Guide: What is a rights issue and new share issue?

In this article you will learn, among other things, about the concepts of rights issue and rights issue, both of which are key concepts in finance and investment. We also cover related concepts such as bonus issue, private placement and issue in kind. 

What is an issue?

A rights issue is a collective term for when a company issues new shares or other securities, such as convertible bonds and warrants. The purpose of an issue is usually to raise new capital to finance investment, growth or strengthen the balance sheet. However, some issues, such as bonus issues, reallocate existing capital without raising new funds.

What types of emissions are there?

The most common types of emissions are:

• New issue: The company issues new shares that are bought by investors, raising new capital. This is the most common type of issue when a company needs to strengthen its finances or finance expansion.
• Directed issue: Shares are issued to a specific group of investors, such as strategic partners or institutional investors.
• Fund issue: The company redistributes existing capital by transferring funds from retained earnings or reserve fund to share capital. Shares are distributed to existing shareholders at no cost.

Other types of emissions include:

• Issue in kind: Payment for shares is made in the form of assets instead of money, such as real estate or intellectual property.
• Set-off issue: The company issues shares in exchange for debt write-offs, which reduces the company's debt.

What is a rights issue?

A rights issue involves a company issuing new shares and selling them to raise capital. In a rights issue existing shareholders are offered priority to buy the new shares, protecting their shareholding from dilution. In some cases, the shares may also be offered to new investors through a directed issue, where shares are sold to, for example, institutional investors or strategic partners.

The capital raised by a company through a rights issue is usually used to:

• Fund new projects and product development.
• Expand into new markets and strengthen their market position.
• Pay off debts and strengthen the balance sheet depending on the company's needs and strategy.

Benefits of a new share issue

New share issues offer several important benefits to a company:

1. Access to capital for growth: The capital raised can be used to scale up operations, develop new products and expand into new markets.
2. Improved liquidity: The new capital strengthens the company's liquidity and allows it to manage current costs and future investments.
3. Reduced indebtedness: By using part of its capital to pay off debts, the company can reduce its financial risk and improve its long-term stability.

Disadvantages of a new share issue

There are also challenges and potential drawbacks to carrying out a rights issue:

1. Dilution of shareholdings: Existing shareholders who do not participate in the rights issue will have a reduced shareholding, which may affect their influence in the company.
2. High costs: New share issues are often costly due to the need for legal advice, prospectus preparation, marketing and other administrative costs.
3. Risk of negative market reaction: The share price may be negatively affected if the market perceives the rights issue as a sign of economic problems or uncertainty, especially if the issue takes place under stressed circumstances.

How does a rights issue work?

A rights issue is a process where a company issues new shares to raise capital. Here is a clear overview of the steps usually involved in the process:

1. proposal for a new share issue

The process starts with the company's board preparing a proposal for a rights issue. The proposal states:

• The purpose of the issue, such as financing expansion or debt payment.
• the conditions applicable to the issue, such as the price per share, the number of shares to be issued and the subscription period

The proposal must be approved by the general meeting, where shareholders vote on the decision. In some cases, the board may have already received an authorization from the general meeting, giving them the right to carry out the issue without further approval.

2. subscription of shares

Once the rights issue has been approved, the company will open up for subscription of the new shares. Interested parties can apply to buy shares according to the established conditions.

• If preferential rights apply: Existing shareholders will have priority to subscribe for new shares in proportion to their current ownership.
• If the issue is directed: Only a specific group of investors, such as institutional investors or strategic partners, can subscribe to shares.

Those who subscribe and pay for the shares receive ownership shares in the company. If more interested parties apply than there are shares to subscribe, it is called oversubscriptionand the allocation will be made according to the rules set out in the terms and conditions of the issue.

3. registration with the Swedish Companies Registration Office

Once subscription and payment have been completed, the rights issue must be registered with the Swedish Companies Registration Office. This registration is necessary in order to:

• The new shares shall become valid.
• The capital increase should be reflected in the company's balance sheet.

After registration, the new shares can start trading (if the company is listed) or be included in the share register (if the company is unlisted).

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What is meant by dilution of shares? 

Share dilution occurs when a company carries out a rights issue and issues new shares, increasing the total number of shares in the company. This means that each existing share represents a smaller percentage of the company's total ownership structure after the issue, if existing shareholders do not subscribe to the new shares.

