Share Issues
A share issue is a process whereby a company creates and distributes new shares to investors to raise capital. Each share represents partial ownership in the company, entitling shareholders to voting rights, dividends (when declared), and a claim on company assets in proportion to their shareholding.
Whilst share issues allow companies to raise funds, this may also dilute any existing shareholders’ ownership percentages.
Companies may issue shares for strategic reasons, which are primarily centered around financing and growth:
Raising capital without taking on more debt - Equity financing through share issues doesn’t require repayment of principal or interest, this can be attractive to companies with limited cash flow
Funding growth and expansion - Capital raised could be used to purchase more assets or equipment, expansion into new markets, or injected as funding into research and development for new products
Reducing existing debt - Some companies may even do it to reduce existing debt, to make their financial position more attractive to the market.
Alternatively, companies could borrow money from a bank, but would need to pay interest costs, and ultimately repay the debt.
Example
Bob’s Airport wants to raise capital in 2025. The offer provides current shareholders with the opportunity to purchase more shares at a discount, with any excess shares then offered to the public.
The rights issue raises $1.2m from both institutional and retail shareholders, and helps the company bolster its financial position to purchase new aircraft and expand into overseas markets.
Summary
Despite their advantages, share issues present potential challenges:
Ownership Dilution - Existing shareholders may see their percentage ownership decrease
Control Implications - Changes in ownership structure can affect decision-making authority
Share Pricing - Determining the optimal price is crucial for successful capital raising
Companies should carefully evaluate all available funding options to determine which approach best suits their specific circumstances and strategic objectives.
Contact Us
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This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
