Rights Issues are Corporate Actions Events whereby a company seeks to increase its capital by issuing new securities to its existing shareholder base.
- A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
- An issue of new shares offered at a special price (the Exercise Price) by a company to its existing shareholders in proportion to their holding of old shares within a certain time frame which is called the Exercise Period.
- A rights issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings.
- A Rights Issue is also being referred to as a Capital Increase whereby the Capital Increase is the goal and the Rights Issue is the method by which the goal can be reached. It is worth bearing the difference between issued capital and outstanding capital in mind. The Rights Issue increases the issued capital.
- Convertible Bonds (being the newly issued security)
Rights Issue Glossary
As the Rights Issue is one of the more complex Corporate Actions Events, please find below a Glossary of Terms specifically for Rights Issues. Reading through this list alone will already add to the impression readers may get from how Rights Issues are processed.
The date at which the company announces the event officially.
The date at which the parent line shares trade without the entitlement to the rights. For example if the rights issue has an Ex Date of 24.03.2009 this will mean that all shares traded up until 23.03.2009 will entitle the buyer or the holder of the shares to the rights.
This is the date at which a snapshot of the holdings is being taken in order to calculate entitlements. This is done by all relevant industry market players.
Date at which the rights have to be settled in the account of a direct market participant or agent bank in order to be exercised.
The period during the event in which instructions can be sent to the broker/custodians/agents to exercise the rights in order to subscribe to new shares.
Rights are securities that can be listed (for short periods of time) at a stock exchange themselves just like other securities. This period of time can be used to buy or sell rights.
Rights can be nil paid or fully paid. When credited to the shareholders rights are nil paid, meaning that no payment has been made to exercise the right.
Rights can be nil paid fully paid. If the holder of the rights who exercised them pays the exercise price, the rights become fully paid.
There are 2 ratios in the event of a rights issue: 1) the amount of rights a shareholder is entitled to resulting from each original parent line share held and 2) the amount of rights one needs to exercise in order to be able to subscribe to one new resultant security. For example: One share entitles to receive one right (1 original share : 1 right) and 5 rights entitle to subscribe to 2 new shares at the exercise price of GBP 3.50 (5 old : 2 new @ GBP 3.50).
The actual shares of the company that carry the entitlement to the rights.
There may be reasons why the resulting new shares cannot be credited straight away but shareholders are already credited with an alternative nonetheless. One such reason is when the resulting shares should not be entitled to an upcoming dividend. In such cases a temporary line of stock, called an interim line, is credited to shareholders instead. After the dividend is paid on the original security, the interim line shares are then assimilated into the original line by means of an Assimilation Event (Pari Passu). The interim line itself is tradeable (sometimes on-exchange but surely OTC).
The resultant line shares are the security that holders of the rights can subscribe to by exercising the rights in the rights issue. These can generally be equity, bonds or convertible bonds.
When the event of a rights issue takes place during the course of the dividend year, the company can decide to credit holders who exercised their rights Young Shares rather than the final resultant line shares. Young shares are credited under a different (temporary) ISIN and will assimilate back into the parent line after the next due dividend has been paid on the parent line shares.
Shareholders can be allowed to subscribe to more shares than they’d normally be entitled to if they’d exercised their full amount of rights. This option is not always offered. Over-subscription is often subject to “scale back” (in case too many shares are being subscribed to). Over-subscription is not always possible in every rights issue.
The options that shareholders have during the event of a rights issue are to 1) Exercise the rights, 2) Oversubscribe to new securities, 3) buy additional rights, 4) sell their rights, 5) Lapse their rights or 6) Take No Action. In theory, every beneficiary owner of the rights will have to send an official instruction to their broker or custodian on what they decide to do with their rights.
If the exercise price is lower than the market price of the shares the rights issue is called “in the money”. In this scenario It is attractive to subscribe to the new securities, because they can be sold in the market for a higher price.
The company can set the exercise price too high. In that case it would be unattractive for the investor to subscribe to the new securities in the event. The same shares could be bought in the market for a lower price. The market price of the shares can also suddenly drop below the exercise price of the event. Companies therefore tend towards keeping the exercise period relatively short to minimise the effects of volatility.
When the exercise price is exactly the same as the price of the securities in the market, the event is called “at the money”.
