Reservation of securities: Overview, definition, and example
What is reservation of securities?
Reservation of securities refers to the practice in which an entity, such as a company, retains or sets aside certain securities (such as stocks, bonds, or other financial instruments) for a specific purpose, typically to ensure that they are available for future use, such as for issuance, transfer, or distribution under certain conditions. It may involve a legal right or arrangement that prevents the sale or transfer of the securities until specific terms or conditions are met. The reservation of securities can be part of a corporate strategy, such as in the case of stock options, rights offerings, or other financial transactions.
For example, a company may reserve a certain number of shares to distribute to employees as part of an employee stock option plan.
Why is reservation of securities important?
Reservation of securities is important because it helps organizations manage their financial instruments and plan for future funding or operations. By reserving securities, companies can ensure that they have the necessary assets available for key strategic purposes, such as raising capital, issuing stock to employees, or meeting other financial obligations. It also provides a level of security for stakeholders, ensuring that they can access securities as needed under predefined conditions.
For investors and stakeholders, the reservation of securities can be important in understanding a company’s financial flexibility and future plans, such as how and when they might be able to acquire shares or other securities.
Understanding reservation of securities through an example
Imagine a corporation that decides to reserve 10% of its outstanding shares for a future rights offering to existing shareholders. By reserving these shares, the company ensures that current shareholders will have the opportunity to purchase additional shares at a discounted price before the shares are offered to the public. This strategy is intended to maintain shareholder control and raise capital without diluting existing ownership too much.
In another example, a venture capital firm may reserve a certain percentage of equity in a start-up company to allocate to key employees as part of a future compensation package. This helps the firm incentivize top talent while ensuring that equity is available when needed.
An example of reservation of securities clause
Here’s how a clause related to reservation of securities might appear in a contract or agreement:
“The Company reserves [number/percentage] of its outstanding shares for future issuance to employees under the Employee Stock Option Plan, subject to approval by the Board of Directors. The reserved shares will not be available for sale, transfer, or issuance for purposes other than those outlined in the Plan.”
Conclusion
Reservation of securities is a strategic tool used by companies to ensure that they have the necessary financial instruments available for future purposes, such as raising capital, rewarding employees, or fulfilling other financial obligations. By clearly defining the terms of reserved securities, companies can provide transparency and maintain control over their financial instruments while planning for future growth and operations. Understanding how securities are reserved helps investors and stakeholders evaluate the company’s financial planning and strategic direction.
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.