What a set-off issue means for shareholders
In a set-off issue, the company's share capital changes as new shares are issued to a creditor instead of a cash payment. This can affect existing shareholders' ownership stakes, since the number of outstanding shares increases.
It is therefore important to understand both the terms of the issue and how the ownership changes, especially in smaller companies where a few shares can have a big impact on control and influence.
Key components of a set-off issue
Here are common elements of a set-off issue.
- The claim to be set off is determined and approved
- The number of new shares is calculated based on the value of the claim
- The terms of the issue are formally decided by the general meeting
- The new shares are entered in the share register once the issue has been completed
- The ownership structure is updated to reflect the newly acquired shares
When these components are clearly defined, it is easier for you to judge how a set-off issue affects the company and your role as a shareholder.
When a set-off issue is used
Worth bearing in mind
A set-off issue is often used when a company wants to strengthen its balance sheet or restructure its financing without having to raise new cash. This can happen, for example, if the company has accumulated losses or if a lender agrees to convert its claim into an ownership stake.
This type of issue can also be a way of maintaining relationships with creditors while improving the company's financial ratios.
Frequently asked questions
Why do companies carry out a set-off issue?
To reduce debt, strengthen the balance sheet and improve cash flow without having to pay the debts in cash.
Does a set-off issue affect existing owners?
Yes. Because new shares are created, the ownership stake of existing owners can shrink through dilution.
How is the subscription price determined?
It is set by the company and approved under the company's formal process. The price determines how many shares correspond to the debt.
Who receives the new shares?
Whoever has a claim on the company, for example a lender or an investor who has lent money to the company.
Are set-off issues common in unlisted companies?
Yes. They are often used when the company wants to strengthen its finances or avoid cash payments in early stages of development.