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What is an Antidilution Provision?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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    Conjecture Corporation
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Most shareholders choose to invest financial resources in the hopes of not only retaining the value of the original investment, but also realizing a return on that investment. One of the reasons that any investor can reasonably expect that the company issuing the stocks or bonds will make every effort to provide those returns is because of the antidilution provision found in many agreements related to stock ownership. Here is how the antidilution provision works to protect the rights and privileges of all stockholders in the company.

One of the main protections that are extended to shareholders with an antidilution provision is the guarantee that their shares of stock will not be devalued should the company enjoy a stock split or the issuance of additional shares of stock. This means that if an investor purchases two thousand shares of stock in Company A at a price of $10.00 US Dollars (USD) per share, the shares will still be worth at least $10.00 USD each, no matter how many shares of stock are now available.

Of course, an antidilution provision does not prevent the value of shares from increasing; however, the provision does establish a bottom line value for the common stock that cannot be manipulated. This is sometimes referred to as an example of subscription right or subscription privilege that is extended to the investor at the time of the stock purchase.

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Another important aspect of the antidilution provision has to do with protecting the preemptive right process that may come into play. The antidilution provision not only protects the investor from a loss of revenue or resources due to fractional ownership of a company. In fact, the provision also often states that any changes in the current stock issuing process or number of shares that are issued will be announced in advance to all stockholders. Often a specified minimum amount of advance notification is spelled out in the terms of the antidilution provision. This notification allows each investor the opportunity to determine whether to hold on to the stock, purchase more of the same stock, or unload the stock altogether.

The antidilution provision is a common component in most stock purchasing transactions. When written properly, they afford an equitable level of protection for the new stockholder, without promising any type of return or increase on the original investment. At the same time, the antidilution provision does ensure that the stockholder will be kept abreast of any type of changes on the part of the company that could impact the shares already issued.

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