An issue of rights to a company's existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them on the open market.
Let me add some important details not mentioned in the definition. When a shareholder exercises their right to buy a share from the company, the purchase price is paid directly to the company like a warrant exercise. A rights offering when exercised by existing shareholders is a method by the company to raise capital cheaply and quickly. Cheaply because underwriting fees are miniscule when compared to IPO costs and quickly due to a date of expiration looms from the moment the right becomes available to exercise.
The simple answer to the question is existing shareholders would NOT exercise a right to purchase shares at a price higher than the actual stock price. However there have been unusual circumstances where it could happen.
Here are some examples:
1. If the price discrepancy between trading price and rights exercise price is negligible and a shareholder seeking to add to their position would rather see the money to exercise a right go to the company than a selling shareholder in the market.
2. When the company’s shares are difficult to buy in the open market due to small float, rights offerings are a useful method to both raise money and increase shares in the float.
3. Right offerings enable large shareholders, insiders, friendly shareholders to add to their position. In the case of insiders however, purchasing free trading shares in a rights offering does not preclude the purchased shares from being restricted.
4. Rights offerings have added benefits in that shareholders can decline to exercise their rights to purchase thus creating an opportunity and small window for new investors to exercise rights to purchase.
I have always felt rights offerings are a smart alternative capital raise by companies to raise capital it is much easier to do so when the stock is priced higher than the rights offering price. However, rights offerings can also be abused by shorts to sell shares in lieu of exercising their right to buy cheaper shares by exercising their rights offering price thus locking in an arbitrage profit. Regardless, the company benefits as it receives the money from the exercise of the rights.
© 2017 Stock News Now
Supported by Superior Web Solutions