The holder of the rights decides to send an instruction to their broker or custodian to exercise the rights in order to buy the new securities. After they have sent an instruction they need to ensure to fund their cash account with sufficient funds on the Pay Date of the event.
Basically anybody can buy rights if the rights are tradeable (even if they didn’t hold the shares on the Ex Date and the Record Date of the rights issue event). However, it is possible that the lead agent or registrar will match Exercise quantities with Record Date positions. Buying is also offered as a means to round up to the nearest multiple of the ratio, for example, if an investor has 7 rights whereas the ratio is 1 new share for every 10 rights. In this example the investor could choose to buy 3 more rights to make it 10.
The holder of the rights decides to send an instruction to their broker or custodian to sell their rights.
The holder of the rights decides to send an instruction to their broker to let the rights lapse at the end of the exercise period. This is very similar to taking no action. In some countries there may be lapsed proceeds resulting from the rump placement after the event. Shareholders receive (a small) amount of money per right at the end of the event.
The holder of the rights decides to send an instruction to their broker to leave the rights in the account and do nothing with them. Often investors hold accounts with other brokers or custodians and it could be that they decide to transfer or sell the rights via another broker or custodian.
This is the official deadline set by the agent of the event by which all instructions need to be received.
This is the deadline that the custodians set for their clients. This will be an Offset from the official market deadline. Over the past two decades this offset is seen to have gone from days to a couple of hours or even less for really bespoke client offerings. This is mainly due to higher Straight Through Processing Rates and automation.
This is the deadline that the brokers set for their clients. This is an offset from the custodian deadlines. In some markets anyone can send instructions directly to the lead agent or issuer CSD, in which case the offset will be based on the official Market Deadline.
If trades settle late over the Ex Date and the Record Date of the event, they need to be compensated. For example: If a settlement cycle is t+2, meaning all trades are settled in accounts 2 days after trade date (TD) and if trader A sells 100 shares to trader B on 23.03.2009 which settles and the Ex Date of a rights issue is 24.03.2009 this will mean that the trades will be still in the account of the custodian of trader A on the 24.03.2009 (RD) (since they will only settle into the custodian’s account of trader B on 25.03.2009. When the paying agent credits the rights to shareholders on the Pay Date (the payment of the rights does not have a T+x settlement cycle), the rights in this case will be credited to trader A. But since trader B bought the shares before the Ex Date, they are entitled to the rights. Trader B has to claim the rights from trader A. This process is also being referred to as compensation.
Trades that settle late over the Ex Date and the Record Date of the event need to be compensated. The following example explains:
- Trader A sells 100 shares to Trader B
- Trade Date is 23.03.2009 and Intended Settlement Date of the trade is 25.03.2009
- Due to liquidity problems at Trader B’s side the trade only settles on the 26th.
- The Ex Date of a Rights Issue is 24.03.2009 and the Record Date is 25.03.2009
- The shares are in trader A’s account at the close of business of Record Date, so the CSD/Custodian/Broker will credit the rights to Trader A’s account.
- Trader B is entitled to the rights (because they bought the shares cum entitlement before the Ex Date) so they will need to claim them from Trader A.
- Both trader A and Trader B need to have a trade in the system (free of payment) to deliver the rights from Trade A to Trader B.
Click here to find out more about CLAIMS
Shares are traded WITH entitlement to the rights until the EX date, which is the day the shares are traded WITHOUT entitlement to the rights.
This is the price that needs to be paid for the new securities that result from the rights issue event. This price is usually offered at a discount to the current market price.
A method by which the exercise price is being determined by calculating the volume weighted average price of the shares during a predetermined period of time.
There are 2 Pay Dates in a rights issue; 1) date on which the rights are paid to holders and 2) date on which cash is paid to the company and shares are distributed to shareholders who subscribed to the new stock. The second Pay Date (where cash and stock are exchanged) can be on the same day but they can also differ (usually depending on market). The cash Pay Date is the date at which the subscription price needs to be paid to the agent. The stock Pay Date is the date at which the resultant shares will be dispatched.
The party in the market working on behalf of the company that takes care of the technical process of the whole rights issue event (including notifications, instructions management, collecting the money and issuing the new shares.
