In this post we will discuss one of the most important and overly watched corporate event for listed companies.

The name goes to “Rights Issue” or just ”Rights” or “Capital Increase With Preferential Subscription Rights Attached“.

Dilution in corporate finance

If you think about it, when ever the company issues new shares, the percentage of stack holding for any existing shareholder would actually decrease. If you hold a 51% stack in a company for example which is equivalent to say 51 shares (Considering a total shares outstanding of 100 shares). Your stack ratio would decrease by half if the company issues another 100 shares. So the ratio would decrease to 25.5% (51% / 2). This operation is called “Dilution” which is the decrease of value of someone’s stack held in any given company

Shareholders matter !

What you should also know is that shareholders interest is kept sacred for any company in the world of finance. What ever we can do to satisfy the shareholders is deeply welcomed. This means that stack dilution is not a lovely concept, and we really don’t want shareholders to be pissed of seeing their stack decreasing without them being consulted or given the choice to intervene. And this is where “Rights issue” comes to rescue.

Rights

This is what happens in reality: The company declares a Capital increase with preferential rights attached, it results into the creation and attachment of the right security (And yes, the right is a security by itself) to the share of the company. At this point we say “the company’s shares are trading with rights attached“.

This right would give the shareholder the priority to subscribe to new shares in this new share issue to protect his existing stack level.

The company decides the rights ratio relative to the level at which the capital would increase as a result of the new shares to be issued.

Example

If the company has 100 shares and is planning to issue new 50 shares, this means a capital increase with a ratio of 50%. This 50% will then be the ratio that the right security give to the existing shareholders.

Let’s do illustrations:

Consider a company “XYZ”

  • Existing share capital: 6 shares
  • Number of shareholders: 2

The company decides to implement a capital increase through issue of another 3 shares with preferential rights to existing shareholders:

dilution in rights event

As you can see above, each shareholder had the right to subscribe for a number of shares that would allow him to maintain his existing stack. This is what we also call subscribing to the capital increase on an irreducible basis.

Reducible and non-reducible basis

If you browse the capital increase documents for rights issues, you will see mentioning something like this “The shareholders can subscribe for new shares on a reducible as well as non reducible basis”.

In the previous illustration we showed you that each shareholder is given the right to subscribe for his specific ratio.

What if this shareholder does not use this option ?

Exercising the rights is an option not an obligation. In case he does not use them he should then be fine seeing his stack being reduced.

Is there any other benefit to these Rights securities ? is it only used to subscribe for new shares ? Can the shareholder get cash compensation for his stack dilution ?

The answer is that the shareholder can either exercise his rights to subscribe for new shares or he can actually sell those rights in the market. Yes these rights have value and they can be sold during the “Trading period“. The priority aspect of these rights gives them value especially when talking about important companies that operate in key areas. The ownership and stack holding percentage is very important, as it may give you the “Veto” power during General Meeting that draw key decisions for any public company. So you are not just holding shares you can be holding “Decision Power“. The trading period is the period in which the right can be sold to anyone in the market including other shareholders of the same company.

What none of the shareholders exercises their rights ?

The shares will then be presented to the public.

let’s connect the dots now

So we say that the shareholders have the right to subscribe on a non-reducible (using their rights which 100% guarantees a specific number of shares), as well as on a reducible basis (Which does not guarantee your subscription order to be filled).

In a (non priority) or (reducible basis) subscription, subscription orders are received an filled in a “FIFO” model (First in first out), so subscriptions are filled in order time. The number of shares presented to the public is fixed so if you ask first you get the priority.

Trading period and subscription period of the rights

  • Trading period: Is the period in which rights can be traded, so right holder can sell it the first time to someone else, and that guy can sell it again…..
  • Subscription period: Is the period in which holders of the Rights can exercise those rights to get new shares.

Subscription period for the public

Is the period in which the public is then presented the shares not subscribed under the priority period for the existing shareholders.

By definition we can split all the periods like this, because usually they get merged to each other, a real example will be provided below:

rights periods

Main details involved in the Rights issue corporate action

  • Subscription price: is the price the price at which the shareholders can subscribe for the new shares as well as the public, there is no discount for the existing shareholders in terms of price.
  • Ratio: is the number of new shares relative to the old existing shares held. Ex: 1 new share for each 2 existing shares as in our example above. So we say: ratio = 1/2
  • Maximum number of shares to be issued: We say maximum because we don’t really know exactly how many shares investors will ask for.
  • Trading period
  • Exercise period
  • Right ISIN: which is the identifier of the rights securities worldwide
  • Rights symbol
  • Rights label
  • Listing date of the new shares

Real example of a Rights issue:

  • Company: N.V.T.
  • Market: Euronext Paris Free market
  • ISIN: ES0158252017

Event source can be found HERE:

  • Ratio: You can see that the ratio is 1 new share for each 5 shares previously held.
  • Maximum number of shares to be issued: 2,586,854
  • Subscription price is 11.6 EUR composed of 0.05 EUR of nominal value + 11.55 EUR as an issue premium.
  • Subscription period: If you check the source document you can read the following:

In accordance with Article 305 of the LSC, the subscription period will last a month and start the day following the publication of this announcement (the ” Preference Subscription Period “). This period cannot be extended. Rightful Shareholders may exercise their preference subscription rights during the Preference Subscription Period.

so the subscription period will last a month as of the publication date which is 2018-11-14

  • Trading period and public subscription period: Before i told you that in theory, the subscription period is defined separate to the trading period. But in reality which is “country dependent”, they merge these two periods in one. They can also merge the public non priority subscription period too. So instead of this:
rights periods

You end up with this:

So in the same period, you have:

  • The rights listed and traded
  • People exercising the rights and the public sending their own subscription requests.

All at the same time but still the rules are applied, and they would prioritize the existing shareholders rights first then serve the public requests.

This is what happens in “Euronext”, which is a global central European market regulating France, Portugal, Belgium, and Netherlands in one central exchange.

Keep in mind what exists in theory, and be flexible with any market rules.

I think this is enough for the rights issue corporate action. let’s jump in to another event now.

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