Cashbox Strategies And The Preemption Clause1

CASHBOX STRATEGIES AND THE PREEMPTION CLAUSE

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 Cashbox Strategies And The Preemption Clause2

CASHBOX STRATEGIES AND THE PRE-EMPTIVE CLAUSE

In the present economic turmoil and recession in the financial markets, the demand from

investors for equities and the equity prices have fallen together with the presence of debt

financing. Similarly, Corporations in the United Kingdom face the challenge of recapitalizing

their balance sheets and raising money from their assets. There are attractive assets available for

those with public funds to purchase at reasonable prices. The convertible and exchangeable

bonds offer a method of meeting the various needs and requirements.

Therefore, the restructuring exchangeable or convertible bonds issue using a cash box

structure is suggested to make it easier to implement the bond issue and is likely to offer

additional benefits. After a very long time, companies in the United Kingdom, we're evaluating

the convertible bond industry. This is either a way of raising capital without the need to be

penalized by inviting investors who have a high coupon or as a means of making money from the

existing securities and shares by placing it in the equity capital markets. From the perspective of

the investor, some leading funds managers have a belief that equity prices that are depressed are

likely to make exchangeable and convertible bonds to become essential and very attractive.

Pandemics have had substantial economic implications for companies and how they take

advantage of recognizing company law clauses that they had not regarded as essential before.

The statements compare two aspects that are to be considered where. One is the use of the

cashbox structure, where the banker states that “In times of crisis, being able to act quickly is the

most valuable thing to the shareholders. It has to either choose a quick, easy to a market deal

that salvages shareholders value and respects the vast majority of the preemption rights of

investors or an expensive and time consuming one that exposes the company to higher risks.”
 Cashbox Strategies And The Preemption Clause3

This study aims to examine the use of cashboxes as a safer way to raise cash by the company

regarding the tenets provided by the rules of the preemptive clause in the company’s act of 2006.

The use of cashbox strategies and the preemptive clause is one major escape that saved

numerous companies and offered more advantages than a rights issue.

The increased and unmatched effect of covid-19 caused intense pressure on the cash

flows of many companies as the travel restrictions and businesses continue. They are facing

many challenges and yearning for government support as measures continue coming to an end.

This is making listed companies consider using alternative ways of raising capital on an urgent

basis, resulting in the emergence of the popularity of the cash box structures. This note brings out

a summary of the cash box transactions and the benefits of using the cash box in raising equity or

capital.

With the advent of the COVID 19 pandemic, most companies were struck by incidences

of cash shortages amid a need to be stable and maintain their cash levels to secure continued

operating. The cashbox operation model allows companies to raise cash by an issue in securities

in return for non-cash consideration.1. It is a quick method that allows for the companies to issue

shares without the need to convene huge general meetings or even seek the permission of the

shareholders in doing so2. It is most convenient when there is either little or no application of
1
Meager, Lizzie. "UK companies embrace cashboxes in Covid-19 fallout." International

Financial Law Review (2020).

2
DAC Beachcroft. "What is a Cash Box Placing?" DAC Beachcroft. Last modified May 11,

2020. https://www.dacbeachcroft.com/en/gb/articles/2020/may/what-is-a-cash-box-placing/.
 Cashbox Strategies And The Preemption Clause4

preemption rights authority. As a result, a huge issue that a standard application procedure would

otherwise not permit is allowed. It even allows for a distributable reserve to be created. However,

the authority has to be obtained from the share allotment.

Cashbox refers to raising cash from the issue of equity securities which is defined by the

company's act of 2006. This act purposes as an issue for non-cash consideration. The cash box

structures enable an issuer to issue new shares based on the exception from the preemption needs

of section 561 of the companies act of 2006 and provided by section 565 of the same show. It is

a non-cash issue because the shares are issued with an exchange of the preference shares in a

specially purposed subsidiary. The only material asset for the particular purpose vehicle is cash,

provided on shares subscription by an investment bank. An investment bank must be able to

finance its commitment to fund the price for subscription on the preference shares from the

proceeds of the placing for the company's equity securities.

