(Stocks Tutorial) What are Stock Rights?

I recently subscribed to the 1:2 Stock Rights Offering of Robinsons Land Corporation (RLC). As a current stockholder, I was entitled to one (1) rights share for every two (2) common shares owned.

The rights offering was RLC’s way of raising additional capital. By issuing up to 1.364 billion common shares at P10 per share, the company is expected to raise as much as P13.6 billion.

What are Stock Rights?

Stock rights are basically the right to purchase additional shares of the company. This right is only given to existing shareholders as of the ex-date, and is not available to non-stockholders. It is a company’s way of raising additional capital. In the case of RLC, the company said proceeds will be used for land acquisition, project construction and development, possible international expansion and other general corporate purposes.

Why would shareholders purchase stock rights?

Stock rights is a must if an investor does not want to dilute his ownership share in the company. In essence, this is an exercise of an investor’s preemptive right or the right of first refusal. If a shareholder will not purchase the rights, his ownership share in the company will decrease with the influx of new shareholders.

For example, if a person owns 10,000 shares out of a total 1 million outstanding shares of a company, he basically owns 1% of that company. If the company issued an additional 100,000 shares through a stock rights offering, the total outstanding shares becomes 1.1 million. If the investor did not purchase any stock rights, his ownership percentage is diluted from 1% to 0.9% since his shares remained at 10,000 while the total base increased to 1,100,000.

Why are stock rights attractive investments?

Aside from the fact that it is a must in order to prevent dilution of ownership, stock rights are usually offered at a price lower than the current stock price. In the case of Robinsons Land Corp.’s offering, the stock rights were priced at P10 apiece at a time when the shares are trading at P13.00. The shares are basically sold at a discount. If, after the new shares were issued, the stock price remained above the stock rights price, those who purchased the rights are rewarded with easy profits.

What if the rights are not fully subscribed?

The unsubscribed shares in a rights offering may be offered to existing shareholders beyond their allocation. In the case of RLC’s 1:2 stock rights, I was entitled to one (1) common share for every two (2) common shares I own. But since I think the shares were priced at a discount, I requested my broker to oversubscribe my shares, meaning I bought more than I was allowed to purchase.

Alternatively, the company may decide to issue the unsubscribed shares through a private placement or to not issue the remaining shares at all.

Can the stock rights shares be sold as soon as they are received?

Unless there are explicit rules disallowing the immediate sale of stock rights shares (for example, rights bought at installment can only be sold upon full payment, etc.), owners of the rights shares can immediately sell these shares to another investor.