Nov. 14 (Bloomberg) -- Shareholder rights in Europe may be the next casualty of the global financial crisis.

Barclays Plc plans to raise capital without giving existing investors first call on new stock. Credit Suisse Group AG did so last month. UniCredit SpA made what's become an unprofitable proposition to all shareholders, and offered a different deal to some, including Libya's central bank. All three are wooing big investors with securities paying as much as 14 percent interest.

The banks argue that so-called rights offerings are too slow and too risky in a falling market. Stockholders are concerned the new approach may become common practice, diluting their voting rights and claims on future profits. Barclays managers met today in London with investors threatening to put up a fight at a Nov. 24 shareholders meeting. UniCredit investors approved the capital increase today in Rome.

``If you waive pre-emption, it damages the relationship with shareholders,'' said Colin Melvin, chief executive officer of Hermes Equity Ownership Services Ltd., which manages about 35 billion pounds ($52 billion) for BT Pension Scheme and 205 other institutional clients.

The issue is important to funds such as Hermes because they hold shares for decades and count on those rights to maintain positions that could be at risk if a large stake is sold to a new investor, Melvin said.

Without pre-emption, ``companies' shares are traded as if they were in a casino, and that's just wrong,'' Melvin said.

Abu Dhabi, Qatar

European corporate law and securities rules typically require companies to offer existing shareholders a first crack at new stock, unlike in the U.S. Sales can take the form of rights offers, which entitle shareholders to buy new stock, often at a discount, or to sell their allotment on to someone else. Companies must get investor approval to bypass common shareholders in most cases.

Barclays, Britain's second-biggest bank by market value, unveiled plans on Oct. 31 to sell 5.8 billion pounds of convertible notes and preferred shares paying as much as 14 percent annual interest to funds in Abu Dhabi and Qatar. It sold an additional 1.25 billion pounds of convertible notes to money managers, without allowing ordinary shareholders to take part.

Shareholders want the bank to change the terms of the transaction to let them participate too, said Robert Talbut, who helps manage $31 billion of assets, including 9.1 million Barclays shares, at Royal London Asset Management.

Middle East Funds' Refusal

``There is widespread dissatisfaction with the terms of the deal, and there is pressure for the company to think again,'' Talbut said.

The U.K. bank has failed to convince the Middle East funds to renegotiate the deal to appease other investors, two people familiar with the matter said today. They declined to be identified because the discussions are confidential.

Barclays is in ``constructive'' talks with shareholders, spokesman Alistair Smith said. He declined to comment on today's meeting in London or on whether there are discussions with Qatar and Abu Dhabi.

Banks are seeking alternatives to tapping existing investors partly because of tepid demand from shareholders burned by plunging stock values.

What's more, selling stock in rights offers can take weeks. Companies need to hold a vote, provide investors with an offer document and give shareholders time to assess the investment.

`Size, Speed, Certainty'

``What we wanted to achieve was raising all the capital that we had agreed to raise simultaneously,'' Barclays CEO John Varley said in a Nov. 3 internal e-mail obtained by Bloomberg News. ``So the words at the top of our mind were: size, speed, certainty.''

The experience of U.K. banks that had rights offers this year ``is not something that inspires confidence,'' he wrote.

HBOS Plc, the U.K.'s largest mortgage lender, in July held the European rights offer with the largest value of unsold stock this decade, with shareholders claiming only 8 percent of its 4 billion-pound sale. New investors and underwriters of the transaction bought the rest. The offer lasted more than 11 weeks as HBOS shares plunged 43 percent. HBOS is being bought by Lloyds TSB Group Plc.

Bradford & Bingley

In August, Bradford & Bingley Plc, the biggest U.K. lender to landlords, raised 400 million pounds in its third attempt at a rights offer in as many months. Investors ordered just 28 percent of the shares on offer, leaving underwriters to buy the rest. The lender was seized by the government on Sept. 29.

Where shareholders have participated more fully, they've been burned. Royal Bank of Scotland Group Plc in June raised the entire 12.3 billion pounds it sought, selling shares at 200 pence apiece. The stock now trades at 56.2 pence.

Credit Suisse, Switzerland's second-biggest bank, is paying interest of 11 percent on $4.7 billion of securities sold to investors including Qatar. It bypassed existing shareholders by selling a combination of bonds that investors must swap into stock and some treasury shares.