Also, the cashbox structure works by first the issuer incorporating a new company whose

shares are set at a fixed par value redeemable preference shares and ordinary shares. The issuer’s

investment bank or broker then subscribes to the common shares of the new company, a claim

that is over 10% of the entire value.3. The issuer holds the rest or balance, a value that is below

90%. It is a conditional requirement that the broker agrees to subscribe to the redeemable

preference shares of the new company at a price that is equal to the proceeds for placing the

claims and that it will be required to pay for its shares in the new company.4. Meanwhile, the

3
Pauls, William. "Unintended consequences? The impact of IRS notice 2014-52 on acquisitions

of US companies by non-US insurers and reinsurers." Journal of Financial Perspectives 4, no. 1

(2017).
4
Zhongming, Zhu, Lu Linong, Zhang Wangqiang, and Liu Wei. "SPACs in the gap." (2021).
 Cashbox Strategies And The Preemption Clause5

issuer agrees to allot new ordinary shares to places that the bank has selected regarding the

transfer to the issuer of the common shares and the preference shares held by the broker.5.

After this, the places then pay the placing price of the new ordinary shares to the bank as

a principal amount. The bank will use the placing proceeds to discharge its undertaking by

paying the subscription price of the preference shares in the subsidiary.6. Gradually, as the issuer

becomes the sole shareholder of the new company, they are then free to remove the cash in the

subsidiary as a loan or by declaring dividends redeeming the preference shares or even

liquidating it. Midway within the agreement, the issuer and the broker may agree to place a put

and call option agreement in between them7. This will safeguard such that if, for whatever

reason, the placing does not proceed. The put or call agreement will enable the bank to transfer

the ordinary shares in the subsidiary to the issuer.

The emergence and increased use of the cash box structure have been assisted by the

United Kingdom pre-exemption Group, which temporarily relaxes its statement of principles

because of the current circumstances, opening the door to the use of cash box structures in a wide

range of

events.

Box structures are among the critical benefit of cash; shares are to be issued based on the

relevant UK public company policy. Whether immediate or after bonds conversion, this is done

5
Meager, Lizzie. "UK companies embrace cashboxes in Covid-19 fallout." International

Financial Law Review (2020

6
DAC Beachcroft. "What is a Cash Box Placing?" DAC Beachcroft. Last modified May 11,

2020. https://www.dacbeachcroft.com/en/gb/articles/2020/may/what-is-a-cash-box-placing/.
7
Essers, Peter. "The concept of beneficial ownership from a Dutch perspective." The concept of

beneficial ownership from a Dutch perspective (2013): 9-28.

 Cashbox Strategies And The Preemption Clause6

based on a non-cash consideration. The statutory preemption provision set out in the United

Kingdom's companies act 2006 doesn't apply at all. Therefore the share issue can occur without

timing and other implication for seeking shareholders' approval to display the preemption rights

or doing a rights issue.

Two critical structures are used relating to cash box transactions. First, the name of the

company is incorporated and then managed and controlled in the United Kingdom and a resident

of the same country for tax purposes. The registered company issues redeemable shares to a

manager as a commercial investment bank typically referred to as the manager.

In all this, a major issue that arises through the entire process is the aspect of preemptive

rights and their importance. Preemptive rights allow the shareholder to buy more shares of any

future share issue of its common stock before their availability is made to the general public. The

prominent people who usually use this clause want to maintain their majority stock by future

acquisitions and their early investors.8. This should be incorporated in the company charter at its

formation to be aware of such. The clause makes them have relinquished their rights to

permission being sought from them for such future commitments. However, the company may

sometimes serve the shareholder with a subscription warrant that encourages them to buy a

specific number of shares in the new issue.

Over the years and in numerous court cases, many judges have delivered decisions

regarding preemptive clauses that have caused changes over time and developed the clause as it

has been refined over numerous circumstances and aspects incorporated into the specific cases.