Underwriters and the company that wants to increase its capital can sign official legal contracts called purchase agreements. In the purchase agreements, the underwriters commit themselves to buying all the shares that other shareholders are not going to subscribe to at the exercise price. In that way a successful capital increase is guaranteed for the company. The company will have to pay the underwriters a fee for taking over the risk.
When the rights issue event is over, the agent will lapse the rights. Depending on the market and the situation, the rights can be lapsed worthless or against money. In case they are being lapsed worthless, they will just be booked out of the accounts worthless. Sometimes, the lead agent tries to find buyers for the additional rights and in that case the rights will lapse versus money.
Which options do investors have in a Rights Issue?
Rights can be exercised to subscribe to new shares. The Exercise Price per new share needs to be paid.
In theory every shareholder can subscribe to an amount of shares that is equivalent to their current stake in the company. In some rights issues it is possible to subscribe to more newly issued shares. In case there are more shares being oversubscribed to then there are available, a pro rata allotment will follow. This is also known as a scale back.
- A shareholder holds a 2% stake in a company
- The company issues 100,000 new shares
- The shareholder will receive an amount of rights that would entitle to subscribe to 2,000 new shares (2% of 100,000).
- In our example the shareholder exercises all their rights and subscribes to 2,000 new shares and gives instruction to oversubscribe to 1,000 new shares.
- After the event is finished, the agent establishes that 95% of the shares was subscribed to by normal means of exercising rights (this would leave 5,000 new shares available for oversubscription).
- Let’s say that the agent has received instructions to oversubscribe to an additional 10,000 shares.
- The scaleback ratio on oversubscription in this case is 50% (5,000 / 10,000)
- The shareholder in this example will receive and pay for 2,000 + 500 (oversubscription after scaleback) = 2,500 new shares.
In order to oversubscribe, the shareholder would not have to buy additional rights.
Rights themselves are securities that can be listed on a stock exchange (usually for a short period of time). Shareholders can go in the market and try to buy rights from shareholders who want to sell them. Buying rights is also often used for rounding purposes, to get the correct multiple for exercising rights.
Just like buying rights, a shareholder can also decide to sell his rights. He might want to do this because he might not have funds available to pay for any new shares from the event.
The investor might conclude that the rights offering is unattractive (out-of-the money for example) and instruct their broker or custodian to let the rights lapse. Rights can lapse worthless (they will be booked out as worthless after the event) or they can result in a (small) cash payment.
Take No Action – this means that the investor is instructing their broker or custodian to leave the rights in their account and do nothing with them. An investor might hold accounts with several financial institutions and he could for example decide to transfer his rights to another custodian or broker. Another reason to choose No Action may be that the Beneficial Owner is legally restricted to participate in the event based on which country they are domiciled in.
Longer Description from the point of view of different market participants
The Issuer will have positive or negative reasons for wanting to raise their Capital. Positive reasons could include raising funds to finance an acquisition strategy and buy other companies, whereas negative reasons could include trying to solve immediate liquidity problems. The main role during the actual event is to Announce the Event officially and to make sure that new shares are issued in time.
The Registrar will need to record all the eligible positions as per close of day Record Date. They will also need to update the share register with the newly issued amount of shares. Besides that there will be disclosure rules whereby the issuer has to disclose to the public the amount of issued stock and the amount of outstanding stock (“Free Float”). In the UK for example, the Financial Conduct Authority (FCA) prescribes in the “DTR Disclosure Guidance and Transparency Rules sourcebook https://www.handbook.fca.org.uk/handbook/DTR/5/6.html that “an issuer must, at the end of each calendar month during which an increase or decrease has occurred, disclose to the public:
- (1) the total number of voting rights and capital in respect of each class of share which it issues.
- (2) the total number of voting rights attaching to shares of the issuer which are held by it in treasury.
- (1) the total number of voting rights and capital in respect of each class of share which it issues.
The UK was taken as an example here, other countries will undoubtedly have similar rules.
