Dilution meaning

What changes to entrepreneurs’ relief were announced at the Budget 2018 and what was the motivation behind them? What is their likely impact? There will be three amendments to entrepreneurs’ relief in the Finance Act 2019. Diluted holdings The first reform permits a shareholder whose interest falls below the 5% qualifying threshold to elect to be treated as having disposed of, and immediately reacquired, their shares just before the dilution, effectively banking entrepreneurs’ relief for the qualifying holding period. The driver for this was a perceived obstacle to third-party investment in entrepreneurial businesses, where fundraising could push existing owners under the 5% line. In practice, the arrangement demands two distinct elections: one to crystallise the deemed sale and repurchase, and a separate one—on different deadlines—to defer the liability until an actual disposal, unless the person prefers to pay the capital gains tax upfront as a ‘dirty’ tax charge. Consequently, the approach is relatively intricate and uses two elections where one would do. It also necessitates...

Tianrui (International) Holding Company v China Shanshui Cement Group (Cayman Islands) [2024] UKPC 36 What are the practical implications of this case? The Privy Council has now articulated the juridical basis on which a shareholder may bring a personal claim to hold a board to the company’s constitution, without resort to a derivative action, following an allotment of shares. As the judgment explains (paras [3]–[4]), authorities of the highest level — from the Privy Council, the UK Supreme Court, the High Court of Australia and other appellate courts — have long recognised that shareholders may proceed personally to contest such allotments, rather than by derivative action on the company’s behalf, notwithstanding that the directors’ duty to exercise the power of allotment for proper purposes is owed to the company alone, not to shareholders individually. Although that personal standing had rarely been doubted, the precise juridical rationale had seldom been determined or even closely discussed; this decision supplies the explanation...

In this issue: Corporate governance Q&As New and revised content Key dates for your diary Weekly highlights across other practice areas Corporate governance ISS Governance has released its 2025 Proxy Voting Guidelines for the UK and Ireland, following the publication of its updated benchmark policies on 17 December 2024 (see: Share Incentives weekly highlights—19 December 2024—Corporate governance), and these will apply to shareholder meetings held on or after 1 February 2025. The revised guidelines mirror the changes announced in December, many of which incorporated amendments made by the Investment Association (IA) to its Principles of Remuneration issued in October 2024. Nonetheless, departing from the new IA Principles, ISS Governance considers a 5 per cent dilution limit to remain widely viewed as best practice by many investors—and therefore expects that authorisations to issue new shares under discretionary share schemes should not exceed 5 per cent of the issued ordinary share capital over any rolling ten-year period; where this is breached, an...

Pre-emption rights on allotment Pre-emption rights on allotment provide every shareholder in a company with a means to guard against dilution of their percentage stake where this could result from a share allotment, the issue of rights to subscribe for shares, the conversion of securities into shares, or a disposal of treasury shares by that company. This Practice Note addresses the pre-emption rights applicable to an allotment of equity securities by a public company that is neither a listed company nor an AIM company (that is, an unlisted public company), as prescribed in the Companies Act 2006 (CA 2006). Close attention should be paid to the breadth of those statutory pre-emption rights, because an unlisted public company must observe them to the extent that they have not been disapplied, varied, waived, or excluded and ensure that it complies with them to that extent...

Produced with input from Rebecca Cousin of Slaughter and May on market practice. This Practice Note succinctly outlines the relevant rules and guidance concerning parties who are, or are deemed likely to be, acting in concert for the purposes of The City Code on Takeovers and Mergers (the Code). In particular, the note reviews the various relationships that may amount to acting in concert, the importance of concert parties for Rule 9 of the Code, and the disclosures required in connection with stakebuilding. Stakebuilding is not prohibited by the Code, but can carry significant implications. The effects of membership of a concert party will typically be engaged under Rules 4 (Restrictions on dealings), 5 (Timing restrictions on acquisitions), 6 (Acquisitions resulting in an obligation to offer a minimum level of consideration), 8 (Disclosure of dealings and positions), 9 (The Mandatory offer and its terms) and 11 (Nature of consideration to be offered) when any of the relevant parties acquires shares...

A long-term incentive plan (LTIP) Within listed companies, the term LTIP typically refers to executive share arrangements whereby senior staff receive share-based awards that vest over no less than three years, usually followed by a further two-year holding requirement. For an introduction to LTIPs, see Practice Note: What is a long-term incentive plan? Using LTIPs to drive senior executive performance has become accepted market practice among listed companies. Yet, in July 2016, the Executive Remuneration Working Group—an independent body formed by the Investment Association—issued its final report on the design of executive pay, urging every company to assess whether the conventional LTIP model remained suitable for its business or if it should depart from that approach. In the Working Group’s view, rather than defaulting to an LTIP, companies must identify the structure that best fits their organisation and engage with shareholders to gauge their views on the preferred framework. The emphasis was on careful selection of pay structures and meaningful dialogue with shareholders before settling on any model, rather...

Insert new Article 14 as set out below: 14. Anti-dilution 14.1 In this Article 14, unless the context indicates otherwise, the expressions below shall bear the definitions: New Securities means any Shares or other securities convertible into, or conferring the right to subscribe for, Shares, issued by the Company after the date these Articles were adopted...

Net settling a share award Net settling a share award is employed to cut down the quantity of shares a company is required to issue in order to discharge the award. Awards can, in principle, be net settled against both any exercise price due and any tax or National Insurance contributions (NICs) that arise. Key benefits of net settlement include reduced dilution for existing shareholders and the possibility for a company to stretch its headroom under any relevant dilution limits, thereby enabling those limits to accommodate more awards. Net settlement for tax and NICs means the company issues to the award holder a number of shares whose value equals the post‑tax amount they would have retained had they taken the full, gross allocation and sold sufficient shares on‑market to meet the pay as you earn (PAYE) and NICs obligations due at that point in time in practice. The company then settles the PAYE and NICs by remitting a cash payment to HMRC...