OPTIONS FOR INVESTORS IN RIGHTS ISSUES

EXERCISE

Rights can be exercised to subscribe to new shares

OVERSUBSCRIBE

In theory every shareholder can subscribe to an amount of shares that is equivalent to their present 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.

For example:

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 his rights and subscribes to 2,000 new shares and gives instruction to oversubscribe to 1,000 new shares.
Let's say that 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.

BUY

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.

SELL

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.

LAPSE

The investor might conclude that the rights offering is unattractive (out-of-the money for example) and instruct his broker or custodian to let the rights lapse. Rights can lapse worthless (they will be booked out as wortless after the event) or they can result in a (small) cash payment.

NOAC

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.

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