Proration
Candlefocus EditorWhen the total amount of tendered shares surpasses the amount of shares or cash initially provided, proration comes into play. For example, if a company declares a stock split that increases the number of issued shares three-fold, and investors offer to purchase twenty-five shares, proration would equalize the offer to seven shares. In this way, the initial investment offer is preserved, despite the investor’s demand for additional shares.
Shareholders may prefer cash to equity for various reasons. For instance, tax rates, growth opportunities, and interest rates may each be better for the investor in cash offers than with equity. When proration is initiated, the company’s leverage increases as it is able to generate more value for its shareholders in cash offers than it would with equity offers.
Proration differs from pro-rata allocations, as the latter is related to a proportional split of available funds or resources. Proration is used as a means of ensuring fairness and equity when a certain corporate transaction results in a discrepancy between the numbers of investors’ tender and the company’s offers. By keeping the two variables in balance, proration enables companies to maintain organized recruitment and investment practices.