Chapter 8 • Sources of long-term finance
Existing shareholders are forced either to increase or to liquidate
part of their shareholding
To shareholders given rights to take up additional shares, doing nothing is not a
sensible option. To preserve their wealth they must either take up the shares, and so
increase their investment in the business, or sell the rights, thus in effect liquidating
part of their investment. Neither of these may be attractive to some shareholders. This
could cause the shares of businesses that make frequent rights issues to become
unpopular, thus adversely affecting their market value.
It is, of course, always open to an individual shareholder to sell some of the
rights to obtain sufficient cash to take up the rest. This still requires action on the
shareholder’s part. In practice the vast majority of rights (thought to be about 90 per
cent) are taken up by existing shareholders.Dilution of control
Dilution of control need not occur with rights issues as existing shareholders are given
the opportunity, usually accepted, to retain the same voting power after the issue as
they had before.Some shareholders may not have the funds available to take up
the rights issue
This can be a particular problem with businesses whose shares are not listed on a
recognised stock exchange, since it may be difficult to sell the rights to a third party.Alternative Investment Market
Smaller businesses may not wish to be subjected to the rigours, and the accompany-
ing cost, of obtaining a full LSE listing for their shares. For such businesses the
LSE provides a separate market in which shares may be traded. This is the Alternative
Investment Market (AIM), which tends to cater for businesses whose shares have a
total market value of around £20 million, though many are either much larger or much
smaller than this.
The fact that a particular business’s securities are traded in the AIM should
warn potential investors that the requirements to obtain, and retain, a full listing for
its shares have not been met, though less rigorous ones will have been complied with.
This implies that such securities represent a more hazardous investment than would
those of a similar business that had obtained a full listing.
AIM has been seen as a step towards a business obtaining a full listing. Recently,
however, several fully listed businesses have transferred their listing to AIM. The
objective has clearly been to save the larger annual fee for being fully listed and, per-
haps, to avoid the cost and inconvenience of meeting the more stringent requirements
of a full listing.
AIM is discussed in greater detail, in the context of smaller businesses, in Chapter 16.8.4 Preference shares
Preference shares form part of the risk-bearing ownership of the business, but pref-
erence shareholders usually have the right to the first slice (of predetermined size)
of any dividend paid. As a result, preference shares are less risky, from an investor’s