The Agent Bank will need to create the events (RHDI and EXRI) in the systems of the CSD (or in their own systems) and initiate messaging downstream. The agent bank will also have to manage the instruction handling process, meaning that they will have to collate all instructions at the highest level and execute them accordingly. Assuming that payment is triggered automatically, the Agent needs to ensure that the stock proceeds are in the account so that all distributions can be initiated correctly and on time. Often, it is also the Agent Bank that facilitates trading in the rights. In case the rights are officially listed on an exchange, the agent bank will have to create the security with the Security Identification providers, in other words; they will have to create the ISIN for the Rights. When the subscription costs are paid by the investors, the agent bank will have to relay the funds to the issuer.
Numbering Agencies need to update the status of the shares to “Ex-Rights Entitlement” or something that reflects that the rights have been distributed. In case the rights are tradeable and listed on an exchange, they will need to get an ISIN/Sedol/Ticker/WKN/etc which needs to be issued by the Numbering Agencies (although it will be the Agent requesting it). In case there is an interim line involved, an extra ISIN will be required for that line of stock as well. Once the new shares are issued, the static data of the stock with have to be updated with the newly issued amount.
Any exchange that is listing the security will continue to list the security and see a change in pricing on the Ex Date (In theory, the Price will go down to an amount closer to the exercise price of the rights).
Any index that included the security will continue to include the security in the index. The price of the individual share goes down as shareholders can now buy new shares at the exercise price which should in theory be lower than the market price of the shares. Once the newly issued shares are credited the total market capitalisation of the company should be higher (the increase should in theory be the same as the total amount of exercise costs paid to the company).
At CSD level the stock proceeds for the RHDI event need to be booked to participants. To effect this, bookings (so called “Deliveries free of Payment”) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the RHDI need to compensated (Stock Claims), meaning that an additional trade has to be created (also Delivery free of Payment) to deliver the stock proceeds from the seller to the entitled buyer. Messaging is generated at the issuer CSD and sent down the chain. The CSD needs to make sure that the stock transactions coming in and out are reconciling with each other otherwise it would make a loss. For the EXRI event, the Issuer CSD needs to send all messaging down the chain, however it will receive back all instructions from investors as well. The investors can send their instructions via different formats, but in theory, at CSD level all instructions should be received via Swift messages so that they can be processed via Straight Through Processing (STP). On the Pay Date, the CSD will have to debit the cash account of the investors who exercised their rights and credit the newly issued stock in the participants accounts who in turn can credit their underlying clients. Usually it will be the Agent Bank who triggers the payments or sets up the CSD system of automatic payment.
At Custodian level the stock proceeds for the RHDI event need to be booked to Clients. To effect this, bookings (so called “Deliveries free of Payment”) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the RHDI Event need to compensated (Stock Claims), meaning that an additional trade has to be created (also Delivery free of Payment) to deliver the stock proceeds from the seller to the buyer. Messaging is received from the Issuer CSD (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Custodian needs to make sure that the stock transactions coming in and out are Reconciling with each other otherwise it would make a loss. For the EXRI event, the Custodian needs to send all messaging down the chain, however it will receive back all instructions from investors as well after which they have to forward them onward to the investor CSD/Agent again. The investors can send their instructions via different formats, but in theory, at Custodian level all instructions should be received via Swift messages so that they can be processed via Straight Through Processing (STP). On the Pay Date, the Custodian will have to debit the cash account of the investors who exercised their rights and credit the newly issued stock in the clients’ accounts who in turn can credit their underlying clients. Usually the systems will be set up (to a degree) for (semi-)automated payment upon receipt of the messaging from the Investor CSD.
At Broker level the stock proceeds need to be booked for the RHDI event. To effect this, bookings (so called “Deliveries free of Payment”) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the RHDI event need to compensated (Stock Claims), meaning that an additional trade has to be created (a so called “Delivery free of Payment”) to deliver the Stock Proceeds from the seller to the entitled buyer. Messaging is received from the Custodian (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Broker needs to make sure that the stock transactions coming in and out are Reconciling with each other otherwise it would make a loss. For the EXRI event, the Broker/Dealer needs to send all messaging down the chain, however it will receive back all instructions from investors as well after which they have to forward them onward to the investor Custodian again. The investors can send their instructions via different formats, it’s likely that most Broker/Dealer Clients will instruct via the proprietary systems of the Broker Dealer which will generate Swift messages so that they can be processed via Straight Through Processing (STP) higher up in the chain. Not long ago though, instructions could be sent via fax, email or simply over the phone. Some of these processes could still be valid today. On the Pay Date, the Broker/Dealer will have to debit the cash account of the investors who exercised their rights and credit the newly issued stock in the clients’ accounts who in turn can credit their underlying clients. Usually the systems will be set up (to a degree) for (semi-)automated payment upon receipt of the messaging from the Custodians.