In the case of CSPC group, the judge stated, "The company at this moment grants to the Holder

pre-emptive rights concerning issuances, other than Exempt Issuances, after the Initial Exercise
8
Bienz, Carsten, and Uwe Walz. "Venture capital exit rights." Journal of Economics &

Management Strategy 19, no. 4 (2010): 1071-1116.

 Cashbox Strategies And The Preemption Clause7

Date, by the company of its equity securities or securities or rights convertible into or exercisable

for equity securities, where issuance of those securities or rights would result in dilution of the

Holder's beneficial ownership of the Common Stock on a fully-diluted and as-converted basis,

taking into account all securities of the company held by the Holder which entitles the Holder to

acquire Common Stock at any time, including, without limitation, this Warrant, immediately

before the consummation of the proposed issuance.9” The rights grant the owner of the shares the

rights to buy any subsequently issued company shares until and unless they decide to revoke

them.

The main beneficiaries of the pre-emptive clause are the shareholders. Shareholders who

have the highest shareholding stand to win most because the clause enables them to easily

increase their shareholding by buying more shares when they see the need or want to. These

rights serve as protection from excessive dilution and the chances of loss of control.10. The

shares also come with a lower price than the market price as they are shareholders of the

company already and thus enjoy this benefit. The shares are most likely priced lower since the

shareholder is accorded the chance to acquire them before they hit the market, and the piece

9
Lexis Nexis. "Pre-emption Rights—private Companies with More Than One Class of Shares

and Unlisted Public Companies | Last modified September 30, 2021.

https://www.lexisnexis.co.uk/legal/guidance/pre-emption-rights-private-companies-with-more-

than-one-class-of-shares-public-unlisted-companies.
10
Lexis Nexis. "Pre-emption Rights—private Companies with More Than One Class of Shares

and Unlisted Public Companies | Last modified September 30, 2021.

https://www.lexisnexis.co.uk/legal/guidance/pre-emption-rights-private-companies-with-more-

than-one-class-of-shares-public-unlisted-companies.
 Cashbox Strategies And The Preemption Clause8

might most likely rise higher11. This effect motivates the shareholders to seek a higher profit

motive and secure a good position. Shareholders recognize and value these rights as crucial when

launching new ventures before turning profitable or making an IPO for a newly formed

company.

The preemptive rights also offer great benefits to the company itself. The company is in a

good position as selling the shares to its existing shareholders is cheaper than if it would be

trading in the market or selling to the general public where a lot of processes are undergone, and

many more costs are incurred in a bid to secure investors1213. This effect of a direct sale also

tends to reduce the cost of the capital. Hence the value of the firm is increased as a result. The

equity becomes less expensive and a preferable funding source through this method.14. This

effect has made it a quick, preferable, and effective means of raising funds by the company.

Many companies have adopted it as a technique capable of motivating additional incentives to

secure better performance and raise stock levels to make higher stock prices and generate higher

firm value in the subsequent stock issues.

11
Fried, Jesse M., and Holger Spamann. "Cheap-stock tunneling around preemptive

rights." European Corporate Governance Institute (ECGI)-Law Working Paper 408 (2018): 18-

33.
12
Ventoruzzo, Marco. "Issuing new shares and preemptive rights: a comparative analysis." Rich.

J. Global L. & Bus. 12 (2012): 517.

13
Mallin, Chris, and Andrea Melis. "Shareholder rights, shareholder voting, and corporate

performance." Journal of Management & Governance 16, no. 2 (2012): 171-176.

14
Spemann, Holger. "The "antidirector rights index" revisited." The Review of Financial

Studies 23, no. 2 (2010): 467-486.

