Exercise of warrant: Overview, definition, and example
What is exercise of warrant?
Exercise of warrant refers to the process by which a holder of a warrant—a financial instrument granting the right to buy a company’s stock at a specific price—chooses to purchase the underlying shares. Warrants typically include details such as the exercise price (the price at which shares can be purchased) and the expiration date (the deadline for exercising the warrant).
For example, if an investor holds a warrant to buy shares at $10 each and the current market price is $15, exercising the warrant allows them to acquire shares below the market value.
Why is exercise of warrant important?
The exercise of a warrant is important because it allows the holder to capitalize on favorable market conditions, potentially generating profits or acquiring shares at a discount. For companies, warrants can serve as a tool for raising capital, incentivizing investors, or rewarding employees.
The process is also critical for ensuring compliance with the terms of the warrant, such as deadlines and payment conditions. Both the warrant holder and the issuing company must follow the specified procedures to complete the transaction.
Understanding exercise of warrant through an example
Imagine an investor holds a warrant to buy 1,000 shares of a company’s stock at an exercise price of $20 per share. If the market price of the stock rises to $30, the investor can exercise the warrant, purchasing 1,000 shares at $20 each and immediately gaining $10 per share in unrealized value.
An example of an exercise of warrant clause
Here’s how an exercise of warrant clause might appear in an agreement:
“The Warrant Holder may exercise this Warrant, in whole or in part, at any time prior to the Expiration Date by delivering written notice of exercise to the Company, along with payment of the Exercise Price for the number of shares being purchased. The Company shall issue the corresponding shares within [Insert Time Period] following receipt of notice and payment.”
Conclusion
Exercise of warrant enables investors or employees to purchase shares at a predetermined price, often below market value, offering opportunities for profit or ownership in the company.
By including clear terms for exercising warrants, companies can ensure a smooth process, align with investor expectations, and maintain transparency in financial and contractual arrangements.
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.