The Definition of a Net Share Settlement

A net share settlement is a deliverance of stock when dealing with options or warrants of purchasing stock. Through options and warrants one party has a loss. With net share settlements, the party with the loss gives the other party stock, often for free.

Types

A warrant to purchase stock is similar to an option. The difference is that a warrant does not obligate an investor to purchase the stock. Warrants are issued by a company, and options are instruments of the stock exchange. Net share settlements occur when one party in these types of transactions incurs a loss.

Features

When a loss in this type of situation occurs, the party incurring a gain gives the other party an amount of stock shares equal to the gain incurred. This is an agreement that takes place when an option or warrant is obtained.

Procedure Example

For example, Company A obtains a warrant to purchase 100 shares of stock through Company Z for $5 a share. When the warrant becomes due, however, the stock price has risen to $10. Company A was supposed to give Company Z $500 for the 100 shares, but because of the rise in price, a net share settlement occurs. The stock price for the 100 shares is now $1,000. Instead of Company A paying the $500, Company Z simply provides the 100 shares to Company A at no cost. This makes up for the rise in price.

References

• Financial Accounting Standards Board: Derivatives Implemation Group
• Fresh Patents: Method and System for Net Share Settlement of a Convertible Bond
• Pepper Hamilton LLP: Shedding Light on the Benefits of Net Share Settlement