Richard K. Ainsberg
Bear, Stearns & Co. Inc.
New York City
Dividend reinvestment and direct stock purchase plans have existed for many years, mainly as a benefit to shareholders. A recent development - the creation of a waiver feature - has changed the nature of these plans, making them more valuable to corporate management.
Many companies, in a broad range of industries, are bringing traditional plans to the state-of-the-art level. Simply including a waiver feature in a traditional plan provides companies - even those that do not pay dividends - with new abilities, including the flexibility to raise capital inexpensively.
Equity can be raised with no fanfare, no road show, no announcements, and no underwriter. Capital can be raised opportunistically.
Traditional plans offer the following benefits to a company, its shareholders, and investors:
• Shareholders can reinvest dividends in lieu of receiving cash.
• Shareholders can invest small sums of cash ($500 to $10,000) monthly.
• A first-time investor can buy stock directly from the company.
A plan with a waiver feature includes the following enhancement: Shareholders or new investors can invest larger sums of cash and receive shares of stock issued at a slight discount from the market price, at the company’s control and discretion.
This provision provides an alternative mechanism for a company to raise capital, if and when it chooses to do so. In this case, the shareholder completes a Request for Waiver Form, which is submitted for amounts that exceed the stated limit in the traditional plan.
There is no need to offer shareholders a discount on the traditional components of a plan, as there is benefit simply in being able to purchase stock directly from the company (thus saving commissions).
The waiver feature, however, is more likely to generate interest when the issuer offers a slight incentive discount - typically less than what a traditional underwriting would cost.
The waiver feature has been designed to provide companies with full control when it is utilized as an equity-issuing mechanism. Here are some features and benefits:
• Company has the ability to vary the monthly discount - which determines the total cost of issuance.
• Company can choose how much in the aggregate to accept, and how much any one participant can invest - controlling the inflow of new capital.
• Company can incorporate pricing mechanisms (threshold price provision) in which stock will not be issued below a price (floor).
• Company can set a pricing period (days on which the stock is valued) of any duration during the month, eliminating the need to issue shares at a price based on a single point in time and taking advantage of dollar-price averaging.
Each month, the company makes an internal determination as to whether or not there is a desire to raise capital. Once that decision has been made, the company sets the discount rate and threshold price.
This information is then communicated to interested shareholders via a taped message or directly from a designated person at the company from a telephone number printed in the S-3 filing prospectus. At times companies utilize their web page to notify shareholders of plan-related information.
These plans are flexible; they can be turned on and off from month to month as capital raising needs and general market conditions change. If Company XYZ wishes to raise capital in one month because there is a need and the stock price is strong, it may do so. If there is less of a need the next month or the stock price has become less attractive, the plan can be shut off by not granting waiver requests.
An integral control component of the waiver feature is the threshold price provision. This provision allows the issuer to set a minimum price at which they will issue stock each month. During that month’s specified pricing period, if the stock price is at or above this established price, stock will be issued. If the stock price is below this set price, no stock would be issued on that day and a ratable amount of the shareholder’s subscription would be returned.
Each month, the company may establish a new threshold price based on current market conditions and whether or not it is interested in raising capital. This protects Company XYZ from general market or company specific volatility. At no time will it issue stock below the threshold price.
Once a company has a plan in place, it is in full control of the process - the total amount of capital raised, the minimum price of the issuance, the discount, the participant, and the individual participation amount.
Despite their flexibility and minimal cost, these plans have limitations. The amount of capital a company can raise is proportionate to its market capitalization and trading volume. Thus, if a company requires a large infusion overnight, this may not be an effective method of raising capital.
These plans are more suited for companies that would like to have the ability to raise equity capital over time. Although a plan may be the only capital tool needed, using one doesn’t preclude the use of other options.
To initiate a plan, a company files a Shelf (Form S-3, 415 box - incorporated into a universal, or stand-alone) with the Securities and Exchange Commission. Once the registration statement is effective, the process is simple and quick.
Transfer agents have the systems and programming available to administer a state-of-the-art plan. And potential investors monitor plan filings and features, so once a plan is in place, companies find the participant universe is ready.
In an ever-changing global economy that has made conventional financing a challenge, the waiver feature in a direct stock purchase plan has gained importance as a reliable alternative source of equity funds. It provides a company with a mechanism to raise capital efficiently, economically, and opportunistically. OGFJ
The author
Richard K. Ainsberg is a managing director in the treasurer’s office at Bear, Stearns & Co. in New York and can be contacted at [email protected].
