When a listed company needs funding but does not want to increase its loans, it may consider issuing additional shares.
Listed companies can raise further funds using various methods. The most common ones are rights issues, placings and top-up placings.
In a rights issue, a listed company offers qualified shareholders the opportunity to buy more shares in proportion to their existing shareholdings.
You might be entitled to subscribe for one share for every share you hold, or for other multiples. You can also apply for "excess rights shares", i.e. rights that are not taken up by other shareholders.
Shareholders' approval is needed if:
- the rights issue either increases the issued share capital or the market capitalisation by more than 50% (on its own or aggregated with any other rights issues or open offers made in the previous 12 months).
While controlling shareholders are not allowed to vote on this at the shareholders' meeting, as a minority shareholder, you should exercise rights to vote in the meeting. Depending on the results of the voting, it is possible for a rights issue to be vetoed.
There are often conditions attached to a rights issue. For example, the underwriter may terminate the underwriting agreement under certain conditions, such as when external events adversely affect the company's business or conditions. In these types of circumstances, the rights issue may be cancelled. You should pay careful attention to any conditions contained in the announcement and the rights issue prospectus.
Unless shareholders' approval is obtained, Main Board companies cannot conduct a rights issue within 12 months after their listing date while GEM companies are not allowed to conduct rights issues within 6 months of listing.
How do I find out about a rights issue?
When a company proposes a rights issue, it publishes an announcement that explains the reasons it wants to raise further funds and the terms and conditions of the proposal. It also issues a prospectus setting out the details and a timetable of the important steps in the issue.
What should shareholders do?
- If you hold share certificates in your own name, you will receive a prospectus along with your "rights" in the form of a provisional allotment letter, and an application form for "excess rights shares". The company's directors will allocate the excess rights to shareholders at their discretion on a fair basis. Shareholders with odd lots may be given priority to top up their shares to whole board lots.
- As part of your decision on whether or not to take up the shares, consider your financial ability and the company's prospects. Find out the reasons for the fund-raising from the announcement and prospectus. And remember that it is possible the rights issue may not happen unless all conditions are fulfilled.
- You will be given no fewer than 10 business days to decide whether or not to exercise your rights. If you decide to go ahead, complete the forms, settle the payment within the specified period, and return the documents to the share registrar. If your shares are entrusted to safe custody by your bank or brokerage, let the intermediary know your decision early so that it has sufficient time to act before the deadline.
- If you decide not to exercise your rights, you do not have to take any action. However, remember that your existing shareholdings will be diluted as more shares are issued.
- Remember also that you can sell your rights to other market players.
- Seek professional advice if you are unclear about any part of the rights issue proposal.