Rights Issues: When the Company Asks Its Own Shareholders for Money

It is the secondary-offering family's most shareholder-protective member, because the dilution that article dissected becomes optional: exercise your rights and your ownership percentage is untouched. But it is also the corporate action where doing nothing has a real cost — the one event in this pillar where a holder's inaction, rather than any market move, reliably destroys value they were handed. This article covers the mechanics, the TERP arithmetic every rights announcement implies, the three choices a holder faces, and why rights issues are everyday financing in some jurisdictions and a distress signal in others. Mechanics only, per the pillar rule — what to do with any actual entitlement is each investor's own decision.

The mechanics: ratio, discount, and the rights themselves

A rights issue is announced as a ratio and a price: "1-for-4 at $6.00" means each holder may buy 1 new share for every 4 held, at $6.00 each — typically a meaningful discount to the pre-announcement market price, both to make take-up attractive and to protect the raise against market dips during the offer window. The entitlements themselves — often called nil-paid rights in European markets — are usually securities in their own right: in most large-market rights issues they can be traded during the subscription window, so a holder unwilling or unable to invest more cash can sell the entitlement to someone who will. The timetable runs on the same date machinery as dividends: holders on the record date receive rights; the shares trade ex-rights from a set date (buyers thereafter get no entitlement); the subscription window runs typically two to three weeks; and unexercised rights either lapse, are sold on holders' behalf with proceeds remitted (a jurisdiction- and terms-dependent protection), or expire worthless — which of these applies is in the offer documents, and it is the single most practically important line in them. Underwriting varies: many rights issues are underwritten (banks buy whatever shareholders don't), some are not, and a heavily discounted "deep-discount" structure is sometimes used precisely to make underwriting unnecessary — the discount itself guarantees take-up.

TERP: the arithmetic every announcement implies

Because new shares arrive at a discount, the post-issue share price should mechanically settle below the old price even if nothing else changes — not a loss, an averaging. The theoretical ex-rights price (TERP) is that blend: old shares at the old price plus new shares at the subscription price, divided by the new total. The worked panel runs the numbers; the conceptual takeaways matter more. First, the headline "discount" overstates the bargain: a $6.00 subscription price against a $10.00 market price is really a discount to the ~$9.20 TERP, because every holder's existing shares re-rate to the blend — the free lunch is smaller than the announcement makes it look. Second, the rights have a computable value — approximately TERP minus subscription price per new share — which is exactly what selling the nil-paid rights recovers. Third, and the article's central education point: the three choices are not symmetric. A holder can (a) exercise — pay cash, keep their ownership percentage, end economically whole at the blended price; (b) sell the rights — accept dilution of their percentage but pocket the rights' value as compensation, also ending roughly economically whole; or (c) do nothing — and, unless the terms include an automatic lapsed-rights sale on their behalf, suffer the dilution without the compensation: their shares re-rate to TERP and the entitlement's value evaporates. Options (a) and (b) are legitimate financial decisions that depend on a holder's cash, conviction, and circumstances — this portal ranks neither. Option (c) is not a decision but a lapse, and knowing that is precisely the kind of mechanical literacy this pillar exists to provide.

Signal, jurisdiction, and the reasons behind the raise

Context determines how markets read a rights issue, and two honest frames apply. Jurisdiction first: in the UK and much of Europe, pre-emption rights — the principle that existing shareholders get first refusal on new equity — are embedded in law and listing practice, so rights issues are the standard large-raise instrument for healthy and troubled companies alike; in the US, where pre-emption is largely absent from public-company practice, companies default to the follow-on offerings of the previous article, and rights issues are rarer. The same instrument therefore carries different base rates in different markets — routine financing in one, unusual event in another. Purpose second, same test as before: the what-did-the-cash-become question from the dilution article applies unchanged — rights issues have funded acquisitions and expansion from strength, and they have recapitalised balance sheets in distress (bank recapitalisations during crisis years are the documented heavyweight category). The deep-discount structure, the raise's size relative to market value, and the stated use of proceeds are the readable signals; the announcement documents state all three, and reading them is, once again, ordinary diligence rather than expertise.