If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to effect the transactions in their books. Stock may have to be recalled before the important dates of the event. When it comes to a Rights Issue, if the stock is not recalled (on time) the rights may have to be recalled whilst the shares remain out on loan/collateral. Another option is that lenders pass their instructions onto borrowers, however in that case they will also transfer the subscription costs when choosing to exercise the rights which is likely to be more cumbersome.
Fund Manager needs to study the deal in-depth as they will have to ascertain whether it’s worth paying more money into the company and whether the investment opportunities the company is planning to carry out are in fact as promising as is believed. The fund manager will have to make a decision and pass on instructions accordingly up the chain.
In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the Rights Issue, meaning receiving the rights and potentially trading them, securing the funds for potential exercise of rights and receiving in the new shares. All these transactions need to be included in NAV calculations. These transactions need to be included in investment statements that are sent to investors also.
Vendors will have to update their systems with the correct information for the security and send messaging to their clients about it.
At Retail Bank level the rights from the RHDI need to be booked into Beneficial Owners Accounts. To effect this, bookings (free of payment) need to be made to clients. Open Trades that are in “matched” status as of Record Date of the Stock Dividend event need to compensated (stock claims), meaning that an additional trade has to be created (free of Payment) to deliver the additional shares from the seller to the buyer. However, the volumes of claims at this level are not likely to be substantial. Messaging is received from the higher up in the chain (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. What is interesting to see here is that this seems to be the End Point for Swift Messaging as a means to inform underlying clients. At this level it’s often just a text message or a short description in a “secure message” with a summary of the event details and a reference to where source documentation can be found (online). Retail banks will solicit instructions from their clients, although this is usually just for EXERCISE, LAPSE or NOAC. It’s not a given that rights trading will be facilitated.
When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)
Beneficial owner will have to take note of the event and make a decision on whether they want to pay more money into the company and retain their relative stake in the company or take no action and suffer the effects of dilution. It’s worth noting that there may be “Legal Restrictions” tied to Beneficial Owners being domiciled in certain jurisdictions and the type of investor they are and not all investors may actually be allowed to participate in the event.
Background and other aspects
The Capital Increase is one of the more complex events and there are some differences, for example:
- The ratio “shares : rights” being “1:1” and the ratio “rights : new shares” being “X:Y” for some countries while being the other way around for other countries
- Use of Interim Lines
- Trading in Rights
- Option to oversubscribe regardless of Record Date positions. In some countries the agent would take into consideration what the initial eligibility to participate was.
- Cash Payment Date and Stock Payment date differences
- Existing shareholders need to be given a chance to maintain their stake in the company to prevent dilution. More about dilution can be read here.
- There can be positive reasons; for example, the company wants to build up a so called “War Chest” to facilitate an Acquisition Strategy whereby the Company will have funds to buy other companies.
- There can be negative reasons; for example, during the Financial Crisis (also referred to as the Banking Crisis) of 2008-2009 many companies ran into liquidity problems and had to go “cap in hand” to their shareholders for more money.
The source of the distributed shares should be that they are newly issued shares which in some markets is referred to as Primary Market.
Rights issues can be processed in one or two event types, either using the event type code “RHTS” when processed in one event type or using the event type codes ”RHDI” and “EXRI” when processed in two events. At its Madrid meeting in October 2005, the SMPG agreed that the general way forward is to migrate to process rights as two events.
- Qualifier CAEV = RHDI and EXRI
- CAOP = EXER, OVER, SELL, BUYA, LAPS, NOAC
- Mandatory event => field 22F: CAMV = MAND for RHDI and CHOS for EXRI
An extra word on dilution as this is the premise as to why Rights Issues are being processed.
Dilution can affect shareholders in two different ways:
- The relative stake in the company of each shareholder, in particular relating to the ownership percentage and corresponding voting rights at the AGM/EGM’s
- The expected earnings per share (commonly known as the EPS).
