What is a Renounceable Right
A renounceable right is an offer issued by a corporation to shareholders to purchase more shares of the corporation's stock (usually at a discount). Renounceable rights have a value and can be traded.
During a rights offering, existing common stock shareholders are given the opportunity to purchase newly issued shares at a discount to the price shares will be offered to the public at a later date.
The “right,” which is given to the owner of each outstanding share is similar to a stock option: Each right’s holder has the option to purchase a specified number of new shares of the company’s stock at a specified purchase price on a certain date.
BREAKING DOWN Renounceable Right
A rights offering prevents existing shareholder dilution under a regular seasoned equity offering. By setting the purchase price below market value, existing shareholders may find the rights offering an attractive enough proposition to offset ownership dilution.
A renounceable right gives each share the opportunity to maintain a proportional ownership stake in a business but also allows for shareholders to receive cash from the sale of the right if so preferred.
Also called a rights offering or preemptive rights, renounceable rights can be transferred or sold to another party. Similar to the transfer of a stock option. When rights cannot be sold, they’re known as a non-renounceable rights issue.
See our case study for a detailed look at rights issues.