5.10 Shares as a Source of Cash 223Existing shareholders have pre-emption rights.^438 There is a minimum statutory
period for the pre-emptive offer.^439 The Second Directive provides that the general
meeting decides on the withdrawal of shareholders right of pre-emption^440 or the
authorisation of a company body to decide on it.^441 According to the Second Di-
rective, pre-emption rights do not have to apply in relation to the sale of paid-up
shares (no increase in capital), allotment of bonus shares (no consideration),
shares paid up otherwise than in cash (not consideration in cash), or shares under
an employees’ share scheme (employee exemption).^442
Because of such exemptions, pre-emption rights can be circumvented by, for
example, vendor placing or the use of the cashbox structure.
Ferran has described vendor placing and the cashbox structure as methods to circumvent
existing shareholders’ pre-emption rights as follows: “In a vendor placing, the purchaser
technically allots new shares to the vendor as consideration for the asset acquired, thereby
coming within the non-cash exemption from pre-emption rights, but the new shares are then
immediately sold in the market on the vendor’s behalf with the result that the vendor re-
ceives the cash proceeds of the new issue. The ultimate outcome is thus that the vendor re-
ceives cash in return for the asset it has sold without the company having to go to its share-
holders for it or for permission to raise it on a non pre-emptive basis.”^443 “One step beyond
the vendor placing is the ‘cashbox’ structure where a third party vendor has no direct in-
volvement in the contractual structure. In a cashbox structure, the company in need of funds
(Issuer) extablishes a Newco and an offer of Newco ordinary and preference shares is made
to an intermediary bank. The bank gives an undertaking to pay the subscription price (X).
The bank then agrees to transfer the Newco ordinary and preference shares to Issuer in con-
sideration for the allotment of shares in Issuer to placees found by the bank. The placing
made by the Issuer is thus an issue for non-cash consideration. The bank then pays X to
Newco and the Issuer can thereafter extract it, for example by redeeming the preference
shares or by an intra-group loan. Cashbox structures tend to be utilized in conjunction with
an acquisition.”^444
(^438) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive): “Whenever the
capital is increased by consideration in cash, the shares must be offered on a pre-emptive
basis to shareholders in proportion to the capital represented by their shares.”
(^439) Article 29(3) of Directive 77/91/EEC (Second Company Law Directive): “... The right
of pre-emption must be exercised within a period which shall not be less than 14 days
from the date of publication of the offer or from the date of dispatch of the letters to the
shareholders.”
(^440) Article 29(4) of Directive 77/91/EEC (Second Company Law Directive).
(^441) Article 29(5) of Directive 77/91/EEC (Second Company Law Directive).
(^442) For English law, see Ferran E, Principles of Corporate Finance Law. OUP, Oxford
(2008) p 138.
(^443) Ferran E, Principles of Corporate Finance Law. OUP, Oxford (2008) p 139. For UK of-
fering structures, see Myners P, The impact of shareholders’ pre-emption rights on a
public company’s ability to raise new capital. An invitation to comment from Paul Myn-
ers (3 November 2004).
(^444) Ferran E, Principles of Corporate Finance Law. OUP, Oxford (2008) pp 139–140, refer-
ring to Wippell M, Stuart A, Cash Box Structures: Uses and Implications, Practical Law
for Companies 16(6) (2004).