Legal Definitions - rights offering

A rights offering is a method used by a company to raise additional capital by giving its existing shareholders the exclusive opportunity to purchase new shares of the company's stock. This offer is typically made at a predetermined price, which is often discounted compared to the current market price, and for a limited period. The primary purpose is to allow current shareholders to maintain their proportional ownership in the company and avoid the dilution of their stake that would occur if new shares were simply issued to the public or new investors without their prior participation.

Here are some examples illustrating how a rights offering works:

• Funding a Major Expansion:

  Imagine "Global Innovations Corp.," a publicly traded technology company, plans a significant expansion into new international markets. This expansion requires substantial capital for new facilities, marketing, and hiring. Instead of taking out a large loan or selling new shares directly to the public, which could reduce the ownership percentage of current shareholders, Global Innovations announces a rights offering. Each existing shareholder receives one "right" for every share they own, entitling them to purchase a certain number of new shares at a 10% discount to the current market price. Shareholders can choose to exercise these rights to buy more stock, thereby contributing to the expansion fund and maintaining their percentage of ownership, or they can sell their rights to other investors who wish to acquire shares in the company.

  This illustrates a rights offering because Global Innovations is giving its existing shareholders the first opportunity to invest more capital by buying new shares, often at a favorable price, to fund a company initiative while allowing them to preserve their ownership stake.

• Private Company Capital Infusion:

  "BioHealth Solutions," a privately held biotechnology startup, has successfully completed its initial research phase and needs significant funding to begin clinical trials for its new drug. The company has a small group of angel investors and founders as its current shareholders. To raise the necessary capital, BioHealth Solutions conducts a rights offering, allowing these existing investors to purchase additional shares at a set valuation. This approach ensures that the original investors, who took the initial risks, have the first chance to increase their investment and potentially benefit from the company's future success, rather than immediately bringing in new outside investors who might dilute their ownership.

  This example demonstrates a rights offering in a private company context, where the mechanism is used to raise capital from the existing, limited group of shareholders, giving them a preemptive right to invest further and maintain their proportional ownership.

• Financial Restructuring and Debt Reduction:

  "Coastal Shipping Lines," an established but financially struggling company, is burdened with significant debt and needs to improve its balance sheet to avoid bankruptcy. As part of a comprehensive financial restructuring plan, the company proposes a rights offering to its current shareholders. The offering allows shareholders to buy new shares at a very low subscription price, significantly below the current trading value, with the understanding that participation is crucial for the company's survival and long-term viability. While risky, this gives existing shareholders a chance to inject much-needed capital, potentially save their original investment, and retain ownership in a reorganized company, rather than seeing their shares become worthless in a liquidation scenario.

  Here, a rights offering is employed in a distressed situation. The company is raising critical capital from its existing shareholders by offering them the right to buy new shares, demonstrating how this mechanism can be used for financial stabilization and restructuring, not just growth.