Rights Offerings: Mechanics, Subscription Price, and Oversubscription

Introduction

A rights offering protects existing shareholders from dilution by giving them the first opportunity to buy new shares before outsiders participate. The issuer distributes subscription rights per existing share at a defined ratio, each right entitles the holder to buy new shares at a discount within a fixed window, and rights typically trade as separate transferable securities on the exchange. The structure dominates in Europe and the UK (where pre-emption is statutory) and is rare in the US (where charters typically waive pre-emption and issuers default to marketed follow-ons or block trades).

The mechanics are tightly choreographed and run on a published timeline.

The Subscription Price

The subscription price is set below the current market price to create economic incentive to participate. Typical discounts run 20 to 30 percent for routine European rights offerings and can be wider (40 percent or more) for stressed situations. The discount is the principal reason shareholders rarely let rights lapse: a discounted subscription price plus a freely tradable right means non-participating shareholders can sell the rights and capture the value rather than letting them expire.

Cum-Rights and Ex-Rights Trading

Before the ex-rights date, the stock trades cum-rights (with the right embedded in the share price). On the ex-rights date, the stock trades without the right, and the rights begin trading as a separate security. The cum-rights price equals the ex-rights price plus the value of the right, and the theoretical ex-rights price (TERP) is the formula used to estimate the post-issuance share price assuming the rights are fully exercised at the subscription price.

A TERP Calculation Example

Consider an issuer with 100 million shares trading at $50 per share (cum-rights market cap of $5 billion) launching a 1-for-5 rights offering at a $30 subscription price. The issuer will issue 20 million new shares (100 million $/ 5$) at $30 each, raising $600 million. TERP equals the weighted average price post-issuance: (100 million $\times$ $50 + 20 million $\times$ $30) / 120 million $\approx$ $46.67 per share. The theoretical value of one right is therefore $50 $-$ $46.67 $=$ $3.33, which is what the right should trade for during the subscription period (less small adjustments for time value and exercise risk).

Theoretical Ex-Rights Price (TERP)

The expected market price of a share after a rights offering assuming full exercise at the subscription price. TERP equals the weighted average of cum-rights price and subscription price, weighted by pre-existing versus new shares. Cum-rights price minus TERP equals the right's theoretical value.

Subscription and Oversubscription

The subscription period runs 14 to 30 calendar days. Holders exercise the basic privilege (purchase the shares their rights entitle them to) and, if offered, an oversubscription privilege lets fully-participating shareholders bid for unsubscribed shares pro rata, with each holder's allocation weighted by the number of basic rights they exercised:

The structure has specific advantages and disadvantages relative to alternatives.

Advantages

Rights offerings preserve existing shareholders' percentage ownership, distribute the discount value to existing shareholders rather than new institutional buyers, and are less expensive in fees than a marketed follow-on. The structure creates a clear shareholder-friendly narrative.

Disadvantages

The execution timeline is 4 to 6 weeks (versus 2-to-4 days for a marketed follow-on), the discount is typically wider, and the structure does not bring fresh institutional demand. For US issuers with healthy market access, the trade-off rarely favors a rights offering; for European issuers required to use it (or distressed US issuers without other options), it is the default tool.

Pre-emptive rights, a discounted subscription price, and a 14-to-30-day subscription window: that is the default European structure, and a tool US issuers reach for almost exclusively in distress. So far this section has covered products where the issuer is raising equity; the next article inverts the direction. Accelerated share repurchase programs are a buyback product where the bank takes principal risk on the borrow.