Glossary for Rights Issues

Announcement date

The date at which the company announces the event officially

Exdate

The date at which the parent line shares trade without the entitlement to the rights. For example if the rights issue has an exdate 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.

Record date

Date at which holdings are being taken in order to calculate entitlements.

Deposit date

Date at which the rights have to be settled in the account of a direct market participant or agent bank.

Exercise period

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.

Trading period

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

Nil paid 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.

Fully paid rights

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.

Ratios

There are 2 ratios in the event of a rights issue: the amount of rights one is entitled to per original parent line share one held and 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 old : 1 old) and 5 rights entitle to subscribe to 2 new shares (5 old : 2 new).

Parent line shares

The actual shares of the company that cary the entitlement to the rights.

Resultant line security

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.

Young shares

When the event of a rights issue takes place during 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.

Oversubscription

Shareholders can be entitled 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.

Options

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.

In the money

If the exercise price is lower than the market price of the shares the rights issue is called "in the money". It is attractive to subscribe to the new securities, because they can be sold in the market for a higher price

Out of the money

The compay 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

At the money

When the exercise price is exactly the same as the price of the securities in the market, the event is called "at the money".

Exercise

The hoder of the rights decideds to send an instruction to their broker or custodian to exercise the rights in order to buy the new securities.

Oversubscribe

The holder of the rights has the right to subscribe to more shares than they would be entitled to by just exercising the rights. Oversubscription is often subject to scaleback (in case too many shares are being subscribed to). Oversubscription is not always possible in every rights issue.

Buy

Basically anybody can buy rigths if the rights are tradeable (even if they didn't hold the shares on the exdate and the record date of the rights issue event.

Sell

The holder of the rights decides to send an instruction to their broker or custodian to sell their rights.

Lapse

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.

Noac

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.

Market deadline

This is the official daedline set by the agent of the event by which all instruction need to be received.

Custodian deadline

This is the deadline that the custodians set for their clients.

Broker deadline

This is the deadlien that the brokers set for their clients

Claims

Due to the difference in trade date and settlement date of the shares into accounts when trading. Shares that are traded and settled over the exdate of a rights issue need to be compensated. For example: If a settlement cycle is t+3, meaing all trades are settled in accounts 3 days after trade date (T) and if trader A sells 100 shares to trader B on 23.03.2009 and the exdate 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 (since the will only settle into the custodian's account of trader B on 26.03.2009. When the paying agent credits the rights to shareholders on exdate (without 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 exdate, he is entitled to the rights. Trader B has to claim the rights from trader A. This process is also being referred to as compensation.

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CUM / EX

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.

Exercise price

This is the price that needs to be paid for the new securities that result from the rights issue event. This price usually is offered at a discount to the current market price.

Bookbuilding

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.

Paydate

There are two paydates in a rights issue; cash pay date and stock pay date. Both 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 paydate is the date at which the resultant shares will be dispatched.

Paying agent

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 managment, collecting the money and issuing the new shares.

Underwriters

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 buy all the shares at the exercise price that other shareholders did not subscribe to. In that way a succesfull capital increase is guaranteed for the company. The company will have to pay the underwriters a fee for taking over the risk.

Lapsing rights

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 agains money. In case they are being lapsed worthless, they will just be booked out of the accounts worthless. Sometimes, the leadagent tries to find buyers for the additional rights and in that case the rights will lapse versus money.

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