Protection against dilution
The protection against dilution guarantees first-time shareholders that the proportion of their shares in the stock corporation will not be changed in the event of a capital increase . In the case of a capital increase, the first shareholders receive a subscription right .
Corporate actions by companies lead to changes in the share price , against which option holders and writers are protected by anti-dilution clauses. Examples of such measures are:
- Payment of a cash dividend
- Issue of bonus shares ('stock dividend')
- Capital increases
- Stock splits
- Issuance of conditional equity ( e.g. convertible bonds )
The consequence of these measures is a falling share price. There are also measures taken by companies, such as buying back their own shares , which, ceteris paribus, increase the share price .
Protection against dilution for options
Looking at options, such a disadvantage, a declining stock price holder of a call option and favors holders of put options . This is not considered fair as those involved in the option trade have not made any wagers in relation to these actions.
An option is optimally protected against dilution if the asset position of the owner (or the writer ) does not change as a result of the measure taken. This is the case if the base price is reduced by the ratio of the new to the old price and the number of shares available is increased by this ratio.
The dilution protection practiced (for example at Eurex ) does not offer any protection against dividend payments. This is due to the technical complexity and the resulting lack of transparency in the option price structure. For free shares and share splits , however, ideal protection against dilution applies. In the event of a capital increase , the base price is adjusted with the help of subscription rights (or cash compensation if additional shares are not delivered).
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