Q: We are looking to allocate excess rights shares, what are the issues we should consider?
A: Rights issues have received media coverage recently, particularly some shareholder practices designed to increase the number of excess rights shares allocated to them. These include splitting holdings into odd-lots at differently numbered addresses in the same apartment, or transferring shares to different combinations of joint names.
A rights issue is a way for a company to issue new shares in order to raise capital. Shares are offered to existing shareholders in proportion to their current shareholding. They can take these up partially or in full, sell the rights to other investors or ignore the rights issue. If there are excess shares available from any unsold entitlements, qualifying shareholders can then apply for more than their provisional entitlements.
The allocation for these excess rights shares is typically done at the company’s discretion on a fair and reasonable basis and on the following common principles:
- preference is given to applications for less than a board lot of rights shares where they appear to be made to round up odd-lot holdings to whole-lot holdings, and
- subject to availability of excess rights shares after allocation under principle A, the remainder (if preference will be given), or all excess rights shares (if no preference will be given), will be allocated to qualifying shareholders who have applied for excess rights shares on (i) a pro-rata basis, or (ii) a sliding scale relative to the number of excess rights shares applied for.
This means that those who split their holding into multiple odd-lots potentially stand more chance of gaining more shares than other shareholders if and when the excess is allocated.
However, for companies wanting to explore different options to ensure a fair allocation to shareholders, there are alternatives that we have developed from our experience in dealing with different rights issues in the past. Get in touch with us to find out more.
Lina Wynn, Head of Client Services
Computershare Hong Kong Investor Services Ltd