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Capital Markets

Debt restructuring: UKLA gives equity a seat at the workout table

Loss of guidance note 5 wording boosts shareholder leverage.

Changes made last year by the United Kingdom Listing Authority (UKLA) to its listing rules could give equity investors a much bigger role in debt restructuring.

Equity holders traditionally have a limited say in debt-for-equity swaps and company delistings, both of which have been used to effect debt restructurings. Share cancellations need shareholder consent, as does an increase in share capital. And if shares sold to a newco are worth more than 25% of the value of the selling company, the sale is a class one transaction under UKLA rules and also needs shareholder approval.

Dispensation

However, until July last year, the UKLA’s guidance note number 05/2000 said that a company could do a class-one transaction without shareholder approval, if it could demonstrate to the UKLA that it was in severe financial difficulty. In 2003, Marconi’s £3.1 billion ($5.4 billion) debt-for-equity swap delivered 99.5% of the company into the hands of its debt providers. “We got a dispensation from the UKLA to do a class-one deal without shareholder approval,” says Earl Griffith, a partner at Allen & Overy, Marconi’s legal advisers. “The shareholders had no economic interest, and there was a risk that they would vote down whatever was put to them.

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