Legal Definitions - subscription right

A subscription right is a special privilege granted to existing shareholders of a company, allowing them to purchase a certain number of newly issued shares before those shares are offered to the general public. This right, sometimes called a preemptive right, is designed to protect existing shareholders from having their ownership percentage diluted when a company issues new stock.

These rights often allow shareholders to buy new shares at a price that is typically lower than the current market price, making them valuable. Because of their inherent value, subscription rights can often be bought and sold by investors on a market, allowing shareholders to either exercise the right to buy new shares or profit by selling the right itself.

Here are some examples to illustrate how subscription rights work:

• Company Expansion Funding: Imagine "InnovateTech Inc.," a publicly traded software company, plans a major expansion into a new market. To fund this growth, the company decides to issue 1 million new shares of stock. Before offering these shares to the general public, InnovateTech Inc. issues subscription rights to its current shareholders. For instance, an existing shareholder owning 1,000 shares might receive a right to purchase 100 new shares at a discounted price of $45 per share, while the current market price is $50. This allows the shareholder to maintain their proportional ownership in the company and potentially profit from the favorable purchase price, or they could sell their valuable subscription rights to another investor who wishes to acquire shares at a discount.

• Maintaining Ownership Percentage: Consider "Green Energy Solutions," a publicly traded company focused on renewable energy, which needs to raise significant capital to build a new solar farm. The company's board decides to issue new shares. The founders and early investors of Green Energy Solutions, who collectively hold a substantial portion of the company's stock, are keen to maintain their level of influence and ownership. By issuing subscription rights, the company ensures that these existing major shareholders have the first opportunity to purchase new shares. This enables them to buy enough new stock to prevent their ownership percentage from decreasing, thereby preserving their voting power and control over strategic decisions, without having to compete with new investors in the open market.

• Financing an Acquisition: Suppose "Global Pharma Corp." announces its intention to acquire a smaller biotechnology firm, a move expected to significantly boost its market share. To finance a portion of this acquisition, Global Pharma decides to issue new common stock. To reward its loyal investor base and raise capital efficiently, Global Pharma Corp. distributes subscription rights to its current shareholders. Each right allows a shareholder to buy a specific number of new shares at a price below the current market value. A shareholder who holds 500 shares might receive rights to purchase 50 new shares at $120 each, while the market price is $135. This gives existing shareholders a preferential opportunity to invest in the company's growth strategy at a favorable rate, or they can sell these valuable rights to other interested parties.