Rights issues for retail shareholders
A rights issue is an invitation to existing shareholders to purchase additional shares in the company. Retail shareholders will then need to consider whether to invest more money to subscribe to the rights shares. This may pose a dilemma for those who may not be able to subscribe due to their financial situation, or who simply do not want to. If they do not take up the rights shares, there is potential dilution to the value of their shareholdings.
What should shareholders do when faced with rights issues and other fundraising activities?
Exercise your shareholder rights
Shareholders are entitled to vote on some corporate actions. Certain fundraising activities require the approval of the minority shareholders. However, retail shareholders in Hong Kong seldom exercise their votes. Based on past fundraising activities that required the approval of minority shareholders, the voting rate was relatively low, while the approval rate was overwhelmingly high. A low voting rate is an indication that voting by minority shareholders may not be an effective gatekeeping tool.
"Every vote counts" and retail shareholders should not overlook their voting power. If shareholders believe that the proposed corporate actions are not in line with overall shareholders' interests, they should cast their votes accordingly, and there will be a chance to veto fundraisings proposals that are not in line with the interests of the shareholders.
Reasons for fundraising
In a rights issue, the company is obligated to disclose the purpose and the terms and conditions. Investors should evaluate if the company has a valid need to raise funds, and whether the reasons and the use of proceeds are being clearly outlined such that it will create value for the shareholders and the company. However, investors should not rest on what the company says alone, but to look into the company's history. If the company raises funds from the shareholders frequently, it is questionable.
Shareholders need to look into the company fundamentals such as its earning, quality of assets and business prospects. If the company makes losses consecutively for years, or if it does not have any valuable assets, shareholders should rethink whether to increase their investments or exit.
Choices available to shareholders
In a rights issue, the shareholders can sell the rights in the market. While open offers are similar to rights issues, the major difference is that open offers do not cater for trading of the rights in the market.
The shareholders require additional funds to subscribe to the rights. If the shareholders do not subscribe to the rights shares, the value of their shareholdings will be diluted. Rights issues at a high ratio and deep discounts have larger dilutive effect. If shareholders do not want to take up the rights shares and do not want their shareholding to be diluted, they can choose to exit.
27 October 2017