When a company issues new stock and existing shareholders are not buying new shares this will result in a decrease of an existing stockholder’s ownership percentage of that company. When a company increases the number of outstanding shares, each existing stockholder will own a smaller, otherwise referred to as diluted, percentage of the company.
When it comes to the diluted Earnings per Share (EPS), this can be disputed because assuming that the company would invest the money buy for example buying a new company, the earnings per share should in theory increase with it. But there can definitely be a temporary negative effect on EPS.
- Announcement Date
- Ex Date
- Record Date
- Pay Date
- Individual Client Deadlines of several market players (offsets from market deadline)
- Market Deadline
- Guaranteed Participation Date
- Buyer Protection Deadline
- Start of Trading Period
- End Trading Period
- Start of Exercise Period
- End of Exercise Period
- Pay Date
In most countries the ratio for the rights distribution event is 1:1. This means there are no fractions for the first event. For the second event, shareholders are expected to instruct in multiple of the ratio (either in Amount of new shares received “QREC” or amount of rights instructed “QINS”) the remaining rights will lapse worthless or can be sold. This means that there is nog logically any fractions resulting from a rights issue.
DEVELOPMENT OF THE SHARE PRICE
The below information is for informational purposes only – no rights can be derived from it. No investment decisions should be made on the below. In case readers are not sure, they should contact their own financial adviser.
Please find below a description of the effects Rights Issue events can have on the share price in the market. For the calculations the following assumptions are used:
1) the investor holds 100,000 shares in company “ABC” before the rights issue event takes effect
2) the market price of the shares before the event = EUR 5.00
3) the nominal value of the shares before the event = EUR 1.00
Rights Issue (ratios: 1 right for every 1 share, 10 rights entitle to buy 1 new share for EUR 4.00)
In the example the shareholder will receive 100,000 rights based on their holdings of 100,000 shares. With those 100,000 rights they are entitled to buy an additional 10,000 new shares at a subscription price of EUR 4 per share.
Value of their holdings before the rights issue: 100,000 x EUR 5.00 = EUR 500,000.
Value of his holdings after the rights issue:
100,000 x EUR 5.00 = EUR 500,000.
10,000 x EUR 4.00 = EUR 40,000
value of 110,000 shares: EUR 540,000
Theoretical market price after the Ex Date of the rights issue: EUR 540,000 / 110,000 = EUR 4.91 per share.
The theoretical value of every right equals therefore: EUR 5.00 – EUR 4.91 = EUR 0.09. In reality however, the Rights Issue takes place over a period of time in which the value of the shares will change and hence the value of the rights will change accordingly.
Please note that every shareholder has got 4 basic options in a rights issue event:
1) Take No Action and let the rights lapse worthless.
please note that under this option the value of their holdings decreases – theoretically – from EUR 500,000 to EUR 491,000. Put differently: they lose 100,000 x (EUR 5.00 – EUR 4.91) = EUR 9,000.
2) Sell the rights.
Under this option they will not lose any value if they manage to sell their rights for at least EUR 0.09 each.
3) Exercise the rights in order to subscribe to 10,000 new share for a total amount of EUR 40,000
In this case the value of his original holdings stays the same, however, they needs to invest an additional EUR 40,000 to achieve this.
4) buy (and subsequently exercise) additional rights from other shareholders. In this case the shareholder could make a profit if they manage to buy the rights for less than EUR 0.09 per right.
Combinations of the options mentioned above are possible as well.
The above are THEORETICAL calculations only. In reality, a rights issue will take place during the course of a couple of weeks and the share price is subject to several factors, like developments in underlying operations, macro-economic data and market sentiment. Also a shareholder needs to be confident that the management of the company will find good use for the extra money.
(Please note that any investment decisions made based on the content of this site are entirely at the reader’s risk only. Corporate-Actions.net and its owner take no responsibility.)
SETTING THE EXERCISE PRICE
The company is interested in raising as much money as possible and therefore in theory would like to set the exercise price as high as possible.
Shareholders and underwriters on the other hand will be interested in an exercise price that gives a substantial discount to the market. If the exercise price is too close to the market price of the securities, than investors have no real incentive to subscribe to new shares in the event (they can otherwise buy the same shares in the market for the almost same price).
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