Delivery of warrant shares upon exercise: Overview, definition, and example
What is the delivery of warrant shares upon exercise?
The delivery of warrant shares upon exercise refers to the process by which an individual or entity exercises their rights under a warrant agreement to purchase shares of stock, and the company subsequently delivers those shares to the warrant holder. A warrant is a financial instrument that gives the holder the right (but not the obligation) to purchase shares of a company at a predetermined price, known as the exercise price, within a specific period.
When a warrant holder decides to exercise their right, they must submit the exercise notice and pay the exercise price. Upon receipt of the notice and payment, the company then issues the corresponding number of shares and delivers them to the warrant holder. This process marks the conversion of the warrant into actual equity shares of the company.
Why is the delivery of warrant shares upon exercise important?
The delivery of warrant shares upon exercise is important because it facilitates the conversion of a warrant into common shares, allowing the holder to become an equity shareholder of the company. This process ensures that the company honors its obligations under the warrant agreement, and that the warrant holder receives the shares they are entitled to upon exercising the warrant.
For the company, delivering the shares upon exercise also means receiving the exercise price, which provides additional capital. For the warrant holder, it represents an opportunity to own part of the company at a set price, often with the potential for profit if the stock value has increased since the warrant was issued.
Understanding delivery of warrant shares upon exercise through an example
Imagine a company issues warrants to investors as part of a financing deal. Each warrant gives the holder the right to purchase one share of stock for $10 per share within five years. After two years, the stock price increases to $20 per share, making the warrant an attractive opportunity. The warrant holder decides to exercise the warrant and buys 100 shares for $10 each, totaling $1,000.
Upon receiving the exercise notice and payment of $1,000, the company delivers 100 shares of stock to the warrant holder. The warrant holder now owns the shares, and the company has received the exercise price, which can be used for its operations.
In another example, suppose a company’s warrant agreement states that shares will be delivered electronically to the warrant holder’s brokerage account once they exercise their warrants. The company’s share registrar updates the shareholder records, ensuring that the holder’s ownership is reflected accurately.
An example of a delivery of warrant shares upon exercise clause
Here’s how a delivery of warrant shares upon exercise clause might look in a warrant agreement:
“Upon receipt of the exercise notice and full payment of the exercise price, the Company shall deliver the Warrant Shares to the Holder within [X] business days. Delivery of such shares shall be made through electronic transfer to the Holder’s designated brokerage account or by issuing physical certificates, as determined by the Company.”
Conclusion
The delivery of warrant shares upon exercise is a critical step in the process of warrant exercise, marking the conversion of a warrant into actual equity. This process provides value to the warrant holder by allowing them to become a shareholder, while the company benefits from the additional capital raised through the exercise price. Clear and efficient procedures for delivering the shares upon exercise help ensure smooth transactions and maintain transparency between the company and its investors.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.