Series 6: 4.1.4. Rights

4.1.4.  Rights

Sometimes companies decide to raise money by carrying out a rights offering, also called a rights issue, in which the company sells new shares to current shareholders. An issuer may hold a rights offering if it needs money but is having difficulty getting financing. Companies may also hold a rights offering to fulfill their obligation to shareholders who hold pre-emptive rights, or to fulfill the provisions of an anti-dilution agreement. Anti-dilution agreements give investors the right to maintain their percentage share in the company in the event new shares are issued. In a rights offering, current shareholders are offered the right to purchase enough additional stock to keep their ownership in the company proportionate to what it was before the rights offering. 

Usually, a rights offering entitles stockholders to buy the additional shares at a discount to the market price. The rights given to investors in a rights offering may be referred to as subscription rights or simply rights. It is important to realize that a right gives the holder a right to, but not an obligation to, purchase additional shares. A subscription right is similar to a warrant in that it offers the holder the right to buy a share at a particular price. However, rights have a shorter life than warrants, usually two to four weeks. The rights holder may decide to ignore the rights offering and let the rights expire. If th