Confused on rights. Their defined purpose is to give existing shareholders the opportunity to retain their proportional ownership amount when a company is going to issue more shares. In all of the examples however, 1 right does not allow the investor to purchase one new share. If they receive one right per share of common stock they own, but it takes 4 rights to purchase one share of the newly issued stock, how is this helping them keep their ownership percentage?
Not sure what I’m overlooking here.
1 Like
Hi @Bennie_Kuhn - great question. We’ll go through an example to discover why rights are structured the way they are. Quick answer to your question - the structure gives the corporation needed flexibility to align new offerings with currently outstanding shares.
Let’s assume ABC Corp. has 100 shares outstanding and you own 10 of those shares, representing a 10% ownership. ABC Corp. wants to distribute 100 more shares through an additional public offering (APO). You would be granted 10 rights (1 per share owned). To maintain your same 10% ownership, you would need to obtain 10% of the new shares being offered, which would be 10 additional shares (100 new shares x 10% = 10 shares). In this example, 1 right would be needed to purchase 1 new share (10 rights for 10 new shares). If every rights offering were this simple, it would be easy to understand!
We’ll reset the example back to the start - again, let’s assume ABC Corp. has 100 shares outstanding and you own 10 of those shares, representing a 10% ownership. This time, ABC Corp. wants to distribute 50 more shares through an APO. You would again be granted 10 rights (1 per share owned). To maintain your same 10% ownership, you would need to obtain 10% of the new shares being offered, which would be 5 additional shares (50 new shares x 10% = 5 shares). In this example, 2 rights would be needed to purchase 1 new share (10 rights for 5 new shares).
In the second example, ABC Corp. was issuing fewer new shares (50) than were originally outstanding (100). When this occurs, more than 1 right will be needed to obtain 1 new share. It’s rare for a corporation to perform an APO the size of their current outstanding shares (doubling their outstanding shares), so that’s why most rights offering questions are structured the way they are.
I hope this helps! It’s a bit of a confusing topic, so please let me know if you have additional questions.
1 Like
This answers my question concisely and very easily understood, you guys are awesome! If all things were taught in the manner used in this platform, I would be one educated fool.
1 Like