Aviva PLC (LSE:AV.) is relying on clued-up private shareholders to vote through next Monday its proposed £3.75bn return of capital to shareholders through the issue of “B” shares.
If Aviva gets sufficient backing for its plan, shareholders can look forward to receiving some free shares that Aviva will immediately purchase. Institutional investors are probably used to this sort of bizarre procedure (which is being done for tax purposes, as will be explained later) but it probably seems a bit baffling to the insurance giant's many legions of private shareholders.
The background to the return of capital
Aviva, which is sitting on surplus cash after getting shot of peripheral business in recent years, will be issuing one new “B” share for every existing ordinary share held by Aviva shareholders. These shares will then subsequently be redeemable for cash at roughly a pound a pop.
To maintain comparability between the market price for Aviva ordinary shares and its American Depositary Shares (ADSs) before and after the implementation of the “B” share scheme, it is proposed that the “B” share scheme will be accompanied by a share consolidation (and an equivalent consolidation of the ADSs).
On its website, Aviva gives an illustrative example of a shareholder who currently has 100 shares; that shareholder would receive £101 in cash via the “B” share scheme. Shareholders receiving this cash should treat it as a capital gain for tax purposes, whereas if the company had paid out the money in the form of dividends, the money would have been taxed differently.
Investors can receive annual dividends worth up to £2,000 tax-free, after which they pay a minimum tax rate of 8.75%, whereas those same investors can register up to £12,300 a year in capital gains before becoming liable for tax.
But what of the share consolidation?
The share consolidation would then kick in on the basis of 76 new shares for every 100 existing shares. Aviva shares currently trade at 430.9p so on the face of it, shareholders trouser the £101 from the “B” shares but then “lose” 24 shares, worth (24 * 430.0p) £103.42; however, it is the nature of share price consolidations that the underlying share price adjusts to reflect the fact there are fewer shares in issue so shareholders should not lose anything by endign up with a lower number of shares.
If it helps, think of it as a case of the Aviva pie being the same size but each slice being bigger - all other things being equal, one would expect the back-history of Aviva’s share prices to be inflated by a factor of roughly 1.32 (which is 100/76) and for the current share price to adjust accordingly.
The “B” share proposal requires 75% of shareholder votes in favour to pass. Unless you have some moral objection to such flagrant tax avoidance (as opposed to tax evasion, which is illegal), then there seems little reason for Aviva shareholders not to vote in favour.