Subsequent rights offerings: Overview, definition, and example
What are subsequent rights offerings?
A subsequent rights offering is a process in which a company offers additional shares of its stock to existing shareholders, usually at a discounted price, after an initial public offering (IPO) or previous rights offering. These offerings allow current shareholders to maintain their proportional ownership in the company by purchasing new shares before they are made available to the general public. A subsequent rights offering can be used by a company to raise capital, reduce debt, or fund specific business projects, while giving existing shareholders the first opportunity to buy additional shares and preserve their ownership stake.
Subsequent rights offerings are often referred to as "follow-on" rights offerings, as they occur after the initial issuance of shares and give current shareholders the right (but not the obligation) to purchase additional stock.
Why are subsequent rights offerings important?
Subsequent rights offerings are important because they provide existing shareholders with an opportunity to maintain their ownership percentage in a company. Without this offering, shareholders could be diluted by new shares issued to the public. By offering shares first to existing shareholders, a company can raise capital without significantly affecting the ownership structure. Additionally, subsequent rights offerings can help companies raise funds quickly, often at a lower cost than other forms of capital raising, such as debt issuance or a public stock offering.
These offerings also allow companies to take advantage of favorable market conditions, raise funds for strategic initiatives, and demonstrate a commitment to existing shareholders by giving them preferential treatment.
Understanding subsequent rights offerings through an example
Imagine a technology company that has previously gone public and is now looking to raise additional funds to finance a new product development. The company decides to conduct a subsequent rights offering, offering 1 million additional shares to existing shareholders at a price of $10 per share, significantly lower than the current market price of $15. This allows current shareholders the opportunity to buy new shares at a discount and maintain their current ownership stake.
In another example, a biotech company that previously raised capital through an IPO needs additional funds for clinical trials. Instead of issuing new shares to the public, the company offers the new shares to existing shareholders via a subsequent rights offering. Shareholders can exercise their rights to purchase the new shares at a discounted price, providing the company with the capital it needs while protecting existing investors from dilution.
An example of a subsequent rights offering clause
Here’s how a subsequent rights offering clause might look in a contract or agreement:
“The Company shall have the right to conduct a subsequent rights offering to its existing shareholders, whereby each shareholder shall have the opportunity to purchase additional shares of stock at a price to be determined by the Company, but not less than 85% of the current market price. The terms and conditions of the rights offering shall be set forth in a separate notice to shareholders and will include the period during which shareholders can exercise their rights to purchase additional shares.”
Conclusion
Subsequent rights offerings are an effective method for companies to raise capital while providing their existing shareholders with an opportunity to maintain their ownership percentage. By offering additional shares at a discount, these offerings help protect shareholders from dilution and strengthen the company’s capital position. A well-structured subsequent rights offering can be a valuable tool for businesses looking to raise funds, whether for expansion, debt reduction, or other strategic initiatives, while also fostering shareholder loyalty and trust.
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.