Example: If you own 100 % of a company with 100 shares, and the company issues another 100 shares that you do not buy, your ownership share will decrease to 50 %, as the total number of shares is now 200.

Other issues

The other issues we will talk about in this article are private placements, bonus issues, issues in kind and set-off issues. It is worth pointing out that all these issues are "new issues", which is a broad term for capital injections where a company issues new shares.

What is a private placement?

A private placement is a type of share issue where a company offers new shares to a specific group of investors, such as strategic partners, institutional investors or experts in a particular industry. Unlike a rights issue, where all existing shareholders have the right to participate, in a private placement the company chooses who can participate. As a result, private placements are often used to attract specific investors who can bring more than just capital, such as industry knowledge or strategic contacts.

Advantages of a private placement

Directed issues have several advantages that make them attractive to companies in certain situations:

1. Fast and efficient fundraising: As only a limited number of investors are involved, the process can be carried out more quickly and with less administrative complexity than a broader rights issue.
2. Strategic partnerships: By offering shares to specific investors, such as industry experts or companies with similar objectives, the company can create valuable partnerships that contribute to its development and growth.
3. Flexibility: The company has more control over who becomes a new shareholder, which can be important to ensure a long-term strategy and stable ownership structure.

Disadvantages of targeted issuance

However, there are also challenges and drawbacks to targeted emissions:

1. Dilution of shareholdings: Existing shareholders who are not given the opportunity to participate in the issue may see their shareholdings decrease, which could create dissatisfaction.
2. Risk of loss of confidence: If shareholders perceive that the issue benefits a specific group at their expense, it can damage trust in management and negatively affect the value of the share.
3. Regulatory requirementsAlthough private placements can be faster, they require careful legal and financial preparation to ensure that the process complies with applicable rules and that existing shareholders are treated fairly.

Private placements are a useful tool for companies that need capital quickly or want to attract strategic investors. Despite their advantages, such as efficiency and the possibility of partnerships, the company must carefully consider the impact of the issue on existing shareholders to avoid dissatisfaction and loss of confidence.

What is a bonus issue?

A bonus issue involves a company converting part of its existing capital, such as accumulated profits or reserve funds, into share capital. This is done without raising new money from external investors. In a bonus issue, new shares are issued to existing shareholders at no cost to them. Alternatively, depending on how the issue is structured, the bonus issue can increase the nominal value of shares already issued.

The purpose of a bonus issue is not to increase the company's liquidity, but to reallocate capital within the balance sheet. It strengthens the company's share capital, which can signal financial stability and increase market confidence in the company.

Benefits of a bonus issue

1. Strengthening the balance sheet: By increasing the share capital, the company can be perceived as more financially stable, which may facilitate future capital raising or borrowing.
2. No cost to shareholders: Existing shareholders receive new shares without having to pay anything, and their stake in the company is not affected.
3. Boosting market confidence: A larger share capital can improve the company's credibility with investors, suppliers and other stakeholders.

Disadvantages of a bonus issue

1. No new liquidity: As no new money is injected into the company, the bonus issue cannot be used to finance new projects or investments.
2. Dilution of share value: If more shares are issued, the value per share (measured as the book value) decreases. This can affect the market value of the share, even if the owner's percentage stake in the company remains unchanged.

A bonus issue is an effective way for companies to strengthen their share capital by restructuring existing capital, without burdening existing shareholders. Although it does not inject new money into the company, it can create benefits such as improved balance sheet and increased market confidence. At the same time, the company should be aware of potential negative effects, such as dilution of share value, and assess whether a bonus issue is the right strategy for their specific needs.

What is an issue in kind?

A contribution in kind is a method whereby a company pays for the acquisition of assets, such as another company, intellectual property or equipment, with shares instead of cash. This means that those who contribute the assets to the company become shareholders in the acquiring company.

A common example is when a large company acquires a smaller company. If a large technology company wants to buy a smaller company that has developed a strategically important product, it can use a non-cash issue to pay by offering shares in its own company instead of cash.

Benefits of issuing in kind

1. Preserving liquidity: The company can make acquisitions without using its cash, which is particularly beneficial if cash flow needs to be prioritized for other investments or ongoing operations.
2. Strategic assets without cash payment: Using shares as payment allows the company to acquire key assets, such as technology, intellectual property or entire companies, and strengthen its position in the market.
3. Flexibility in acquisition strategy: A non-cash issue allows for acquisitions even when the company does not have sufficient cash, which can create opportunities for strategic growth.

