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A pre-emptive right is the right of existing stockholders to purchase new issues of the company stock before it is offered to the public, so that existing stockholders can maintain proportionate ownership of the company, if desired. Although most states have laws that give shareholders pre-emptive rights, the company may, depending on the law, pay stockholders a fee to waive their pre-emptive rights or the pre-emptive rights may exist only if so specified in the corporate charter. Pre-emptive rights were more prevalent in the past, but are rare today.
So if a corporation offers pre-emptive rights and wants to raise more money by issuing new shares from its authorized, but unissued shares, it will offer rights to existing shareholders so that they can maintain their proportionate ownership of the company. The company will provide existing stockholders with subscription rights (aka rights certificates), giving stockholders the right, but not the obligation, to buy the new shares at a specified price—the subscription price—which is usually lower than the market price. A benefit for the company of selling to existing shareholders is that marketing costs will be less than selling to the general public. The rights offering is generally handled by investment bankers in a standby commitment, where the investment bank agrees to buy any shares not subscribed to by the holders of rights.
A stockholder usually receives 1 right for each stock owned at the rights record date, when the rights certificates are issued to shareholders as of the rights record date. This gives the stockholder the right, but not the obligation, to buy additional shares of stock at the subscription price. To buy an additional share of stock requires a certain number of rights, and the number of rights required will be the quotient of the number of issued shares divided by the number of newly issued shares. If there is a remainder, then there will be a dollar amount added to the number of rights required to purchase each share. This will allow the shareholder to buy enough shares to maintain proportionate ownership, but no more.
| 1 Share of Stock = | Issued Shares Number | Rights | + Possible Specific Dollar Amount |
| Newly Issued Shares Number |
When a stock with rights is trading on the stock exchange, it is said to have cum-rights, and it will probably have a higher market value than the same stock trading ex-rights (aka rights off)—without rights. The ex-rights date begins 2 days before the rights record date and ends when the rights expire. From the time of the announcement of the rights offering to the ex-rights date, the rights are attached to the stock. During the ex-rights period, the rights are sold separately, just like a stock. When a stock is trading with rights, the value of a right is (market value – subscription value)/(number of rights to buy 1 share +1).
| Value of 1 Cum Right = | Stock Market Value - Subscription Value |
| Number of Rights needed to Buy 1 Share of Stock + 1 |
However, this value is theoretical because the right is attached to the stock and therefore is bought and sold with the stock during the cum-rights period. During the ex-rights period, the rights are sold separately, like a stock, and the formula is the same, but without the +1 in the denominator.
| Value of 1 Right = | Stock Market Value - Subscription Value |
| Number of Rights needed to Buy 1 Share of Stock |
When the rights expire, usually 4 to 6 weeks after the ex-rights date, they become worthless.
| The advertisement below the chart is for a rights offering by USG Corporation (NYSE: USG, Rights Symbol: USG RT) that appeared in the Wall Street Journal on Wednesday, July 19, 2006. The closing prices for the stock on June 30, July 19, and July 27, 2006 were $72.93, $47.65, and $46.12. Directly below is a 2 month chart (source: BigCharts.com) showing the daily stock prices before and after the rights offering.
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Milacron Launches Stock Rights Offering |
CINCINNATI, OHIO, October 6, 2004...Milacron Inc. (NYSE: MZ) intends to sell up to 16.3 million new shares of common stock in a "rights offering" to its shareholders of record as of 5:00 p.m. EDT on October 18, 2004. The Securities and Exchange Commission declared the registration statement for Milacron's rights offering effective as of 4:00 p.m. EDT today. In approximately two weeks, Milacron will distribute to all shareholders of record subscription certificates evidencing the right to purchase the new shares, together with a copy of the prospectus, which describes the terms of the rights offering in detail. Under the terms of the rights offering, each holder of common stock (other than any common stock received upon conversion of Milacron's Series B Convertible Preferred Stock) will be granted 0.452 non-transferable rights for each share of common stock held on the record date. The number of rights granted to each holder of common stock will be rounded up to the nearest whole number, and each right will be exercisable for one share of common stock at a subscription price of $2.00 in cash per share. Currently, there are approximately 35.8 million outstanding shares of Milacron common stock, all eligible to receive subscription rights. The rights offering, which Milacron may cancel at any time, is scheduled to expire at 5:00 p.m. EST on November 22, 2004, unless extended, at the company's discretion, to a date no later than January 7, 2005. |
Milacron Completes Stock Rights Offering |
CINCINNATI, OHIO, December 13, 2004...Milacron Inc. (NYSE: MZ) has successfully concluded a stock rights offering, which expired at 5 p.m. ET on Friday, December 10. The offering was 78% subscribed and will result in the issuance of 12.7 million new shares of Milacron common stock. The gross proceeds to Milacron from the rights offering will be approximately $25.4 million. The company expects to use most of the net proceeds to repurchase a portion of its 6% Series B Convertible Preferred Stock. Including shares to be issued in connection with the rights offering, Milacron will now have approximately 48.5 million shares of common stock outstanding. |
Note: Closing price of stock, June 27, 2003: $10.37
South San Francisco, CA - June 30, 2003
Rigel Pharmaceuticals, Inc. (Nasdaq: RIGLD) today announced the commencement of a stockholder rights offering. The rights offering is a distribution of non-transferable subscription rights on a pro rata basis to each Rigel stockholder as of April 29, 2003, the record date of the rights offering. Each stockholder will receive one basic subscription right to purchase 0.4508 of a share of Rigel common stock at $5.76 per share for each share owned as of the record date. If all subscription rights are not exercised, stockholders who have exercised their basic subscription right, can also subscribe to those unsubscribed rights. If all subscription rights are exercised, Rigel will issue approximately 1,763,111 shares of its common stock in the rights offering, raising gross proceeds of approximately $10 million.
The subscription rights are exercisable from June 27, 2003 until 5:00 p.m. Central Daylight time on July 25, 2003, the expiration date, unless extended by Rigel. Subscription certificates were mailed, along with a prospectus, on or about June 27, 2003, to each stockholder of record as of April 29, 2003 (other than certain stockholders who have waived their right to participate in the rights offering). Copies of the prospectus may be obtained by contacting the subscription agent, Wells Fargo Shareowner Services, at 800-468-9716.
Sometimes, a company wants to move money from a reserve account to a capital account on its balance sheets to convert reserve capital into ordinary share capital. To accomplish this, the company will issue more shares for this extra cash in the capital account as bonus issues to current shareholders in proportion to their holdings, which is similar to a rights offering, but the current shareholders do not have to pay for the new issue. However, the company does need the approval of the shareholders to issue bonus shares.
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