Rights Offers and Delaware Law

Under Delaware law, a securities issuance in which all existing investors may participate pro rata (a “rights offer”) is often seen as treating insiders and outsiders equally, making it difficult for nonparticipating outsiders to prevail on a claim that insiders sold themselves cheap securities. I show that insiders can use rights offers to sell themselves cheap securities, even if outsiders are sophisticated and well-capitalized. My analysis suggests courts applying Delaware law should more aggressively probe rights offers for substantive fairness. I conclude by describing red flags indicating a heightened risk of expropriation.