Souscription of preference shares after closing

[Leo]

Hi,

In a case where the investor and the issuer have agreed (materialised by signature of an agreement) that the investor would subscribe for 500 prefs for an amount of 1 millions LC, in Feb 2024. The agreement was signed in Dec 2023.

In this case, is there a derivative instrument from the perspective of the investor, and treated as such in its books closing at 31.12.2023? because the conditions seem to be met:

Its value changes in response to the changes in underlying. (not sure because although investor will buy the prefs for a fixed amount at a future date, the value of the prefs would vary between the date of the signature of the agreement and the date the prefs are issued)
No initial net investment (yes)
Settled at a future date. (yes)

I'm wondering whether we are in presence of a future.

thanks.

[Marek Muc]

I'm wondering whether we are in presence of a future.

That's so profound!

[Leo]

Sorry, I meant a derivative instrument, e.g., a forward or future.

[fr.perezca]

For me, yes, you are in the presence of a derivative, a forward specifically (since it is over-the-counter, unlike futures that are traded on the stock exchange), since (1) based on the conditions it would not be a regular-way purchase transaction considering the term does not aligns with market conventions, (2) there is no initial investment, (3) it will be settled at a future date, (3) the price has already been set, (4) the value of the contract changes in response to changes in value of the underlying, (5) it is irrelevant whether the underlying is a financial instrument that qualifies as a liability or equity in the issuer, and (6) the underlying is not an non-financial variable.

[Leo]

Merci! tous les clignotants sont au vert, like we say in french.

[JRSB]

seems like a fine line between this and simple unpaid share capital.

[Leo]

that's a very good remark JRSB! I think if it's unpaid capital, there is an obligation to pay cash by the investor.

However, you could argue that in an agreement where the investor agree to subscribe for the shares at X LC when the shares are issued, there is also an obligation to pay.

They look the same for me.

So any thoughts?

[JRSB]

Technically it depends exactly when the agreements says the shares will be allotted (Dec or Feb). Seems like overkill to think of this as a forward but I accept we're thinking about what's technically correct.

[Leo]

the shares will be issued in Feb.

[Leo]

There might not be any fair value changes at all. But strictly speaking, is there a derivative instrument there?

[JRSB]

If you look at it technically then you could also look at an example when you agree to buy shares in 10 years' time, which is a forward?

[Leo]

Yes, that would be a forward.

When an investor subscribes for unpaid shares on which an obligation to pay arises for the investor, the investor would recognise an investment in subs and a liability. The liability would be measured at fair value. Do you agree?

In that case, there is no difference between subscribing for shares and pay later, and subscribing shares at a price fixed in advance that will be issued at a later date.

[JRSB]

I looked at it slightly different, ie instead of subscribing for shares now and just leaving the liability unpaid, the alternative is simply an agreement to subscribe for shares in the future, so you don't have the shares now, nor the liability to pay for them, until say 2 years. Then yes that seems like a forward.