A rights issue underwriting agreement is a legally binding contract between a company and its underwriters that governs the issuance of new shares of stocks to existing shareholders. This agreement details the underwriting process, pricing, and the rights of the underwriters and existing shareholders.
Underwriters play a vital role in ensuring the success of a company`s rights issue. They help the company to raise capital by buying the new shares of stocks and reselling them to the existing shareholders. Underwriters guarantee that the company`s new shares of stock will be sold, even if the existing shareholders do not exercise their right to purchase them.
Companies usually hire underwriters to help them with their rights issues because they want to reduce the risk of not being able to sell new shares of stocks to existing shareholders. Underwriters also help companies to raise more capital than they would have raised without their services.
A rights issue underwriting agreement typically includes several important provisions, such as the underwriting fee, which is the amount paid by the company to the underwriters for their services. The agreement also outlines the underwriters` obligations, including their responsibility to purchase and resell the new shares of stocks.
Underwriters may also have the option to purchase additional shares of stocks if there is an oversubscription, which occurs when the demand for new shares exceeds the available supply. Underwriters may also have the right to purchase additional shares of stocks if the company`s share price drops significantly after the rights issue.
Existing shareholders also have the right to purchase new shares at a discounted price. This is known as the subscription price, which is typically lower than the market price of the company`s shares. The subscription price is determined by the company and its underwriters based on the demand for new shares and the company`s desired level of capital raising.
A rights issue underwriting agreement is an important document that protects both the company and its underwriters. It ensures that the company`s rights issue is successful and that its existing shareholders are given the opportunity to participate in the company`s growth. By hiring underwriters and entering into a rights issue underwriting agreement, companies can raise capital and continue to expand their operations while minimizing risk.