An entitlement offer is an offer to purchase a security or other asset that cannot be transferred to another party. An entitlement offer is offered at a specific price and must be used during a set timeframe. Failing to use the entitlement offer will lead to its withdrawal. An entitlement offer is also known as an open offer or a non-transferable offer.
An open offer is specifically related to a share offering, while an entitlement offer is not limited to securities.
Entitlement offers are most commonly associated with the issuance of new shares of stock by a company. A company looking to raise new capital can offer existing shareholders a deal–such as the ability to purchase a given amount of new shares at a set price over a specific time period. Unlike with a rights offer, the existing shareholder cannot transfer the entitlement offer to anyone else.
Limiting who can use the entitlement offer increases the complexities associated with a transaction. From the onset, the company issuing the offer may have to match the type of new shares the offer is providing with the type of shares the shareholder already has. If the investor chooses not to purchase the new shares then the company also cannot transfer the offer to another shareholder.
One option that the company has in the case of a declined entitlement offer is to shift the sale of the new shares to the general public, though this does mean that the price it can fetch may not be the same as with the entitlement offer.
The offer is valid for a set timeframe and in some cases can be accelerated, where the time to accept the offer is reduced.
A company cannot transfer who the entitlement offer was made for. If an entitlement offer fails, a company may choose to shift the sale to the general public.
The entitlement offer’s limited timeframe is usually long enough to provide the existing shareholder with enough time to examine whether the offer is in his or her best interest. In some cases, existing shareholders with large holdings are given a larger share of the new issues. In order to entice larger or institutional shareholders, the issuing company may issue an accelerated entitlement offer, meaning that the amount of time that a shareholder has to decide is reduced.