Rights Offering

The company announces a record date, and shareholders as of that date receive rights based on their holdings. Each right entitles the holder to buy a specified number of new shares at the subscription price, which is set below the current market price to incentivize participation. The subscription period typically lasts 2-4 weeks, during which shareholders can exercise, sell, or let their rights expire. An oversubscription privilege may allow participating shareholders to buy additional shares not taken up by others.

TERP is the theoretical market price of a share after the rights offering is completed, assuming all rights are exercised. It is calculated as the weighted average of the pre-offering market price and the subscription price, weighted by the number of old and new shares. TERP represents the equilibrium price at which neither exercising nor selling the rights creates a windfall. Understanding TERP is essential for evaluating whether the rights offering terms are fair.

Shareholders who exercise their rights maintain their proportional ownership and experience no economic dilution. Shareholders who do not participate see their ownership percentage decrease as new shares are issued to those who do exercise. The value of the right compensates non-participating shareholders for this dilution — they can sell their rights in the market to offset the loss. The diluted share count increases by the number of new shares issued, affecting per-share metrics like EPS.

Unlike a secondary offering or PIPE, a rights offering gives existing shareholders the first opportunity to participate, protecting them from dilution. Rights offerings are more common in European and Asian markets and for financial institutions needing to raise regulatory capital. They take longer to complete than PIPEs but are perceived as more shareholder-friendly. Companies in distress sometimes use deeply discounted rights offerings to ensure full subscription.