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A company has made an application for new Ordinary Shares. The new Ordinary Shares will rank pari passu with the existing Ordinary Shares. Also the company issues Ordinary Shares in respect of the satisfaction of the initial tranche of deferred consideration for an acquisition to vendors at a strike price of 12.5 per Ordinary Share.

My understanding is that the above mentioned sellers bought the new issued shares at the price of 12.5. However the market price at the time was 8.37. Could you please explain what happened here as it is not likely that one will buy shares at a much higher price than one can buy on market.

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This can arise with very thinly traded stocks for large blocks of shares. If the market only has a few thousand dollars available at between 8.37 and 12.5 the price is largely meaningless for people who want to invest in hundreds of thousands/millions of dollars worth, as the quoted price can't get them anywhere near the number of shares they want.

How liquid is the stock in question?

  • I am not very knowledgeable in this matters. Are you saying that because buyers want to invest significant amounts of money, but shares are not available they are willing to pay more and the company issues new shares at a higher price to satisfy their demand? Could you give an example (hypothetical). The company is collagen solutions. – Vasile Nov 5 '16 at 15:44
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    Yep, this is exactly the type of company where this is very common. As the market capitalisation is so small there are very low volumes of shares available on public markets. Someone wanting to invest millions in the company basically has to be issued new shares or buy out one of the existing major owners, both of which frequently carry large premiums vs the price of the small number of low volume, day to day trades. – Philip Nov 5 '16 at 16:18
  • Thanks. Have not thought of the cost of small daily trades. However the difference between the market price and what they negotiated still seems big (~50%) – Vasile Nov 5 '16 at 16:37
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    It's a similar problem to when a company is taken over - the price people have to pay for large, controlling or heavily influencing stakes in companies is virtually always well above the lower liquidity trade prices, because it carries massive additional benefits to the buyer they can't easily purchase on the open market (and often downside to the seller). The premium between voting and non voting shares is also a good example of this. – Philip Nov 5 '16 at 16:53
  • I see the point. Great to know. Thanks for your help – Vasile Nov 5 '16 at 17:09
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Berkshire Hathaway issues first ever-negative coupon security from back in 2002 had this part:

The warrants will give the holder the right to purchase either shares of the Company's class A or class B common stock at the holder’s option. The initial exercise price represents a 15% premium over the closing price of the class A shares on the NYSE on May 21, 2002. The Notes will pay holders a 3.0% interest rate per annum and holders will pay 3.75% installment payments per annum on the warrants. The warrant payments due from holders will be greater than the coupon on the senior notes, effectively making SQUARZ the first negative coupon security. Berkshire Hathaway will use the net proceeds from the issuance for general corporate purposes, including possible acquisitions, none of which are pending.

This would be an example where the strike price was 15% higher than the closing price yet the security sold well.

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