Shares issued at a discount

3 key takeaways

• Issuing shares at a discount involves selling them for less than their nominal value, which can be an attractive option for investors.
• This practice is generally restricted and subject to regulatory approval due to potential risks of undervaluing the company.
• Companies may issue shares at a discount to raise capital swiftly or incentivize investment during financial difficulties.

What are shares issued at a discount?

Shares issued at a discount are shares sold by a company at a price lower than their nominal or par value. The nominal value, set when the shares are created, represents the minimum price at which the shares should ideally be issued. Selling shares below this value is termed as issuing at a discount. This practice can help companies attract investors by offering shares at a lower cost, thereby raising capital more quickly.

Issuing shares at a discount is often used as a strategic tool during financial hardships or when the company needs to incentivize investment quickly. However, it is usually heavily regulated to prevent potential abuse and protect existing shareholders from undue dilution of their investments.

Reasons for issuing shares at a discount

Companies may choose to issue shares at a discount for several reasons:

• Capital raising: Companies facing financial difficulties or those in need of quick capital infusion may issue shares at a discount to attract immediate investment.
• Incentivizing investment: Offering shares at a lower price can make the investment more attractive to potential shareholders, encouraging them to buy into the company.
• Strategic partnerships: Companies may offer discounted shares to strategic partners or investors as part of broader business arrangements or collaborations.

These reasons highlight the flexibility and strategic importance of issuing shares at a discount, despite its potential risks.

Legal and regulatory considerations

Issuing shares at a discount is typically subject to stringent legal and regulatory scrutiny:

• Company law: Many jurisdictions have specific legal provisions governing the issuance of shares at a discount. For example, in the UK, the Companies Act generally prohibits the issuance of shares at a discount to protect the integrity of the company’s capital.
• Shareholder approval: Often, the issuance of shares at a discount requires approval from the company’s existing shareholders. This ensures that shareholders are aware of and agree to the potential dilution of their investments.
• Regulatory approval: Regulatory bodies may need to approve the issuance of discounted shares, especially if the company is publicly listed. This oversight helps protect investors and maintain market stability.

Adhering to these legal and regulatory frameworks is crucial for companies to avoid penalties and maintain shareholder trust.

Impact on existing shareholders

Issuing shares at a discount can significantly affect existing shareholders:

• Dilution of ownership: When new shares are issued at a discount, existing shareholders may experience a dilution of their ownership percentage, reducing their control over the company.
• Impact on share value: The issuance of discounted shares can impact the market value of existing shares. If the market perceives the discounted issuance as a sign of financial distress, it can lead to a decline in share prices.
• Dividend distribution: With more shares in circulation, the dividend per share may decrease unless the company’s profits increase proportionally.

Understanding these impacts helps existing shareholders make informed decisions about their investments and potential responses to such corporate actions.

Examples and case studies

Several high-profile companies have issued shares at a discount under various circumstances:

• Rescue financing: During financial crises, companies may issue shares at a discount to secure rescue financing. For example, during the 2008 financial crisis, many banks issued shares at a discount to bolster their capital reserves.
• Strategic investments: Companies entering into strategic partnerships may issue shares at a discount as part of the agreement. This can provide immediate capital and solidify business relationships.

These examples illustrate the practical applications and potential benefits of issuing shares at a discount, despite the associated risks.

Shares issued at a discount can be a valuable tool for companies in need of quick capital or strategic investment. By understanding the legal frameworks, potential impacts, and strategic reasons behind such issuances, investors and companies can navigate this complex financial strategy effectively.