Anti-dilution provisions protect shareholders from devaluation of their shares due to demergers or the issue of further shares, and ensure advance notification of any changes to the share issue process or number of shares issued.
Most shareholders choose to invest financial resources in the hope not only of maintaining the value of their original investment, but also of realizing a return on that investment. One of the reasons any investor can reasonably expect that the company issuing stock or bond will make every effort to provide such returns is because of the anti-dilution provision found in many agreements relating to stock ownership. Here’s how the anti-dilution provision works to protect the rights and privileges of all of the company’s shareholders.
One of the main protections that are extended to shareholders with an anti-dilution provision is the guarantee that their shares will not be devalued should the company benefit from a demerger or the issue of further shares. This means that if an investor buys two thousand shares in Company A at a price of $10.00 United States Dollars (USD) per share, the shares will still be worth at least $10.00 USD each, regardless of how many shares are available now.
Of course, an anti-dilution provision does not prevent the share value from increasing; however, the provision establishes a background value for the common stock that cannot be manipulated. This is sometimes referred to as an example of subscription right or subscription privilege which is extended to the investor upon purchase of the shares.
Another important aspect of the anti-dilution provision concerns the protection of preventive due process that may come into play. The anti-dilution provision not only protects the investor from a loss of income or assets due to fractional ownership of a company. Indeed, the provision also often stipulates that any changes to the current share issue process or the number of shares issued will be notified in advance to all shareholders. A specified minimum advance notification amount is often specified under the terms of the anti-dilution provision. This notification gives each investor the ability to determine whether to keep the stock, buy more of the same stock, or dump the stock altogether.
The anti-dilution provision is a common component in most stock purchase transactions. When written correctly, they offer a fair level of protection for the new shareholder, without promising any kind of return or increase on the original investment. At the same time, the anti-dilution provision ensures that the shareholder will be kept informed of any kind of changes by the company which could have an impact on the already issued shares.
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