Stock rights - Stock rights(akapre-emptive...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Stock rights  (aka  pre-emptive rights subscription rights oversubscription privilege ) are rights given to existing  stockholders to purchase  new issues  of the company stock before it  is offered to the public, so that existing stockholders can maintain  proportionate ownership of the company, if desired. Although most  states have laws that give shareholders pre-emptive rights, the  company may, depending on the law, pay stockholders a fee to  waive their pre-emptive rights or the pre-emptive rights may exist  only if so specified in the corporate charter. Pre-emptive rights were  more prevalent in the past, but are rare today in the United States.  However, pre-emptive rights are prevalent in Europe, since  European security laws typically require that the companies offer  their shareholders the right of first refusal. So if a corporation offers pre-emptive rights and wants to raise more  money by issuing new shares from its authorized, but unissued  shares, it will offer rights to existing shareholders so that they can  maintain their proportionate ownership of the company. The  company will provide existing stockholders with  subscription rights  (aka  rights certificates ), giving stockholders the right, but  not the obligation, to buy the new shares at a specified price—the  subscription price —which is usually lower than the market price. 
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
A benefit for the company of selling to existing shareholders is that  marketing costs will be less than selling to the general public. The Role of Investment Banks in a Rights Offering Sometimes, a company will manage its own offering as a  self-run deal , but, usually, the  rights offering  is handled by investment  bankers in a standby commitment, where the investment bank  agrees to buy any shares not subscribed to by the holders of rights.  Hence, there is a certain amount of risk for the investment bankers.  Investment banks charge a fee both for their services and to cover  their risk of having to buy unsold shares, especially if the stock price  drops below the subscription price. To reduce this risk,  originating   investment banks  spread their risk by using an underwriting  syndicate and selling groups, who, for a part of the fee, guarantee  the sale of the securities. Prior to the credit crisis of 2008, the fee was about 1.9% of the  offering for deals of $250 million or more, for the originating bank,  and syndicate members got 1%; however, during the credit crisis of  2008 and 2009, fees had increased to 3% for the originating bank 
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 12

Stock rights - Stock rights(akapre-emptive...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online