What are Share Purchase Rights
A share repurchase right is a term to a financial contract generally offering the right's holder the option, but not the obligation, to purchase (or repurchase) a predetermined number of shares at a predetermined price. This is similar to a stock option or warrant on a stock. These rights are typically distributed to existing shareholders, who have the ability to trade these rights on an exchange.
Stock Rights Issue
BREAKING DOWN Share Purchase Rights
Share purchase rights only give shareholders the ability to purchase the shares, but they must still pay for the shares to redeem the rights.
Similar to a preemptive right, a share repurchase right may carry a certain amount of weight with investors who don't want their equity investment in an entity "diluted" by the expansion of a business's equity base. Investors owning a series of share repurchase rights effectively have a call option to reconsolidate their proportional stake in a business. This can be important for investors desiring a control position.
Share repurchase rights are usually tied to an equity valuation incentive program. For instance, to motivate central or founding management teams, a certain number of common shares which have been distributed to external shareholders might be packaged as part of a repurchase plan. Here, company's founding management team might be incented to outperform, so they can repurchase (or clawback) equity shares which may have been sold during a financing round.
Share Purchase Right vs. Share Purchase Plan
Although similar in name only, a share repurchase right should not be confused with a share repurchase plan or what is often simply called stock buybacks. A share repurchase plan is a dedicated program a corporation uses to buy back its own shares in the open market. This usually happens when a company feels its shares are undervalued in the market. More recently, these programs have come under fire for potentially engineering excessive executive compensation schemes.