 Cashbox Strategies And The Preemption Clause9

The shareholders choose the preemptive rights, who may decide to exercise them or

waive them. The shareholders may themselves decide on and not take up the shares offered

individually. However, different countries provide different perspectives regarding the

preemption of these rights for the entire company or the shareholders15. In the US, the Securities

exchange commission allows and provides a form that facilitates the removal of preemptive

rights from a previous agreement where both parties had both agreed to it.16. In the UK,

however, the approach is different in that the company must pursue and undergo a legal process

if it wishes to have its pre-emptive rights clause canceled. However, it allows for a waiver where

every shareholder signs a waiver of their preemptive rights.

While companies are seeking to understand and use preemption through cashbox offers to

their advantage, others may opt for rights issues. However, they differ significantly in that. For

the preemptions clause, the company does not have to wait for too long to have the needed cash;

it can raise cash easily from any source it desires as it allows for a wide range of sources to

provide cash through the offer17. However, the rights issues limit its scope to only the company's

existing shareholders, a beneficial aspect, especially when the company urgently needs cash18.

This delay would be unnecessary because the company values to suffer a reduction as the rights
15
Solomon, Jason M. "New governance, preemptive self-regulation, and the blurring of

boundaries in regulatory theory and practice." Wis. L. Rev. (2010): 591.

16
Delport, Piet. "Preemption rights and the sale of shares: case comments." SA Mercantile Law

Journal 15, no. 2 (2003): 264-270.

17
Ferran, Eilís, and Look Chan Ho. Principles of corporate finance law. Oxford University

Press, 2014.
18
Dhakal, Narayan Prasad. "Right Shares Issue in the Nepalese Stock Market." PhD diss.,

Faculty of Management, 2011.

 Cashbox Strategies And The Preemption Clause10

issue is usually valued lower than the market value.19. However, if the shareholder waives their

rights issues, then the shares become available to the market for a member of the general public

to purchase or whoever wishes to. The rights issue process is also a bit time-consuming hence

not suitable when the need for cash is urgent by the company.

While preemptions may be beneficial to the investors and the company, they are

sometimes disadvantageous. The preemption avoids the problem of concentrating ownership,

and the investors relinquish some of their rights to management20. This gives management more

power and control over the business, limiting the investors' say over cash management21.

Another limitation is that the company can also not check the ownership or control of the

shareholders when the preemptive clause is activated. The shareholders can gain a controlling

power such that they become a threat to the company and its management and even intimate a

takeover due to them continuously acquiring shares22. Also, the preemption clause might be

employed at times to acquire funds by management in a manner that is against the shareholder's

will. This clause accords management too much power that might cause friction between them

and the shareholders, causing disagreements.

19
Delport, Piet. "Preemption rights and the sale of shares: case comments." SA Mercantile Law

Journal 15, no. 2 (2003): 264-270.

20
The City Law School. Company Law in Practice. Oxford University Press, 2017.
21
Lawrence, Paul. "The Vagrancy Act (1824) and the persistence of pre-emptive policing in

England since 1750." The British Journal of Criminology 57, no. 3 (2017): 513-531.

22
Martynova, Marina, and Luc Renneboog. "A corporate governance index: convergence and

diversity of national corporate governance regulations." (2010).

 Cashbox Strategies And The Preemption Clause11

Conclusively, with more case laws in company law, major development is taking place

and changes that are reshaping how these laws were initially and how they are today. The

preemption clause has been made to undergo several of these changes such that for private

businesses and companies and across geographical boundaries, major differences are manifested.

Also, the classes of shares that a company has have been made to cause differences. However,

this clause's major benefit and preference allow the cashbox strategies to work. They are an

effective and fast cash source that companies use to save themselves and get cash to solve their

problems and gradually rid themselves of their troubles. More research is required in this area to

allow for the provision and making of this clause a more stable one that provides a clear

understanding of its execution's legal aspects.

23
The City Law School (Ed.). (2018). Company Law in Practice. Oxford University Press.

24
Yearby, R., & Mohapatra, S. (2020). Law, structural racism, and the COVID-19 pandemic.

Journal of Law and the Biosciences, 7(1), lsaa036.