``We thought that speed was essential,'' said Andres Luther, a spokesman for Credit Suisse in Zurich. The bank had already gotten shareholder approval to go that route, he said.

Not all banks agree. On Nov. 10, Spain's Banco Santander SA said it plans to raise 7.2 billion euros from shareholders. The bank, named for the town where it's based, said in a statement on its Web site that enabling shareholders to participate ``provides them with the biggest benefit.''

Hedging Bets

Milan-based UniCredit hedged its bets. At the same time the bank offered shareholders the option of buying 3 billion euros of stock at 3.083 euros a share, it lined up a selection of new and existing shareholders to buy any leftover stock under different terms to secure their commitment. The stock now trades at about 2 euros.

Buyers will get bonds that convert into shares and pay 4.5 percentage points more than the six-month euro interbank offered rate, or Euribor. That's 8.8 percent based on today's Euribor of 4.29 percent. They'll get more if UniCredit's dividend yield is higher than 8 percent.

The Central Bank of Libya and Munich-based Allianz SE, Europe's second-biggest insurer, are among the investors that have ordered about 60 percent of the stock, according to UniCredit's underwriter Mediobanca SpA. New investors, who weren't identified, have committed to buying the rest of the securities. The offering is planned for later this year.

Role Model?

At today's UniCredit meeting in Rome, Giammario Fiorentini, a shareholder, criticized the securities sale, saying investors aren't been treated equally. What's more, ``this may serve as a model for others,'' he said.

UniCredit may not have had a choice, according to Wolfram Mrowetz, CEO of fund manager Alisei SIM in Milan. ``Favoring some investors is the only way to raise cash and help restore credibility in the company,'' said Mrowetz, who sold his UniCredit shares at around 5 euros.

UniCredit CEO Alessandro Profumo confirmed the rights offer terms at the Rome meeting. The price was fixed in October to prevent speculation on the stock, and to give certainty on the dilution, he said. He said the convertible bonds aren't suitable for ordinary shareholders because they won't be traded.

`Dangerous Precedent'

``Bypassing pre-emptive rights damages stocks and creates a dangerous precedent,'' said Arturo Albano, who works in Milan for Deminor, an adviser to investors in closely held and publicly listed companies.

The Bloomberg Europe Banks Index rose 0.4 percent today in London, leaving it down 13.5 percent for the week. Credit Suisse rose 3.7 percent to 32.68 Swiss francs in Zurich trading, Barclays gained 0.9 percent to 159.1 pence in London and UniCredit added 2.2 percent to 1.99 euros in Milan.

The price paid to line up quick financing is steep both for the banks and their investors.

Barclays turned to Abu Dhabi and Qatar to avoid participating in the U.K. government's rescue plan for the banking industry, whose conditions include capping executive salaries and banning dividends. Barclays shares have fallen 22 percent since Oct. 30, the day before the announcement.

``Barclays's alternative avenue to government or shareholder money is very, very expensive,'' said Adrian Darley, who helps oversee $1.6 billion at Resolution Asset Management in London, and is a Barclays shareholder.

Paul Myners, who last month was appointed as minister in charge of the City of London financial district, is leading a review by the Treasury and the U.K. financial regulator into whether the timetable governing rights offers can be sped up.

Myners, a former chairman of retailer Marks & Spencer Group Plc, said in a 2005 report that pre-emption was ``universally considered to be an unnecessarily lengthy and cumbersome process.''

Ownership

Still, he supported the use of rights offers. In the U.S. pre-emption rights were used as early as the 1800s. Their decline began in the 1930s as states competed against each other to attract companies for incorporation.

``They prevent transfers of ownership to new shareholders from occurring without the prior agreement of existing shareholders,'' Myners wrote. ``Ownership confers voting rights as well as claims on the earnings and valuation of a company.''

Matthew Robertson, who helps oversee 4 billion euros at SG Asset Management in London and is a UniCredit shareholder, said that as confidence returns, ordinary shareholders will be more willing to invest.

``It's good for shareholders to have the first call on new equity capital,'' he said.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net; Alan Katz in Paris at akatz5@bloomberg.net; Elisa Martinuzzi in London at emartinuzzi@bloomberg.net

Last Updated: November 14, 2008 13:02 EST