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Lecture

rights issue

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Department
Sociology
Course
SOC 2010
Professor
Linda Hunter
Semester
Fall

Description
What is a rights issue? A rights issue is an issue of new shares for cash to existing shareholders in proportion to their existing holdings. A rights issue is, therefore, a way of raising new cash from shareholders - this is an important source of new equity funding for publicly quoted companies. Why issue shares to existing shareholders? Legally a rights issue must be made before a new issue to the public. This is because existing shareholders have the “right of first refusal” (otherwise known as a “preemption right”) on the new shares. By taking these preemption rights up, existing shareholders can maintain their existing percentage holding in the company. However, shareholders can, and often do, waive these rights, by selling them to others. Shareholders can also vote to rescind their preemption rights. How are the shares sold in a rights issue priced? The price at which the new shares are issued is generally much less than the prevailing market price for the shares. A discount of up to 20-30% is fairly common. Why would a business offer new shares at a price well below the current share price? The main reason is to make the offer relatively attractive to shareholders and encourage them either to take up their rights or sell them so the share issue is "fully subscribed". The price discount also acts as a safeguard should the market price of the company's shares fall before the issue is completed. If the market share price were to fall below the rights issue price, the issue would not have much chance of being a success - since shareholders could buy the shares cheaper in the market than by taking up their rights to buy through the new issue. Do existing shareholders have to take up their rights to buy new shares? In a
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