Rights Offering (Issue)
Candlefocus EditorIt is seen as an attractive option for cash-starved companies who require additional capital and can also be used to resolve highly dilutive equity-for-debt exchanges.
The decision to launch a rights issue typically involves careful consideration by management and the board of directors. This is because the successful completion of a rights issue would solicit additional capital from current shareholders, dilute their current stake, and also come with legal and accounting costs.
A rights issue is separated into two main rounds - the commitment stage and the over-subscription stage. The commitment stage typically has a predetermined rights price and a specific number of newly issued shares. Existing shareholders are given the subscription rights to purchase a pro-rata allocation of shares at a discounted price.
The over-subscription stage allows the shareholders who purchased shares in the commitment stage to purchase additional new shares in the company not covered in their subscription rights. This typically occurs when the demand for new shares exceeds the supply and shareholders are able to purchase additional shares if they so choose.
Rights issues can be seen as a sign of a company that is ‘desperate’ for capital, and as such, may influence a company’s share price in a negative manner. In some cases, companies may opt for a rights issue as a reaction to a potential hostile takeover, in an effort to make themselves less appealing to the potential acquirer.
It is important to note that investors don’t have to participate in a rights issue if they are given the right to purchase additional shares. In the instance where a company may not have a large enough portion of retail shareholders, they may opt to use a Rights Targeting Expedition (RTE). In such cases, a company will buy options to call securities on the open market, in order to increase the number of shareholders participating in the rights offering.
Rights offerings can be a viable option for companies in need of capital, but it is important for any potential investor to understand the risks and rewards of participating in a rights issue.