What Is Antidilutive?

Antidilutive is a term that describes the effects of certain actions, such as securities retirement, securities conversion, or other corporate actions (e.g., acquisitions made through the issuance of common stock or other securities) on the earnings per share (EPS) or voting power of existing shareholders. Antidilutive activities maintain or increase the voting power or EPS for existing shareholders by lowering the company's outstanding share count or increasing the company's earnings.

A second use of the term antidilutive refers to ownership rights, whereby existing shareholders in a certain class of shares have the right to purchase additional shares when there is a new issuance of securities that would otherwise reduce their ownership percentage. This is called an anti-dilution provision. The ability of existing shareholders to purchase additional shares helps them maintain their proportion of outstanding share ownership, therefore maintaining their share of the voting power or receipt of the company's EPS.

Either definition can be contrasted with dilutive corporate actions.

Key Takeaways

  • Antidilutive are those corporate actions that maintain or increase shareholders' voting power or earnings per share (EPS).
  • Antidilutive also refers to a situation where certain existing shareholders have the right to purchase additional shares when there is a new issuance of securities that would otherwise reduce the percentage of their ownership.
  • Antidilutive is most commonly used in reference to convertible securities whose exercise would increase EPS.

Understanding Antidilutive

Although most commonly used in reference to convertible securities whose exercise would have the effect of increasing EPS, the use of the term "antidilutive" has become much more comprehensive. It refers to any action that helps an existing shareholder maintain or increase their voting power or receipt of the company's EPS. If securities are retired, converted, or impacted by certain corporate activities, and the transaction results in an increased EPS, then the action is considered to be antidilutive.

However, these antidilutive actions are not included in the calculation of fully diluted earnings per share (EPS), which is the profit-per-share of outstanding common stock. Both accountants and financial analysts compute diluted earnings per share as a worst-case scenario when evaluating a company's stock. With diluted earnings per share, it is assumed that all convertible securities (e.g., convertible preferred shares and convertible debentures) were exercised.

Dilutive vs. Antidilutive

Antidilutive refers to activities that maintain or increase EPS and shareholder voting power. Conversely, dilutive describes the effect of certain actions or activities that reduce EPS. As a result of dilutive activities, existing shareholders' ownership interests are reduced. Dilution is often accomplished through the issuance of dilutive securities, such as stock options and convertible debt instruments, which ultimately increase the number of outstanding shares of common stock and reduce EPS for existing shareholders.

However, certain contracts contain protective provisions that prohibit the reduction of a shareholder's interest if subsequent funding rounds occur.

Antidilutive Example

For example, suppose Company A has five existing shareholders, who each own 10% of the company. If Company A issued more shares to gain new shareholders, the existing shareholders would see their 10% ownership stake shrink as more owners bought in. This is known as dilution. If Company A had an antidilutive policy in place, they would need to offer the existing five shareholders the ability to buy more shares in order to maintain their 10% ownership in the company.