American Equity Rights Security Offerings - A Distinctive Class of Financial Transactions (Notes on 'European' Rights Including HSBC/Goldman Sachs)
M. A. Gumport
July 6, 2009
An American rights offering is a proposed, distinctive class of financial transactions whose merits shine brightest in juxtaposition to the conflicts and shortcomings of a traditional (“European”) rights offering. This report reviews the math, selected studies, and recent events bearing on traditional rights offerings to provide financial and historical context as a foundation for the future introduction of American equity rights offerings.
In 1935-1955 in the U.S., over 50% of seasoned stock issuances were through rights offerings , and, today, in Europe and much of the rest of the world, rights offerings are the mandated norm for significant equity issuances. However, the transaction’s U.S. reputation fell into disrepair in recent decades: 20% of domestic rights-issuing firms in 1983-1999 filed for bankruptcy within 3 years . U.S. rights offerings veered towards extinction; “European” was tacked onto the moniker both as a nod to the prevalence of rights deals overseas and in dismissal of those on the home front who trafficked in them.
Proponents highlight aspects of traditional rights offerings consistent with good governance, and prominent worldwide offerings suggest U.S. consensus, biased by local experience, may be too negative. A U.S. rebound in offerings may be overdue. Certainly, advantages of rights offerings versus U.S. style underwritings can be debated. Nonetheless, the math underlying traditional rights offerings is deeply conflicted. If fully subscribed, shareholders increase their exposure but receive no benefit. As subscription rates fall, participants receive increasing rewards while non-participants face declining penalties, dynamics that disadvantage the weakest and least knowledgeable. Selection of the structure’s discount, a key determinant of participation, places management and shareholder interests at odds. Shareholder participation below 100% and grants of rights to third parties shift ownership at a bargain price. If shares and rights fail to efficiently trade, traditional rights deals devolve into “put up or shut up”.
An American rights offering requires no capital commitment. Voluntary participation by shareholders can be predictably close to 100%. Corporations with the most outstanding prospects will find the terms most compelling and may be expected to be the chief issuers. The structure is a paradigm of good governance, a walk on the sunny side of corporate finance. A concrete example of an American rights offering will be presented at a later date and take the concept from the realm of the hypothetical to the practical.
Number of Pages in PDF File: 28
Keywords: stock right, equity right, European right, American equity rights offering, underwritten right, B. Espen Eckbo, Nancy D. Ursel, HSBC, Goldman Sachs, Daniel Bushner, Cashless Buyback(tm), stock loan, accelerated stock repurchase, ASR, 10b-18, 10b5-1, stock buyback, convertible
JEL Classification: G10, G15, G20, G24, G30, G32, G33, G34
Date posted: July 8, 2009 ; Last revised: September 1, 2009