(b) A rights issue is the procedure through which a company raises new capital by offering new shares to its existing members.
As the shares are offered to the existing shareholders in proportion to their existing holding, it can be seen as respecting and giving effect to the shareholders’ pre-emption rights, even in situations where those rights have been suspended, as indicated previously. As the purpose is to raise new capital for the company, either because it is in difficulty, or needs the additional capital to expand its business, the shareholders who are offered the new shares are required to pay for them. However, as an inducement to engage in the deal, it is usual for the new shares to be offered at a discount to the current market value of the existing shares. It is essential to note that the discount is not on the nominal value of the shares, which is required by the rules of company law to be fully-paid as companies cannot issue shares at a discount.
Once again there is no compulsion to participate in the rights issue and often the rights to participate in the allotment of new shares are usually tradeable securities in themselves. Consequently shareholders who do not want to buy the new shares themselves may sell the rights to a third party. |
