STSM072020 | Companies and shareholders: rights issues: general

A company that wishes to raise additional capital can either borrow money (which it will ultimately have to pay back with interest), or issue new share capital to attract cash investors in return for the prospect of a share of the company’s future profits paid out as dividends.

Where the company decides to issue new shares, it must offer them first to its existing shareholders in proportion to their shareholdings, in order to prevent dilution of their existing interest in the company (this is known as the shareholder’s ‘pre-emption right’). This ‘rights issue’ gives shareholders the right, but no obligation, to subscribe for further shares. As an incentive to shareholders to take up the offer, the new shares are normally offered at a discount from the current market price.

For more detail of the rights issue process, see STSM072030.