Fractional warrants: Overview, definition and example
What are fractional warrants?
Fractional warrants refer to stock warrants that represent a fraction of a whole warrant or share, rather than an entire unit. Warrants give the holder the right (but not the obligation) to purchase a company’s stock at a predetermined price before a specified expiration date. When a warrant is issued in fractional amounts, it may require multiple fractional warrants to be exercised together to purchase a full share.
For example, if an investor holds 1.5 fractional warrants and each full warrant allows the purchase of one share, the investor would need to acquire an additional 0.5 warrant to exercise their right to buy one whole share.
Why are fractional warrants important?
Fractional warrants are important because they arise in various financial transactions, such as corporate mergers, stock splits, or public offerings, where share entitlements do not always result in whole numbers. Instead of rounding up or down, companies may issue fractional warrants to ensure fair allocation.
For businesses, properly handling fractional warrants prevents disputes and ensures transparency in stock-related transactions. However, many companies have policies stating that fractional warrants cannot be exercised individually, meaning they may either be rounded up, combined with other warrants, or settled in cash instead of stock.
Understanding fractional warrants through an example
Imagine a company issues stock warrants to investors, with three warrants required to purchase one share. If an investor holds four warrants, they effectively own 1.33 fractional warrants, meaning they do not have enough to buy a full second share unless they acquire additional warrants.
In another example, a company merges with another business, and shareholders receive 0.75 of a warrant for each share they previously owned. If a shareholder holds an odd number of shares, they may end up with fractional warrants that either accumulate over time or are settled through cash payments instead of stock.
An example of a fractional warrants clause
Here’s how a fractional warrants clause might appear in a financial agreement:
“No fractional warrants shall be issued upon exercise of this Warrant. If the Holder would otherwise be entitled to receive a fractional warrant, the Company may, at its discretion, either round up to the nearest whole warrant, combine fractional entitlements, or make a cash payment in lieu of issuing fractional warrants.”
Conclusion
Fractional warrants are a common occurrence in financial transactions where stock-related allocations do not result in whole numbers. While they allow for precise distribution, they are often subject to rounding policies or cash settlements. Clearly defining the treatment of fractional warrants in agreements ensures fairness, transparency, and efficiency in stock transactions.
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.