What are 'Non-Renounceable Rights'

Non-renounceable rights refers to an offer issued by a corporation to shareholders to purchase more shares of the corporation (usually at a discount). Unlike a renounceable right, a non-renounceable right is not transferable, and therefore cannot be bought or sold.

BREAKING DOWN 'Non-Renounceable Rights'

Issuing more shares dilutes the value of outstanding stock. But because the rights issue allows the existing shareholders to buy the newly issued stock at a discount, they are compensated for the impending share dilution - the compensation the rights issue gives them is equivalent to the cost of share dilution. However, shareholders who do not take exercise the rights by buying the discounted stock will lose money as their existing holdings will suffer from the dilution.

Why Companies Offer Non-Renounceable Rights

By offering non-renounceable rights, the company is setting a narrow window of opportunity for the shareholders to potentially purchase more stock at discount. Offering such rights can be seen as more favorable to the company than to existing shareholders, even though a discount may be offered. If the shareholders do not have sufficient funds at the time the non-renounceable rights come into play to exercise said rights, they stand to lose the opportunity to purchase the shares at the discount rate. Regardless of what action the existing shareholders take, the company will proceed with issuing more stock, which could service the capital needs of the business.

A company might offer non-renounceable rights on shares if there is a set timeframe and capital objective the business needs to meet. This could be to gather enough funds to make an acquisition of another company, to expand its operations through mass hiring and the establishing of new locations, pay back debts, make new purchases of other assets, or to reorient its financial roadmap for long-term needs. The company could be facing bankruptcy if it does not address its capital circumstances.

If the company is under constraints to raise more capital in order to maintain its prospects as a going concern, it might be necessary to issue shares regardless of the potential dilution effect it could have on existing shareholders. Non-renounceable rights are a way for the company to give existing shareholders the chance to maintain their stake in the business while controlling the leeway available to them to take advantage of the discounts. For shareholders, this can be seen as a less than desirable option than being offered rights they could conceivably sell on the market and see returns for themselves.

  1. Renounceable Right

    A renounceable right is an offer issued by a corporation to shareholders ...
  2. Nil-Paid

    Nil-paid is a security that is tradeable but that originally ...
  3. Oversubscription Privilege

    A privilege provided to existing shareholders in a company when ...
  4. Preemptive Right

    A preemptive right is a privilege extended to select shareholders ...
  5. Shareholder

    A shareholder is any person, company, or institution that owns ...
  6. Subscription Price

    The term "subscription price" refers to a static price at which ...
Related Articles
  1. Investing

    Understanding Rights Issues

    It's important to know why a company is offering a rights issue, what the capital will be used for, and the options available to investors besides buying the shares at a discount.
  2. Know Your Shareholder Rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company.
  3. Investing

    The Dangers of Share Dilution

    Investors need to be aware of dilutive securities and how they can affect existing shareholders.
  4. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  5. Insurance

    Get Sale Prices On Healthcare With Discount Plans

    Medical discount plans can help the uninsured or underinsured afford better healthcare.
  6. Small Business

    Companies That Offer Unique Employee Discounts

    These companies offer employees great discounts and unique incentives you don't find with your average employer.
  7. Small Business

    Corporate Takeover Defense: A Shareholder's Perspective

    Find out the strategies corporations use to protect themselves from unwanted acquisitions.
  8. Investing

    Shareholders: Vote Your Proxy and Be Heard

    Voting shares, in person or via proxy ballot, is a right every shareholder should exercise. Here's why.
  9. Trading

    Should Employees Be Compensated With Stock Options?

    Learn the good, the bad and the ugly sides of this type of payout.
  1. What can shareholders vote on?

    Understand the usual voting rights of common stock shareholders, along with the importance of shareholders exercising their ... Read Answer >>
  2. Why would I need to know how many outstanding shares the shareholders have?

    Find out why shareholders should know how many outstanding shares have been issued by a corporation, and learn what happens ... Read Answer >>
  3. How do a corporation's shareholders influence its Board of Directors?

    Find out how shareholders can influence the activity of the members of the board of directors and even change official corporate ... Read Answer >>
  4. Why is a shareholder rights plan called a "poison pill?"

    Discover why shareholder rights plans are often called "poison pills" to fight hostile takeovers and give smaller corporations ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center