Disadvantages of issue in kind

1. Dilution of shareholdingsWhen new shares are issued, the existing shareholders' percentage ownership in the company decreases. This can lead to shareholder dissatisfaction, especially if the acquisition is not perceived as value-creating.
2. Uncertainty about the share price: The impact on the share price depends on the market's assessment of the acquisition. If the acquisition is seen as strategic and valuable, the share price may strengthen. On the other hand, if it is seen as less favorable, it can lead to a fall in the share price.
3. Complexity and scrutiny: Issues in kind require the assets being contributed to be properly valued and approved by auditors and, in some cases, by the general meeting. This can be a time-consuming and costly process.

Issuing shares in kind is a powerful tool for companies that want to make acquisitions without using cash. It enables strategic acquisitions and preserves liquidity, which can be crucial for the company's growth and long-term goals. At the same time, the company must carefully consider the impact on shareholders and the share price, as well as ensure that the assets being added truly create value for the company.

What is a set-off issue?

A set-off issue is a form of issue where a company issues new shares to its creditors, i.e. parties to whom the company has debts. By offering shares instead of cash, debt is converted into equity. This reduces the company's debt and strengthens its balance sheet, which can contribute to a more stable financial position.

Advantages of offset issuance

1. Preserved liquidity: As the company does not need to use cash to pay its debts, cash can instead be used for the ongoing needs of the business or growth measures.
2. Reduced indebtedness: Set-off issues reduce a company's debt burden, which can improve its creditworthiness and create better conditions for future financing.
3. Strengthening the balance sheet: By increasing equity and reducing debt, the company can appear more stable and financially sustainable.

Disadvantages of offset issuance

1. Dilution of shareholdingsExisting shareholders receive a reduced percentage of ownership in the company when new shares are issued. This can create dissatisfaction among shareholders.
2. Signal of economic problems: If the offset issue is carried out as an emergency measure, the market may interpret it as a sign of financial difficulties. This could put downward pressure on the share price.
3. Dependence on creditors' acceptance: A set-off issue requires creditors to agree to exchange their claims for shares. If they consider the shares not attractive enough, the issue may fail.

A set-off issue is an effective tool to reduce debt and strengthen the balance sheet, especially for companies that need to preserve their liquidity. At the same time, it entails a risk of dilution of existing shareholders' stakes and can negatively affect market confidence if the issue is seen as a distress solution. Companies should therefore carefully consider the timing and communication of a set-off issue to maximize its benefits and minimize potential negative effects.

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Frequently asked questions

What does new issue mean?

A rights issue is a process whereby a company issues new shares to raise capital from investors. This capital can be used to strengthen the company's financial position, finance expansion into new markets, develop products or reduce debt by paying off existing liabilities.

New share issues are a common tool for companies looking to grow or improve their financial stability. They can be directed to existing shareholders through a rights issue or to new investors, for example through a private placement.

What does emission mean?

An issue involves a company issuing new securities, such as shares or bonds, to raise capital or redistribute existing capital. For example, a rights issue or a non-cash issue raises new capital or assets, while a bonus issue redistributes existing capital into share capital without raising new funds from investors.

Is a new share issue good or bad?

A rights issue can be both positive and negative depending on the circumstances. If it is done to finance growth, develop new products or expand into new markets, it is often seen as a positive signal showing the company's ambition and confidence in the future.

If, on the other hand, the rights issue is carried out as an emergency measure to solve financial problems or cover losses, it may create uncertainty among investors and be interpreted as a sign of financial weakness.

The market reaction is influenced by several factors, including:

• Pricing of the shares: Too low a price can signal desperation.
• Size of the issue: A large issue can lead to dilution of existing shareholders.
• Communication of the purpose: Clear and strategic communication on how the capital will be used can reduce concerns and build trust.

A well-motivated and well-thought-out rights issue with long-term objectives tends to create confidence, while a rights issue that is perceived as ill-considered or panicky may have the opposite effect. 

Can you buy whole companies via a rights issue?

No, a rights issue creates new shares that you can buy, but it is not an opportunity to buy an entire company. If you want to buy all the shares in a company, it is better to contact an investment bank that specializes in M&A if it is a larger company you want to buy. If it is a smaller company you want to buy, a business broker better.

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