Rights issues and open offers explained

A rights issue is when a company offers its existing shareholders the chance to buy additional newly issued shares, usually at a discount to the market price¹. The more shares you already hold, the more new shares you have the right to buy². You are not obliged to buy them¹.

The offer is made in proportion to your existing holding, so a shareholder with more shares gets more rights. In a typical example, shareholders receive 3 rights for every 5 shares held, so someone owning 15,000 shares gets 9,000 rights³. Those rights can then be used to buy new shares, sold on if the offer allows it, or left to lapse.

An open offer, also called an entitlement issue, works in a similar way: it offers existing shareholders the right to buy new shares at a discount to the market price⁴. The important difference is what happens if you do nothing. In a rights issue you may receive lapsed proceeds; in an open offer you will not receive a lapsed payment⁴.

What is a rights issue?

A rights issue is a corporate action in which existing shareholders are offered the chance to buy additional newly issued shares, usually at a discount to the market price¹. The company is raising money, and it goes to the people who already own it first. Shareholders have the option to purchase additional shares at a discounted price⁶.

The allocation is proportional. The more shares you already hold, the more new shares you will have the right to buy². That is what makes it a "right": it is attached to your existing holding, not sold to the general public.

A rights issue is considered to be a type of option, since it gives a company's stockholders the right, but not the obligation, to buy new shares². That is the same structure as an employee share option scheme, where an employee can buy shares but does not have to⁷. The difference is who the offer goes to and how the entitlement is worked out.

Because the new shares are issued at a discount, taking up your rights means buying shares for less than the market price. Not taking them up means no shares are lost, but your holding becomes more diluted, because the company now has more shares in issue and your slice of it is smaller⁸.

An open offer, also known as an entitlement issue, is a close relative: like a rights issue, it offers existing shareholders the right to buy new shares at a discount to the market price⁴. The mechanics are similar, but the consequences of doing nothing are not.

How many new shares you can buy: a worked example

The number of new shares you can buy depends on the ratio the company sets and the size of your holding. In one worked example, shareholders receive 3 rights for every 5 shares held on 30 January. If you own 15,000 shares on that date, you get 9,000 rights, which is 3 for every 5 shares³.

Those 9,000 rights can then be exercised. In the same example, exercising all of them produces 18,000 new shares from 9,000 rights³. So each right does not necessarily buy one share: the terms of the offer set how many rights are needed per new share. In a different example, you can use 39 rights to receive 1 new share⁹.

The two numbers to look for in the offer document are therefore the ratio of rights to existing shares, and the number of rights needed for each new share. Together they tell you how much cash you would need to take up the offer in full.

Your four options when you get a rights offer

There are four standard choices, and they are the same whichever provider holds your shares: take up rights, meaning buy the shares; sell rights to another investor; take up a part of the rights; or take no action¹.

Take up all your rights. You buy every new share you are entitled to, at the offer price. This keeps your proportional stake in the company roughly where it was, and it is the option that requires the most cash.

Take up part of your rights. You buy some of the new shares and let the rest go. You spend less, but your holding is diluted by the portion you declined.

Sell your rights. Where the offer allows it, you can sell the rights themselves rather than the shares, and keep the cash. This is covered below.

Do nothing. Your rights lapse. What happens to their value then depends on the type of offer, and is covered further down.

The choice is yours and there is no penalty for declining. Shareholders are not obliged to buy the new shares¹. What you are deciding is whether to put more money into this company at the offer price, or to let your stake shrink.

Selling your rights as nil paid shares

Where the offer allows it, holders of the stock are issued nil paid rights, which each represent a right to buy a new share, and these are tradable on the stock market⁶. They are traded on the market as nil paid shares⁵. The company gives you nil-paid rights based on how many shares you already own³.

"Sold as nil paid" means the buyer is acquiring the entitlement without having paid for the underlying new shares yet. The buyer then pays the offer price to the company when the rights are exercised. The value of a nil paid right reflects the gap between the discounted offer price and the market price of the shares.

Not all rights issues allow rights trading³. Where trading is not permitted, selling your rights is not one of your options, and the choice narrows to taking them up, taking them up in part, or letting them lapse. The offer document for the particular rights issue is what settles this.

If you do nothing: lapsed rights and proceeds

Doing nothing is a real option, and in a rights issue it often has a cash outcome rather than simply losing the entitlement. Your rights will be sold in the market at the best available price, and the proceeds, after charges, paid to you. These are known as lapsed proceeds⁵.

Some offers work differently. Your rights will simply expire, sometimes with a lapsed rights payment depending on the terms³. So the phrase to look for is whether the offer provides for a lapsed rights payment or for the sale of lapsed rights, and on what terms.

There is a tax point for anyone who holds employee share options rather than ordinary shares. If you do not exercise an option and it lapses, you do not make an allowable loss for CGT purposes¹⁰. That is about employee options, not rights issues, but it is the same underlying structure of a right that can be allowed to expire.

Costs: no dealing charges or stamp duty on taking up shares

Taking up rights is cheaper than buying the same shares in the market. There are no dealing charges or stamp duty payable when you take up shares in a rights issue⁵. The same is true of an open offer: there are no dealing charges or stamp duty payable when you take up shares in an open offer⁵.

That matters because stamp duty normally applies to share purchases. Taking up shares in a rights issue carries no dealing charges and no stamp duty¹. The same applies to an open offer: there are no dealing charges or stamp duty payable when you take up shares in an open offer¹.

You still pay the offer price for the new shares themselves, and that is the main cost of taking up your rights. If you sell the rights instead, the sale happens in the market and normal dealing charges and stamp duty rules for that sale apply. If you do nothing and the rights are sold for you, the proceeds are paid to you after charges⁵.

Rights issues compared with open offers

Both are ways for a company to raise money from the people who already own it. The practical difference for a shareholder deciding what to do is the default outcome: a rights issue can produce a cash payment if you take no action, while an open offer will not⁴.

Where to get help and what protects you

A rights issue is a corporate action, and the terms come from the company and are administered by your platform or broker. If you hold shares through a platform, the offer will reach you through that platform, and the deadlines and dealing instructions are theirs. If you are unsure what a particular offer requires, the offer document and your provider's corporate actions team are the places to ask.

For the wider picture on how shares, dealing and platform charges work, see what shares are and how they work, how to buy and sell shares, dealing charges and stamp duty on shares. If you hold shares through a platform, dividends, corporate actions and voting when you invest through a platform explains how these events reach you. For the tax treatment of what you receive, see how investments are taxed.

Rights issues sit alongside other events that can change what you hold, such as takeovers, mergers and share reorganisations and compulsory acquisition. If a company you hold is in difficulty, the terms of any fundraising it proposes are worth reading closely before you decide.