Legal Definitions - standby underwriting agreement

A standby underwriting agreement is a contract between a company issuing new securities (like shares or bonds) and an investment bank (the underwriter). In this agreement, the underwriter commits to purchasing any of the newly issued securities that are not bought by the company's existing shareholders or the general public during the initial offering period.

The primary purpose of a standby underwriting agreement is to guarantee that the company will successfully raise the desired amount of capital, even if there isn't enough demand from other investors. The underwriter essentially acts as a safety net, ensuring all securities are sold and the company receives its funds.

Here are a few examples to illustrate how a standby underwriting agreement works:

• Scenario: A Rights Offering for Expansion Capital

  Imagine a growing technology startup, InnovateTech Inc., needs to raise $50 million to fund the development of a new product line. Instead of offering shares directly to the public, InnovateTech decides to conduct a "rights offering," giving its existing shareholders the first opportunity to purchase new shares at a discounted price. To ensure they raise the full $50 million, InnovateTech enters into a standby underwriting agreement with Global Capital Bank. Under this agreement, Global Capital Bank commits to buying any shares that InnovateTech's existing shareholders do not purchase during the rights offering period. This guarantees InnovateTech will secure the necessary funding for its expansion, regardless of how many existing shareholders exercise their rights.

• Scenario: A Follow-on Public Offering with Market Uncertainty

  GreenEnergy Solutions, a publicly traded company, plans to issue new shares to the public to finance a large-scale renewable energy project. While they anticipate strong interest, there's some market uncertainty due to fluctuating energy prices. To mitigate the risk of not selling all the new shares and falling short of their funding goal, GreenEnergy Solutions engages Apex Investments in a standby underwriting agreement. Apex Investments agrees to purchase any shares that are not subscribed to by public investors during the offering. This provides GreenEnergy Solutions with the assurance that their project will be fully funded, even if public demand is lower than expected.

• Scenario: Recapitalization of a Distressed Company

  Manufacturing Marvels Corp. is facing financial difficulties and needs to recapitalize by issuing new shares to its creditors and existing shareholders as part of a restructuring plan. The success of the restructuring hinges on a guaranteed capital injection. To ensure the full amount of new capital is raised, Manufacturing Marvels enters into a standby underwriting agreement with Phoenix Financial Group. Phoenix Financial Group agrees to acquire any new shares that are not taken up by the creditors or existing shareholders participating in the recapitalization. This agreement is crucial for Manufacturing Marvels to complete its financial restructuring and stabilize its operations, as it ensures the necessary funds are secured.