At an extraordinary general meeting held on July 27, Bank of Valletta shareholders considered and approved resolutions to increase the issued share capital of their company to €1 billion and empower the board of directors to issue new shares. This is nothing new, as the bank has been raising its share capital for a number of years.
In fact, over the past few years, Bank of Valletta has issued new shares through the annual announcement of bonus issues. A bonus issue happens when all shareholders receive shares from the company on a pro-rata basis without the need to fork out any capital – they are given as a ‘bonus’.
These shares are not ‘free’, as the bank would be transferring funds from its distributable reserves to its capital account where they cannot be distributed.
These annual bonus issues have propelled the bank’s share capital to reach €420 million, from €111m a decade ago. What is different about the forthcoming raising of capital, is that this time it will be via a rights issue.
A rights issue is an invitation to all shareholders on the registry of that company’s shareholders at a particular date, to ‘purchase’ additional new shares in the company. The invitation is received in the form of a pre-emptive ‘right’ that shareholders may exercise, within a particular time window, to buy new shares that are normally issued at a discounted price. This means existing shareholders will have a right to acquire the new shares before they are offered for subscription to the public.
A right, as the name implies, is not an obligation. After the rights issue is announced and the appropriate documentation is sent to shareholders, the latter have the following three options when considering what to do in response to it:
• Take up the rights in part or in full: Subscribing for the rights in full by purchasing every new share one is entitled to under the issue would give shareholders the opportunity to participate in the rights issue in proportion to their shareholding in the bank, thus avoiding any dilution of their holdings.
BOV will have greater capacity to undertake new investment, sustain new lending or distribute dividends to shareholders
It is important to remember that as a result of the new shares being issued at a discount to the market price, the value of all the shares will decline. This dilution or loss on the existing shares is offset by the gain in share value taken up (in part or in full) by the rights (new shares).
• Ignore the rights and let them lapse: Rights have a finite lifetime, and if not exercised within the particular time window, they will expire and cease to exist.
If a shareholder chooses to do nothing, his or her shareholding will be diluted. In other words, the value of the investment will go down due to the extra shares issued and subscribed for by others. This will also result in the dilution of the shareholder’s voting rights in the company.
• Transfer the rights to someone else: Rights are transferable. This allows the shareholder to transfer part or all of the rights by assigning them in favour of a third party. Although transferable, the rights will not be tradable on the Malta Stock Exchange.
Apart from the above options, the bank will be giving its shareholders the opportunity to increase their existing holdings by subscribing for additional shares lapsed by their peers. In the event that the equity issue is not fully taken up by current shareholders, any unsubscribed balance of the new issued share capital will be opened to the public.
As explained by Bank of Valletta’s chairman during the EGM, the strengthening of the bank’s Core Equity Tier 1 share capital via the raising of €150 million will allow the bank to meet the level of capital buffers required under the relevant banking regulations.
Essentially, Bank of Valletta will have greater capacity to undertake new investment, sustain new lending or distribute dividends to shareholders.
Should BOV shareholders require further clarification regarding the rights issue, they may refer to the BOV Investor Relations Officer.
David Pace Ross is a senior manager at Bank of Valletta plc.