Subscription Right (Shareholders) - Explained
What is a Subscription Right?
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Table of ContentsWhat is a Subscription Right?How is a Subscription Right Used? Example of a Subscription RightAcademic Research on Subscription Rights
What is a Subscription Right?
A subscription right describes the right held by existing shareholders of a company which enables them to maintain their percentage ownership of a company by subscribing to a number of shares that will be issued by the company at an official issue date. Subscription is a clause in an option or merger agreement which is usually enforced through the use of rights offerings. With this right, existing investors or shareholders of a company can subscribe to a new issue at the market price or below. This right allows existing shareholders to retain an equal percentage ownership in the company. A subscription right is otherwise called "preemptive right," "subscription privilege," or "anti-dilution right."
How is a Subscription Right Used?
In an option or merger agreement, a subscription right is a clause commonly included, this right guarantees an equal percentage ownership of a company by its existing shareholders or investors. Not all companies give subscription rights to their existing investors, although, there can be some level of dilution protection for shareholders in the charters of these companies. A subscription right allows a shareholder to buy an amount of a new issuance of stocks at or below the market price at a specified date before these stocks are offered in the secondary market. It is a strong form of dilution or merger protection, usually, shareholders or investors get notified of their subscription right through their brokers, custodians or via emails. Existing shareholders have up to 30 days before the new stocks are offered to the secondary markets.
Example of a Subscription Right
There are diverse ways companies structure subscription rights for their existing shareholders. A subscription right is enforced by the use ofrights offerings and shareholders who fail to exercise their subscription rights will have their ownership in the company diluted. A subscription right cannot be transferred from one shareholder to another. The subscription right exercised by shareholders of Schmitt Industries in December 22, 2017 is an instance of how this right is exercised. 998,636 common shares wereissued by Schmitt industries that year and each share equal one right. Existing shareholders had the opportunity of exchanging three rights and an additional $2.50 for extra share desired. However, due to this benefit, the company has a record of oversubscription in which the demand for shares was higher than the number of shares available for sale. The available shares were however allocated by pro-rata by investors that exercised their rights.
Academic Research on Subscription Rights