• What is Proration?

Proration is a situation that can arise during a specific corporate action, such as an acquisition. In certain situations, the acquiring firm will offer a combination of cash and equity, and shareholders of the firm being acquired can elect to take either. Following the shareholder election, remaining stock is prorated if available cash or shares are not sufficient to satisfy the offers that shareholders tender. If this occurs, the company grants a proportion of both cash and shares for each offer tendered so that everyone still gets their fair share of the deal.

• Understanding Proration

Proration supports shareholders by ensuring that a company can stick to its initial target and not favor some investors over others (e.g. giving a percentage of shareholders the cash they wanted while delivering shares to the rest). While this means that every investor might not receive their initial election; it does ensure that all investors receive the same reward. Other situations in which the need for proration might occur include bankruptcy or liquidation, special dividends, stock splits, and spinoffs. While these corporate actions must be approved by shareholders, and a company will typically list them on a firm's proxy statement, filed in advance of a public company's annual meeting, individual shareholders must still occasionally sacrifice to maximize wealth for all shareholders.

• Example

Suppose a company decides to acquire another outfit for $100 million, which consists of 75% cash and 25% equity. The cash-equity split might undergo a revision if a majority of investors of the company being acquired elect to be paid in cash. In that case, the acquiring company will change its accounting figures in order to accommodate the demand for cash. This will result in each investor of the acquired company receiving less cash than originally planned. Halliburton had to revise its original stock buy back offer of 2013 and reduced it by a factor of 67.9% in order to balance investor demand and its stock price at that time.

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