25
Thomson, S., & Ip, E. C. (2020). COVID-19 emergency measures and the impending

authoritarian pandemic. Journal of Law and the Biosciences.

26
Thomson, S., & Ip, E. C. (2020). COVID-19 emergency measures and the impending

authoritarian pandemic. Journal of Law and the Biosciences.

27

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Thomson, Stephen, and Eric C. Ip. "COVID-19 emergency measures and the impending authoritarian
pandemic." Journal of Law and the Biosciences (2020).
 Cashbox Strategies And The Preemption Clause12

Bienz, Carsten, and Uwe Walz. "Venture capital exit rights." Journal of Economics &

Management Strategy 19, no. 4 (2010): 1071-1116.

DAC Beachcroft. "What is a Cash Box Placing?" DAC Beachcroft. Last modified May 11, 2020.

https://www.dacbeachcroft.com/en/gb/articles/2020/may/what-is-a-cash-box-placing/.

Delport, Piet. "Preemption rights and the sale of shares: case comments." SA Mercantile Law

Journal 15, no. 2 (2003): 264-270.

Dhakal, Narayan Prasad. "Right Shares Issue in the Nepalese Stock Market." PhD diss., Faculty

of Management, 2011.

Essers, Peter. "The concept of beneficial ownership from a Dutch perspective." The concept of

beneficial ownership from a Dutch perspective (2013): 9-28.

Ferran, Eilís, and Look Chan Ho. Principles of corporate finance law. Oxford University Press,

2014.

Fried, Jesse M., and Holger Spamann. "Cheap-stock tunneling around preemptive

rights." European Corporate Governance Institute (ECGI)-Law Working Paper 408

(2018): 18-33.

Gretchen, Kristoffel. "Discriminating Shareholders through the Exclusion of Pre-emption

Rights?–The European Infringement Proceeding against Spain (C-338/06)–." (2007):

571-592.

Lawrence, Paul. "The Vagrancy Act (1824) and the persistence of pre-emptive policing in

England since 1750." The British Journal of Criminology 57, no. 3 (2017): 513-531.

Lexis Nexis. "Pre-emption Rights—private Companies with More Than One Class of Shares and

Unlisted Public Companies | Last modified September 30, 2021.

 Cashbox Strategies And The Preemption Clause13

https://www.lexisnexis.co.uk/legal/guidance/pre-emption-rights-private-companies-with-

more-than-one-class-of-shares-public-unlisted-companies.

Mallin, Chris, and Andrea Melis. "Shareholder rights, shareholder voting, and corporate

performance." Journal of Management & Governance 16, no. 2 (2012): 171-176.

Martynova, Marina, and Luc Renneboog. "A corporate governance index: convergence and

diversity of national corporate governance regulations." (2010).

Meager, Lizzie. "UK companies embrace cashboxes in Covid-19 fallout." International

Financial Law Review (2020).

Pauls, William. "Unintended consequences? The impact of IRS notice 2014-52 on acquisitions

of US companies by non US insurers and reinsurers." Journal of Financial

Perspectives 4, no. 1 (2017).

Solomon, Jason M. "New governance, preemptive self-regulation, and the blurring of boundaries

in regulatory theory and practice." Wis. L. Rev. (2010): 591.

Spemann, Holger. "The "antidirector rights index" revisited." The Review of Financial

Studies 23, no. 2 (2010): 467-486.

The City Law School. Company Law in Practice. Oxford University Press, 2017.

Thompson Reuters Practical Law. "Cash Box Placing." Practical Law. Last modified 2015.

https://uk.practicallaw.thomsonreuters.com/1-107-5857?

transitionType=Default&contextData= (sc.Default)&firstPage=true.

Ventoruzzo, Marco. "Issuing new shares and preemptive rights: a comparative analysis." Rich. J.

Global L. & Bus. 12 (2012): 517.

Zhongming, Zhu, Lu Linong, Zhang Wangqiang, and Liu Wei. "SPACs in the gap." (2021).