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Green Shoe Option

CA Akshay Joshi (CA) (386 Points)

28 December 2010

Hi to all

plz guide me abt Green Shoe Option with example.

and what is closely held company.

you can mail me at akyrj7 @ gmail.com

thanx & regards

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2 Replies

Mohammed (CS, Mcom, LLB) (857 Points)
Replied 28 December 2010

Greenshoe Option

Legally referred to as an over-allotment option, a provision contained in an underwriting agreement which gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected.

The option gives the issuer company a right to sell more shares to investors than originally planned in their public offering if the demand situation requires such an action after the listing

A greenshoe option can provide additional price stability to a security issue, since the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges too high.

Investopedia Says: Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances - for example, if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.

The term is derived from the fact that the Green Shoe Company was the first to issue this type of option (now called Stride Rite Corporation), founded in 1919.

Closely held Corporation

A closely held corporation is a corporation in which more than half of the shares are held by fewer than 5 individuals. Closely held corporations are private companies, and are not publicly held. In a closely held corporation, if one of the shareholders wants to sell some or all of his/her shares, the sale must take place with one of the other existing shareholders, since no sale of shares can take place.

A closely held corporation is a private corporation, but a private corporation may or may not be closely held. In a closely held corporation, the management of the business may overlap with the primary shareholders.

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(Guest)

A “Greenshoe” is an option with Underwriters in a Public Offering of Shares which gives underwriters the right to sell additional shares if demand for the securities is in excess of the original Shares offered. The greenshoe can vary in size up to 15% of the original number of shares offered.

Eg: Suppose a company X wants to go public and it appoints its underwriters to divest say 1 lac shares. Underwriters have the responsibility to find buyers for these 1 lakh shares. Now, under the Green Shoe option,15% additional shares in addition to the 1 lakh shares are at the underwrites discretion. So this means that the UNDERWRITER can sell the 1.15 lac shares and out of these 1.15 lac shares 15 thousand would be a kind of Short Sell positions i,e selling the shares without actually owning them.