of the Listing Rules and the Transparency Rules. This is a public censure for the purposes of section 91(3) of FSMA 2000. The details of the decision are contained in a Final Notice issued by the FCA which is available here.
The FCA found that the language used in the Announcement was reasonably capable of giving the holders of the preference shares and the market the impression that Aviva intended to retire some or all of the preference shares in 2018 and that it was probable Aviva would seek to do this by exercising the right to cancel at par without compensatory measures, when this was not the case.
What failings did the FCA identify?
The FCA criticised the language used in the Announcement which concerned the cancellation of the preference shares (referred to as the 'Key Statement'). It found that Aviva failed to take reasonable care to ensure that the Key Statement was not misleading and did not omit anything likely to affect the import of the information contained in it.
In particular, the FCA noted that:
- it was reasonably foreseeable that holders of the preference shares and the market more generally would be misled by the Key Statement, as it omitted matters that were likely to affect the import of the information in it
- Aviva failed correctly to assess its obligations under LR 1.3.3R and DTR 1A.3.2R
- Although Aviva sought advice from external professional advisers, it failed to obtain specific advice in relation to compliance with LR 1.3.3R and DTR 1A.3.2R
- The potential for the Key Statement to mislead the holders of the Preference Shares and the market by the omission of information that was likely to affect the import of the information contained in the Key Statement should have been obvious to Aviva if it had properly considered its obligation under the Listing Rules and the Transparency Rules.
Which rules were breached?
The FCA found that Aviva had breached the following rules:
- LR 1.3.3R (Misleading information not to be published) which states that an issuer must take reasonable care to ensure that any information it notifies to a regulatory information service or makes available through the FCA is not misleading, false or deceptive and does not omit anything likely to affect the import of the information
- DTR 1A.3.2R (Misleading information not to be published) which states that an issuer must take all reasonable care to ensure that any information it notifies to a regulatory information service is not misleading, false or deceptive and does not omit anything likely to affect the import of the information.
What are the lessons for listed companies?
There are two main lessons. First, the contents of any regulatory announcement should be reviewed by reference to LR 1.3.3R and DTR 1A.3.2R. If the Announcement had given a more accurate impression of the issuer’s intentions as regards the preference shares then it is likely that the FCA would have reached a different conclusion. For example, the Announcement could have:
- made it clear that Aviva had not in fact made any decision to cancel the preference shares and that there was no current intention to take any action in respect of the preference shares
- outlined the options being considered by Aviva and the key matters which required further consideration before any firm decision was taken.
Second, issuers considering the cancellation of 'irredeemable' preference shares should consider any cancellation carefully and in particular the terms on which any cancellation will be effected so as to avoid a repeat of this situation. A key issue for consideration will be whether preference shareholders should receive more than par. Even though Re Hunting plc [2004] EWHC 2591 (Ch) is authority for cancelling the shares at par, issuers are likely to be much more cautious following Aviva’s experience in 2018. A cash offer by the issuer to preference shareholders seems the more likely approach with the offer price being set by reference to the market price of the shares rather than their par / nominal value.
How can we help?
If you would like to discuss continuing obligations of listed companies, please speak to your usual contact at Burges Salmon or Nick Graves, head of the firm's corporate team.