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Question

Difficulty: Very hardSettlement Dates, Trade Confirmations, and Corporate Actions

A publicly traded corporation announces a transferable rights offering to allow existing equity holders to subscribe for additional shares at a discount. Arrange the following key milestones of the rights offering process in correct chronological order from earliest to latest.

  1. 1The board of directors declares the rights offering, announcing the subscription price and terms.
  2. 2The stock begins trading ex-rights on the secondary exchange under T+1 regular-way settlement rules.
  3. 3The issuer determines the shareholders of record who are entitled to receive subscription rights certificates.
  4. 4The subscription window closes, and unexercised rights expire and become worthless.

Answer

The correct chronological sequence is: Board declaration of the rights offering -> Stock begins trading ex-rights (one business day prior to record date) -> Issuer establishes shareholders of record -> Expiration of unexercised subscription rights.
The standard chronological sequence for a corporate rights offering under FINRA/SEC T+1 rules is: (1) Declaration date by the board of directors establishing terms; (2) Ex-rights date designated as one business day prior to the record date; (3) Record date when settled shareholders are recognized; and (4) Expiration date marking the end of the subscription period.

Step-by-Step Solution

1
Identify the initial announcement event
Board declaration of the rights offering occurs first.
The corporate action originates with the board of directors' formal authorization and announcement of subscription terms.
2
Determine the ex-rights date relative to the record date under T+1 settlement
Ex-rights trading begins one business day before the record date.
Under regular-way T+1 settlement, buying stock on or after the ex-rights date results in settlement after the record date, leaving the buyer without subscription rights.
3
Identify the record date
The record date occurs on the business day immediately following the ex-rights date.
This is the cutoff date when the transfer agent inspects the settled share ledger to distribute rights certificates.
4
Determine the conclusion of the corporate action window
Expiration of unexercised rights occurs last.
Subscription rights are short-term instruments (typically 2–4 weeks) that cease to exist after the specified cutoff time on the expiration date.

Key Concept

Rights Offering Corporate Action Timeline and T+1 Ex-Rights Settlement Rules
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Topics

Settlement Dates, Trade Confirmations, and Corporate Actions