WHEN YOU SHOULD SELL A SHARE
So at what price can you sell a share? It seems like a silly question, you can sell at whatever price you can find a buyer and as a rule you’ll find the buyer in the market – that is the point of stock exchanges, matching buyers and sellers. Fair enough, but not completely accurate either, as a recent Sherbourne Capital SENS illustrated. It bought a holding company for R1.8m using script to fund the purchase and the shares were issued at 12.5c each.
The bigger picture here is that not only is Sherbourne currently suspended (and has been pretty much since February of this year), but the last trades done at the beginning of this year were at either 1c or 2c. So how can it issue new shares at 12.5c, a massive premium on the last traded price?
Well, a couple of points on this – with over 780m shares in issue, another 15m issued to purchase something costing R1.8m is really a drop in the ocean. But, more importantly, existing (and trapped) shareholders should not get all excited that their shares are now worth some 12.5c each. That 12.5c is just what somebody was prepared to accept shares for a R1.8m deal. Is it a good deal for the seller? In short, no, as the shares are suspended and frankly unlikely to hit 12.5c any time soon, but we only know half the deal, that being the price paid.
The point is that a company can issue shares at pretty much any price they like, with shareholder approval that is typically given at the annual general meeting. Now as a rule, the new shares being issued will be at or around the latest traded share price, or maybe a thirty-day volume weighted average price (VWAP). Often they will be issued at a slight discount to entice whoever is receiving the new shares. But a premium on the price is fairly common with low liquidity shares. This premium in low liquidity is because one simply can’t buy the quantity in the open market so in order to get quantity, the buyer pays up.
Importantly, if the quantity of shares being issued leaves the buyer with a holding of over 35%, this would be considered a change of control and the buyer would need to make an offer to buy the shares of other shareholders at the same price.
In the case of Sherbourne, it really is just buying with worthless paper and the seller was prepared to accept the deal. We could do our own off-market deal whereby I sell some of the shares I hold to you at a massive premium to the current share price – but why would you want to overpay when you could go to market and get them for less? Unless, of course, you couldn’t find them for less due to liquidity.