With a subscription right, shareholders in companies are given the right to purchase a proportionate number of shares before more shares are issued. A subscription right is given to shareholders to protect them from dilution. Existing shareholders typically have the ability to purchase said shares below market value.

Why Are Subscription Rights Important?

Without subscription rights, shareholders are subject to losing the size of their position in a company. With subscription rights, shareholders keep the same ownership percentage in the event of a secondary offering. Of course, the higher percentage of a company you own, the more valuable your position is.

How Do Subscription Rights Work?

Not all companies offer dilution protection. If shareholders are offered a subscription right, they are let know by their brokers or the company itself. Shareholders are then given the ability to purchase additional shares, at a discounted price, before other public investors are given the opportunity to do so. However, existing shareholders are given a set amount of time to purchase these shares before their positions are diluted. Shareholders also maintain the ability to transfer these rights to other investors.

Controversy Surrounding Subscription Rights

One common complaint against the issuance of shareholder rights is that they must be exercised in order for shareholders to not be diluted. Although exercising these rights protects shareholders from dilution, purchasing shares requires capital that investors may not have in the given period. Announcements made by companies of secondary share offerings typically lead to sharp declines in market value. Selling shares is typically seen as a desperate fundraising attempt by companies that is ignorant of the interest of the company’s owners.