Kelton, I looked back over my post and I think I presented my thoughts in a poor fashion. The 20% limit on share increase is limited to Nasdaq stocks (there may also be similar exchange rules on ASE and NYSE), and is no real impediment to having the shares increase beyond that. But a shareholder vote is required. Of course it's not much of a choice, because if not authorized, the convert holders call for immediate payment of monies owed. Since this is financing of last resort, the company is usually in no position to cough up the cash, and this can put the company over the edge.
I admit that I was a little piqued by Lee's presentation of the convert writers as 'tricking' companies into these deals. IMO, most of the managers are fully aware of what they are doing. In some cases, management is affiliated with the company that issues the converts. Some folks want to blame these deals for causing the companies to go belly up, but IMO it delays this. Since it is financing of last resort, the companies involved would likely go belly up that much sooner if it were not available. I'm sure some managers are dreamers and think that there is no way their stock price could drop to a place were the shareholders were diluted into oblivion, but my opinion is that most are just trying to keep their jobs going a little while longer. Either way, it's a no win situation for the shareholders. Either management is incompetent (if they were 'tricked') or they're going into it eyes wide. I would never hold a stock of a company that issued junk equity.
I'm not sure where the 20% rule could be verified, perhaps at nasdaq.com I've picked it up from being short a couple of stocks that ran into that problem (CFON comes to mind immediately), and waiting for the correspondent shareholders' vote to go through. If you go back to the start of this thread, pay special attention to a poster named Zeev Hed, he is SI's resident expert on junk equity.
Barb |
