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Stock question for dglH or Ursus (or anyone else)

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    Stock question for dglH or Ursus (or anyone else)

    Hypothetical question: If a company is planning to increase the number of shares available, does that mean that they are planning a split? They can't just create more shares at the same price, can they?

    If it does split, is there any way to know the ratio if you know that there are x shares currently outstanding and they want to add y more?

    #2
    Stock question for dglH or Ursus (or anyone else)

    They can do a number of things.

    They can issue new shares, which would be offered to the public at a price that is likely to be very close (though a bit lower) than the current market price.

    Or they can do a split.

    Most European companies have provisions in their Articles/Bylaws that provide that existing shareholders have a "pre-emptive" right to acquire any new shares issued. This allows existing shareholders to avoid "dilution" (i.e., having the number of shares that they hold represent a smaller percentage of the total than it did before the new offering) Such rights don't exist for US companies. Both US and non-US companies often have shareholder approvals in place that allow them to issue new shares (or sell existing shares that they hold in "treasury") in order to satisfy the exercise of stock options.

    As for your example, if y is less than a multiple of x, then what is planned is a new offering, rather than a split.

    Does that help?

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      #3
      Stock question for dglH or Ursus (or anyone else)

      A split is one way, but it's much more common to just do a rights issue. A split doesn't increase the capital of a company, just the liquidity of the shares - each shareholder gets twice as many shares at half the original value.

      If you want to increase the capital, you cna do it through a rights issue. Because this dilutes existing shareholders, it tends to lower the share price. You can also issue a convertible bond, which pays a low rate of interest but can be converted into new shares by the holder.

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        #4
        Stock question for dglH or Ursus (or anyone else)

        You snooze, you lose around here, don't you?! The other guys have already dealt with it.

        An issue dilutes the share-holding, a split is more to increase the liquidity (Buffett famously does the inverse for Berkshire Hathaway, to try and get long term investors).

        So say, if you are Bear Stearns and write new equity equal to 30% of your company to sell to JPM, then everyone else is effectively decreased in holding as a result.

        (aside from that)
        I saw that an interesting legal screw up meant that before the deal got renegotiated it was possible that JPM may have been on the hook for Bear Stearns guarantees even if the deal didn't go through. As much as I would love to know that, I am sure I won't be able to draw comment for very obvious reasons.

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          #5
          Stock question for dglH or Ursus (or anyone else)

          GY, the corporate law of most (all?) US states doesn't allow for rights issues.

          dglh, I really don't think that Wachtell screwed up. The provision in question was discussed at length on the analyst call on the Sunday night in question. Dimon's story sounds to me like revisionist history 101.

          I'm the first to admit that lawyers make mistakes (I'm eternally grateful that we don't have to sign death certificates for ours), but lawyers of that quality almost never make fundamental errors of that nature.

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            #6
            Stock question for dglH or Ursus (or anyone else)

            It sounded a little bizarre when I read it. I mean to say that an error like that would be so fundamental it would destroy the firm and so many people review these things (even in a whistle-stop tour of legals like a few weekends ago).

            I was hoping for a very amusing story on that basis - it stunned me (into laughter) when I read it may have been the case - and the suggestion was it was a debatable reading anyway.

            I am really surprised by the level of interfering you can do with stock issues in the US. Poison Pills and all still seem to be the call of the day (I think it is great, but it doesn't do any good!)

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              #7
              Stock question for dglH or Ursus (or anyone else)

              It's all what one grows up with, though.

              When I first started working with European companies, I found the concept of pre-emptive rights to be bizarre.

              And it was of course Marty Lipton (of Wachtell, Lipton, Rosen & Katz) who "invented" the poison pill.

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                #8
                Stock question for dglH or Ursus (or anyone else)

                Thanks, that does answer my question. I was hoping for a stock split, since the price has plummeted since I bought it. I don't need any more dilution, thank you very much.

                Oh well, I didn't buy it for a quick turnover; I'm in for the long haul.

                ETA: The current shares outstanding are appr. 3.15M and the amount of the increase would be 6.5M.

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