Definition
Subscription Privilege: A subscription privilege is a right granted to existing shareholders of a corporation, or their transferees, to purchase additional shares of a new issue of common stock before it is offered to the public. This right is often part of a preemptive right outlined in a corporation’s charter.
Examples
- XYZ Corporation issues new common stock. Existing shareholders are given the opportunity to buy these shares at a set price before they are made available to the public. This allows the shareholders to maintain their proportionate ownership in the company.
- ABC Pharmaceuticals plans to expand and needs to raise capital. They announce a new issue of shares, giving current shareholders the first option to purchase these shares via subscription privilege, thereby avoiding dilution of their current holdings.
Frequently Asked Questions
Q: Why do companies offer subscription privileges? A: Companies offer subscription privileges to protect current shareholders from ownership dilution and to raise capital efficiently.
Q: How do shareholders exercise their subscription privileges? A: Shareholders typically receive subscription rights informing them of their option to purchase additional shares. They must notify the company or their broker of their intent to exercise this right and pay the subscription price.
Q: What is the subscription price? A: The subscription price is the price at which shareholders can purchase new shares, often set below the market price to incentivize participation.
Related Terms
- Preemptive Right: The right of shareholders to purchase additional shares in any future issuance to maintain their ownership percentage.
- Subscription Right or Warrant: A certificate giving its owner the right to buy a specific number of shares of stock at a specified price within a specified period.
Online Resources
- Investopedia’s Article on Preemptive Rights
- Securities and Exchange Commission (SEC) Page on Rights Offerings
Suggested Books for Further Studies
- Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- Corporate Finance by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey F. Jaffe
- Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions by Joshua Rosenbaum, Joshua Pearl
Fundamentals of Subscription Privilege: Financial Management Basics Quiz
### What is a subscription privilege?
- [x] The right of existing shareholders to buy shares of a new issue before the public.
- [ ] The right to sell their shares before the public offering.
- [ ] The right to receive dividends before new shareholders.
- [ ] The privilege to vote on corporate matters.
> **Explanation:** A subscription privilege allows existing shareholders to purchase shares of a new issue before they are offered to the public, maintaining their ownership percentage.
### Why do companies offer subscription privileges?
- [x] To protect current shareholders from ownership dilution.
- [ ] To increase the dividend payout.
- [ ] To avoid issuing new shares.
- [ ] To decrease market volatility.
> **Explanation:** Companies offer subscription privileges to protect current shareholders from ownership dilution and to raise capital efficiently.
### What is the term for the price at which shareholders can buy new shares under a subscription privilege?
- [ ] Market price.
- [x] Subscription price.
- [ ] Bid price.
- [ ] Offer price.
> **Explanation:** The subscription price is the set price at which shareholders can buy new shares, often below the market price to incentivize participation.
### What is a preemptive right?
- [ ] The right to vote on shareholder matters.
- [x] The right to purchase additional shares in any future issuance.
- [ ] The right to sell shares without restrictions.
- [ ] The right to receive profit dividends first.
> **Explanation:** A preemptive right ensures that shareholders can purchase additional shares in any future issuance to maintain their ownership percentage.
### Who typically receives a subscription privilege?
- [ ] Only new shareholders.
- [ ] Company employees.
- [ ] Corporate executives only.
- [x] Existing shareholders.
> **Explanation:** Existing shareholders, or their transferees, typically receive subscription privileges to maintain their ownership stake and avoid dilution.
### How do shareholders typically learn about their subscription privileges?
- [x] Through subscription rights certificates or notifications.
- [ ] Via company annual reports.
- [ ] Broadcasted on financial news networks.
- [ ] Through voting at shareholder meetings.
> **Explanation:** Shareholders generally receive subscription rights informing them of their option to purchase additional shares via certificates or notifications.
### What is the primary purpose of subscription privileges?
- [ ] To encourage voting participation.
- [x] To maintain ownership percentages.
- [ ] To reduce company debt.
- [ ] To distribute dividends equitably.
> **Explanation:** The primary purpose of subscription privileges is to maintain the ownership percentages of existing shareholders.
### Can subscription privileges be transferred to another person?
- [ ] Never.
- [ ] Only if approved by a vote.
- [x] Yes, shareholders can sell or transfer their rights.
- [ ] Only to immediate family members.
> **Explanation:** Shareholders can sell or transfer their subscription privileges to another party.
### Who sets the subscription price in a rights offering?
- [ ] The shareholders.
- [x] The company's board of directors.
- [ ] The stock exchange.
- [ ] Industry regulators.
> **Explanation:** The company's board of directors typically sets the subscription price in a rights offering.
### What happens if a shareholder does not exercise their subscription privilege?
- [ ] They lose their shares.
- [ ] They receive a replacement privilege.
- [x] They may face ownership dilution as the new shares are issued to others.
- [ ] They must pay a fee.
> **Explanation:** Shareholders who do not exercise their subscription privilege might face ownership dilution as the new shares are issued to others.
Thank you for exploring the concept of subscription privileges and challenging yourself with our quiz questions. Continue to deepen your understanding in the world of financial management!
