Whenever a company brings new shares to the market, the existing shareholders usually receive subscription rights. What that means exactly and what options it gives you.
If you hold shares in a company, you may one day be granted subscription rights. Then the corporation may be planning a larger investment, but maybe it’s also about survival for them.
We explain to you what exactly the subscription right is all about, why it is granted – and when it is not. We will also use an example to show you how to calculate the value of your subscription right.
What is a subscription right?
If a company that is already listed on the stock exchange needs further capital, it can issue additional shares and thereby earn fresh money. With the help of this so-called Personal-Financial.com increase it can then, for example, make investments, but also pay off debts.
For the previous shareholders, however, this means that their shares in the company are dilutedbecause there are now more stocks overall. And that in turn means that their voting rights and their wealth decrease.
The latter happens because the share price usually falls. Because the price at which the new shares are issued is below the price of the old shares.
In a nutshell: For existing shareholders, the issue of additional shares – also known as new shares – is initially a worsening. To make up for that, there is this Subscription right. It must be granted in Germany if the new shares increase the capital by more than ten percent. The German Stock Corporation Act (AktG) forms the legal basis for this.
Anyone who is already a shareholder in the company can use the subscription right preserve his voting rights and his assetsif he buys the young stocks. Alternatively, he can also sell his subscription right. In this way, however, he only preserves his assets, not the voting rights.
How does the subscription right work?
First of all, the general meeting of the stock corporation has to decide that the share capital should be increased. She determines that too Issue price of the new shares as well as the time of issue.
From then on the so-called Subscription period. The shareholders must decide within 14 days whether they want to make use of their subscription right to buy new shares – or whether they prefer to sell their subscription right or forego it altogether. Once the subscription period has expired, the new shares will be traded alongside the old shares on the stock exchange.
How many new shares the existing shareholders can receive depends on the Subscription ratio from. For example, if it’s four to one, you can buy a new one for four old shares (see next section for calculation).
How do I calculate the value of the subscription right?
The value of the subscription right is determined on the basis of the previous shares, the old share price and the subscription price for new shares. First we have to calculate the subscription ratio. It arises in two ways: either from the Ratio of old share capital to increased capital or from the Ratio of old shares to the number of new shares.
Example: Let us assume that a company is planning an investment and wants to increase the share capital from 56 million euros by 14 million euros to 70 million euros. This results in a subscription ratio of four to one (56 million / 14 million = 4).
In order to calculate the value of the subscription right, we also have to use the Old share price and the Purchase price of the new share know. Let’s assume the current price is 20.50 euros and the new shares are to be issued and sold on the market for 18 euros.
The value of the subscription right can now be determined using the following formula:
(Price of the old share – purchase price of the new share) / (subscription ratio + 1)
For our example this would mean: (20.50 euros – 18 euros) / (4/1 + 1) = 0.50 euros
In this case, the subscription right of a share would be arithmetically worth 50 cents. The value is especially important if you want to sell subscription rights. If you hold 100 shares, you would receive 50 euros for your subscription right. However, this is only a theoretical cost value. Ultimately, subscription rights are traded on the stock exchange, where supply and demand influence the price.
Can subscription rights be excluded?
An exclusion of subscription rights is only possible under certain conditions:
- The share capital may be increased by selling new shares no more than ten percent climb.
- The issue price of the new shares may not much below the current share price lie.
If these conditions are met, there can be several reasons why the general meeting excludes subscription rights. These can be, for example:
- The corporation wants a take over another company.
- The new stocks are employee shares only.
- The new shares are only meant to be part of a foreign exchange to be traded.
What applies to taxation when selling subscription rights?
Whether the profit you make when you sell subscription rights is subject to withholding tax depends on when you bought the old shares in question.
That happened before 2009, is the sale of the shares themselves not taxable and thus also not the sale of subscription rights. Got the old stocks from 2009 on bought is a Personal-Financial.com gains with subscription rights are subject to final withholding taxbecause the sale of the shares is also taxable.