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Capital Reorganisation Issues

UK Capital Reorganisation Issues

A Capital Reorganisation Issue is a process of restructuring a companies share capital by returning un-needed capital to shareholders. The process of implementing a Capital Reorganisation varies however as an example a company may decide to replace existing ordinary shares with a different class of shares. For example a typical approach is to replace each existing share holding, of say ten XYZ ordinary shares, with for example nine new XYZ ordinary shares plus ten new 'XYZ B' shares.

The 'B' shares are usually redeemable preference shares for which the company that are issuing the shares offer special purchase arrangements for investors wishing to sell. The terms of the 'B' shares make them generally unattractive to retain.

A Capital Reorganisation Issue is typically used to:

  • To reduce the number of ordinary shares in circulation; for example reduce the number of XYZ ordinary shares by 10%

  • To provide a mechanism that makes a capital payment to the shareholder (also referred to as a "Return of Capital" or "Capital Distribution"); for example provide 10% of the value of the original shareholding to the investor as capital payment through purchase and cancellation of the B shares.

  • To make a reduction in the company's market capitalisation.

Depending upon the relative values involved, the new share price may be little different from the old share price. Until the abolition of the Advanced Corporation Tax (ACT), this convoluted route was preferable to a special dividend, as capital restructuring avoided the need to pay ACT. Since ACT was abolished in April 1999, special dividends are now equally tax-efficient for the company, if not the taxpaying investor.

Managing Capital Reorganisation Issues using timetotrade
To enter a share reorganisation into timetotrade, follow the general instructions defined on the Share Reorganisation page. This section discusses how to enter specific details relating to Capital Reorganisation Issues.

When managing Capital Reorganisation Issues investors are typically told the ratio of old to new shares, or the number of new shares cancelled or received for each class of share associated with the reorganisation. In addition were multiple classes of shares are received the value of each class of share on the date of the Capital Reorganisation is required to apportion cost between the shares. Occasionally there may be cash payments from the disposal of fractional shares or a return of capital to share holders in the form of cash.

You can use timetotrade to either enter the ratio of old to new shares (e.g. 7:9), the value of the shares on the date of the Capital Reorganisation (e.g. £2.50) and any cash received (e.g. 78 pence) as illustrated:

CapReorg 1-1.png

Alternatively you can enter the number of shares received or cancelled by entering a positive number (e.g. "200") or negative number (e.g. -200) into the shares issued text box as illustrated for this second class of shares associated with Capital Reorganisation:

CapReorg 1-2.png

When entering the value of the different classes of shares on the date of the Capital Reorganisation, please note that the value must be entered must be in Pounds, Euro, Dollars etc and not in pence for UK stocks.

Typically Fractional Shares are not issued when reorganising UK companies. If fractional shares are not received leave the default 'Fractional Shares' drop down menu at 'No' as in "No fractional shares were received". Alternatively if you did receive fractional shares, change the fractional shares drop down menu to 'Yes'.

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