What Is an Entitlement Offer?

An entitlement offer is a term used to describe any type of offer extended by a seller to a buyer, with the understanding that the offer cannot be passed on to a third party. This type of nontransferable offer is often extended only for a certain period of time before it is withdrawn by the seller. An approach of this type is often used by companies about to issue new shares of stock, typically providing current investors the chance to buy fixed lots of the shares before they are offered to the general public.

The terms of an entitlement offer will vary, depending on the intent of the seller and any other regulations or guidelines that the seller must consider before extending this type of offer. For example, an entitlement offer that has to do with providing current investors the chance to buy additional shares of stock may require crafting the offer based on the type and number of shares each investor already holds. In addition, the terms of the offer must be in compliance with not only the founding documents of the business making the offer, but any governmental trade regulations that are relevant to the sale.

One of the chief characteristics of an entitlement offer is that only the intended recipient has the authority to accept that offer. There are no provisions for transferring the offer to a different party if the buyer does not choose to accept the offer. This means that if an investor chooses to not purchase the additional lot of shares offered by a company, neither the investor nor the company has the ability to simply reroute the offer to a different investor. Instead, the offer will be declared null and void and the shares will be included in the first public offering of those shares. In rare situations, the shares may be included in a new offer that is extended to a different investor.

In addition to the nontransferable nature of the shares, an entitlement offer is usually only valid for a limited period of time. Typically, the offer is presented with a time frame that allows the recipient ample opportunity to examine the offer, consider the benefits of accepting it while also looking closely at any risk that may be involved, and make a final decision based on all available information. Once an entitlement offer has expired, it is not resurrected, although there is always the chance that the seller would create a new offer that is extended to the potential buyer.