LONDON - The coronavirus crisis risks doing long-term damage to the UK’s corporate governance. British companies are increasingly using funky so-called cash box placings to issue shares without having to give existing investors first dibs. They look like a temporary necessity but will probably stick around long after the virus has died down.

Cash box placings aren’t new – Tullow Oil used one back in 2009 -- but they are enjoying a fresh lease of life. Under the structure, a company issues shares in return for preference stock in a special purpose vehicle, which is funded by an investment bank. The bank then places the new shares with investors to recoup its investment. By engaging in a share swap, rather than a new issue for cash, the company can circumvent UK rules that limit the amount of cash it can raise without having to seek shareholder approval or offer existing owners first right of refusal. In April, companies including retailers ASOS , WH Smith and recruiter Hays, have used it.

Such structures may seem like a lesser evil in a crisis. Organising annual general meetings and drafting lengthy prospectuses can take time, but companies need cash now. Yet cash box placings can be doubly painful for those shareholders who do not get the chance to subscribe, as the new shares are sold typically at a steep discount to an already depressed price.

ASOS has at least tried to sugar the pill. On Tuesday it raised 247 million pounds to bolster its financial position, equivalent to 18.8% of its existing share count. But it went out of its way to give priority to existing shareholders, who took up most of the issue. Yet the fact a relatively healthy company used the technique – ASOS posted record pre-tax profits for the six months ending Feb. 29 – may only serve to make a slightly risqué structure more mainstream.

True, the satisfaction of strictly giving shareholders pre-emptive rights will ring hollow if the company in question runs out of cash. Yet the risk is that today’s crisis response legitimises skirting shareholder rights once the virus dies down. Taboos, once broken, are hard to restore.

CONTEXT NEWS

- Online fashion retailer ASOS on April 8 said it raised 247 million pounds through a placing of 15.8 million shares, equivalent to 18.8% of its existing share capital. The equity issue in the 1.3 billion pound company was conducted via a so-called cash box placing which allows the company to bypass pre-emption rights for its existing shareholders in order to raise money quickly. However the company said 95% of the shares were taken up by existing investors.

- Shares in the AIM-listed company rose 33% at 0804 GMT on April 8 after the group said revenue increased 21% in the six months to the end of February.

- Recruiter Hays said on April 2 it had raised about 200 million pounds via a cash box issue, seeking to prop up its finances in the face of an expected collapse in fees due to the coronavirus.

(Editing by Neil Unmack and Karen Kwok)

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