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Before a public company can do a secondary offering (issue more shares) do the majority of current share holders need to approve it? or can they issue more shares without having the current shareholders vote for it?

  • I'm voting to close this question as off-topic because this appears to be about how to run a public company, not about investing from a personal perspective. – ChrisInEdmonton Dec 5 '19 at 14:04
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    @ChrisInEdmonton I think this is marginal as the question probably comes from the side of an investor trying to ensure that their holding is not diluted so I'm voting to keep it open – MD-Tech Dec 5 '19 at 14:30
  • That's right. I'm an investor and recently found out about the concept of secondary offerings which raised some questions for me. – Arya Dec 5 '19 at 17:08
  • Nope. That's why retail investor must always watch out the true intention of the company board. – mootmoot Dec 5 '19 at 17:31
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A public company does not need a majority approval from share holders to do a secondary offering.

Note that there are two types of secondary offerings. From Investopedia, What Is a Secondary Offering?

A secondary offering is the sale of new or closely held shares by a company that has already made an initial public offering (IPO).

There are two types of secondary offerings. A non-dilutive secondary offering is a sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds from this sale are paid to the stockholders that sell their shares. Meanwhile, a dilutive secondary offering involves creating new shares and offering them for public sale.

A non-dilutive secondary offering does not dilute shares held by existing shareholders because no new shares are created. The issuing company might not benefit at all because the shares are offered for sale by private shareholders, such as directors or other insiders (like venture capitalists) looking to diversify their holdings. Usually, the increase in available shares allows more institutions to take non-trivial positions in the issuing company, which may benefit the trading liquidity of the issuing company's shares. This kind of secondary offering is common in the years following an IPO, after termination of the lock-up period.

A dilutive secondary offering, also known as a follow-on offering or subsequent offering, is when a company itself creates and places new shares onto the market, thus diluting existing shares. This type of secondary offering happens when a company's board of directors agrees to increase the share float for the purpose of selling more equity. When the number of outstanding shares increases, this causes dilution of per-share earnings. The resulting influx of cash is helpful in achieving the longer term goals of a company or it can be used to pay off debt or finance expansion. Some shareholders shorter-term horizons may not view the event as a positive.

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    Perhaps it's worth noting that the board of directors was elected by, and is supposed to represent the interests of, the existing shareholders, so when the board approves a dilutive secondary offering it is at least indirectly "approved" by the shareholders (in the same sense that government policies are approved by voters in a representative democracy). – nanoman Dec 5 '19 at 17:01
  • I'm pretty sure that most corporations need approval from a majority of stockholders to do a dilutive offering if they've already issued the maximum number of shares permitted under their charter. I don't know what fraction of public companies are anywhere close to their share issue limit though. – David Schwartz Dec 6 '19 at 18:57
  • @David Schwartz - If that was the case, why would shareholders ever approve a dilutive secondary? In some cases, the board of directors can decide to offer a secondary. Dilution scams have occurred on unregulated OTC BB and Pink Sheets stocks via massive follow-on offerings. RFO's exist (right of first offering) giving existing shareholders the right to buy shares in the secondary before they are offered to others, enabling to avoid the dilution. I vaguely recall an SEC 20% rule pertaining to new share issuance as well as change in control but I don't remember the specifics. – Bob Baerker Dec 6 '19 at 20:06
  • @BobBaerker The only major disadvantage of a dilutive secondary is that shareholders get a smaller percentage of future profits. After all, the money raised in the dilutive secondary belongs to the shareholders. The only reason shareholders would approve a dilutive secondary is the same reason the board would approve it -- they believe that the secondary increases the future profits of the company for current shareholders by more than the percentage the dilution reduces the future profits for current shareholders. Shareholders and the board should be aligned on this. – David Schwartz Dec 6 '19 at 20:09
  • And yet, stocks often sell off dramatically when a secondary offering is announced, despite the theoretical result of one. – Bob Baerker Dec 6 '19 at 20:26

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