Oversubscription Privilege

Definition

Oversubscription Privilege, also known as oversubscription right, is a clause in an offering that allows investors to purchase additional shares beyond the determined number initially agreed upon. This clause is commonly included in underwritten offerings and is most often used when the demand for a security exceeds the supply. The oversubscription privilege benefits existing investors by allowing them to maintain their proportional ownership in a company when new shares are issued.

Phonetic

The phonetics for “Oversubscription Privilege” are:Oversubscription: /ˌoʊvərsəbˈskrɪpʃən/Privilege: /ˈprɪv.ɪ.lɪdʒ/

Key Takeaways

Oversubscription Privilege: Main Takeaways

1. An oversubscription privilege, also known as oversubscription rights, is a privilege offered to certain shareholders of a corporation that entitles these shareholders to buy additional shares of a new issue before the company offers it to outside buyers. This privilege is often extended to existing shareholders, and its purpose is mainly to allow these shareholders to maintain their proportional ownership in the company if they choose to do so.
2. Oversubscription privileges are particularly beneficial in cases where there is a rights offering, and the new shares are being offered at a discount. In such scenarios, the shareholders can not only maintain their proportional ownership, they can also purchase additional shares at a reduced price. The company, on the other hand, benefits as well by reducing the number of remaining shares that need to be sold to the public, possibly at higher offering costs.
3. Despite its advantages, not every shareholder may want to exercise their oversubscription privilege. Some shareholders may be uninterested in purchasing more shares, or may not have the necessary funds available. To this extent, it’s crucial to understand that oversubscription privileges are not obligations, but rather options that can either be exercised or ignored, based on the discretion of the shareholder.

Importance

The Oversubscription Privilege is an important business/finance term because it offers existing shareholders the right to purchase additional shares in a company before they are offered to the public during a new share issuance. This right is crucial as it allows shareholders to maintain their proportional ownership in the company, preventing their stake from being diluted. It’s particularly significant for major or controlling shareholders who want to sustain their level of control against potential shifts in ownership structure. This privilege could also allow shareholders to acquire more shares at a potentially lower offering price, offering financial advantages if the stock’s value increases post issuance.

Explanation

The Oversubscription Privilege serves a specific purpose in the world of finance, primarily relevant to existing shareholders in a company. This privilege provides existing shareholders with the opportunity to maintain their proportional ownership in the event of a rights offering, where new shares of the company are being issued. The issuance of new shares could potentially dilute their ownership stake, which could negatively impact their voting power and dividend earnings. Therefore, the Oversubscription Privilege allows shareholders to avoid dilution by purchasing additional shares beyond their initial proportional allocation in a rights offering.Moreover, the Oversubscription Privilege is often utilized as a strategy by businesses to raise additional capital. When a company feels the need to raise new equity, they may prefer to offer the shares first to their existing shareholders as a sign of goodwill, evoking the principle of pre-emptive rights. These rights reassure investors that they will have the ability to preserve their current ownership interest, regardless of future equity issuances, thus, maintaining equity and vote concentration. In essence, the purpose of the Oversubscription Privilege is to protect the rights of current shareholders while providing an avenue for the company to raise needed funds.

Examples

1. Berkshire Hathaway’s 2010 Shareholder Offering: In 2010, Berkshire Hathaway Inc. offered existing shareholders the opportunity to buy additional shares via an oversubscription privilege. The purpose of this move was to finance the acquisition of Burlington Northern Santa Fe Corporation. Shareholders who held a fraction of a share were given priority in this case.2. The Brandes Small Cap Value Fund’s Rights Offering: In 2016, the Brandes Investment Trust offered shareholders the chance to purchase additional shares in its Small Cap Value Fund. Those who bought all their entitled shares had the opportunity to subscribe for any remaining shares via an oversubscription privilege.3. Vivint Solar Inc.’s Oversubscription in Public Offering: In 2014, Vivint Solar Inc., a U.S.-based solar energy company, introduced an oversubscription privilege during its Initial Public Offering (IPO). This encouraged investors to purchase more shares than were originally available because they expected a substantial rise in the share price after the IPO. The company used this method as a strategy to raise more capital.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Right of First Refusal
• Additional Shares
• Rights offering
• Share dilution
• Pro rata

Sources for More Information

• Investopedia
• Wall Street Mojo
• Corporate Finance Institute
• The Balance