Open Offer

An open offer is an invitation to existing shareholders to buy new shares in proportion to their holdings without using a renounceable, separately tradable entitlement. The company raises equity capital, but a shareholder who does not participate generally cannot sell the entitlement as in a traditional rights issue.

This is primarily UK capital-markets terminology. Other jurisdictions use “open offer” for different transactions, including takeover or tender structures. Confirm the context before applying the definition.

Key Takeaways

• Eligible shareholders receive priority to subscribe based on a record date and ratio.
• The entitlement is generally non-renounceable and cannot be sold separately.
• A participating holder contributes cash and receives new shares.
• A non-participating holder can be diluted and may receive no value for the unused entitlement.
• A compensatory open offer can provide different treatment, so the circular must be reviewed.

Worked Example

Assume a company with 100 million shares outstanding makes a 1-for-4 open offer at $8 when its shares trade at $12 before becoming ex-entitlement.

• New shares offered: 100 million / 4 = 25 million
• Maximum gross proceeds: 25 million x $8 = $200 million
• Post-offer shares if fully subscribed: 125 million
• Theoretical ex-entitlement price: [(4 x $12) + (1 x $8)] / 5 = $11.20

A holder of 400 shares may subscribe for 100 new shares by paying $800. If the holder participates fully, ownership remains proportional at 500 shares out of 125 million.

If the holder does not participate, the holding remains 400 shares while the denominator rises to 125 million. The holder’s percentage ownership falls by 20% relative to the previous percentage. Unlike a renounceable rights issue, the holder generally cannot sell the open-offer entitlement to recover its theoretical value.

Open Offer vs. Rights Issue

Current FCA open-offer rules distinguish ordinary open offers from open offers with a compensatory element and caution against implying that an open offer provides the same entitlement as a rights issue unless that element exists.

How an Open Offer Works

1. The company announces the ratio, price, record date, timetable, and purpose.
2. Eligible holders receive non-renounceable subscription entitlements.
3. Holders submit valid instructions and payment before expiration.
4. The subscription agent calculates basic allocations and any permitted excess applications.
5. Untaken shares are handled through the stated allocation, placing, underwriting, or lapse process.
6. New shares are allotted and the final results and proceeds are announced.

How to Evaluate an Open Offer

• Compare the subscription price with current market price and realistic valuation.
• Calculate post-offer shares and dilution for participants and non-participants.
• Review whether excess applications or oversubscription are available.
• Identify controlling-holder, underwriter, or backstop commitments.
• Reconcile gross proceeds, costs, net proceeds, and use of proceeds.
• Check whether a compensatory element applies and how untaken shares are treated.

Risks and Common Mistakes

The share price may fall below the subscription price before completion. A non-participant may lose percentage ownership without the ability to sell an entitlement. A controlling holder may also increase influence if other holders do not participate.

Do not use “open offer” and “rights issue” interchangeably, assume the discount is free value, or assume untaken entitlements are compensated. This page is educational and not investment, legal, or tax advice.

Related Terms

• Rights Issue: A proportional issue commonly using tradable rights.
• Allotment: The securities assigned after valid subscriptions and allocation.
• Oversubscription Privilege: A conditional request for shares left after basic subscriptions.
• Share Dilution: The reduction in proportional ownership from new shares.
• Subscription Price: The price payable for each new share.

FAQs