Companies and shareholders: rights issues: Provisional Allotment Letter and Renounceable Letter of Allotment
As part of the rights issue process (STSM072020), the issuing company sends a letter to all its shareholders, setting out both the terms of the offer and the deadlines by which take-up must be confirmed and subscription money paid. This letter is known as the ‘Provisional Allotment Letter’ (‘PAL’) and does not usually require any payment by the shareholders (so is said to be ‘nil paid’).
When a shareholder decides to take up the rights and pays the subscription monies by the required date, the PAL becomes ‘fully paid’. If payment is required by instalments, the PAL is said to be ‘partly paid’ from the time the first instalment is paid until the final instalment is paid. Once it is fully paid, the PAL is sent to the company in exchange for a share certificate for the additional shares purchased.
Sometimes a company will include a provision in the PAL enabling the shareholder to sell or ‘renounce’ the rights entitlements to a third party. This sort of letter is called a ‘Renounceable Letter of Allotment’ (‘RLA’). If the rights under a RLA are sold, the RLA is returned to the company and reissued to the purchaser. Where the original shareholder did not take up the offer before renouncing their rights, this is called a ‘sale of rights nil paid’.
Nil-paid, partly-paid and fully-paid RLAs can all be traded on the secondary market and are a chargeable security for SDRT purposes (FA86/S99(3)(c)). As it may be sold, a RLA has an inherent value, calculated as the market price of the shares post-issue minus the stated subscription price for the offer.