Let's be clear about this. The shorts will owe the dividend to the shareholders of record, just as they would any other dividend or distribution. The shorts sold shares that they receieved on loan from brokers that hold those shares in street name from actually customers. Shareholders of record will all be entitled to the the dividends on the ex-div date. If your short, you will owe the sharholder of record the div period.
So shorts will be caught in a bit of a bind. Do they wish to liable to for the dividend or close their short. The most interesting part of this is that shorts will be liable for delivering the warrants which are not going to be publicly traded. Thats a real problem if the stock takes off. The shorts will have an open ended liability that they will have a real problem hedging. Remember the warrents will be issued to shareholders of record in Oct. but not publicly traded until the summer of 2014. No public market means no access to the warrants.
It seems to me that the warrants simply go to the record owner. The lender of the stock that was sold by the short would also expect the warrants and the short seller could make good on that possible future liability by simply buying out of the money calls in an amount that would hedge the liability represented by possible future appreciation of MHR. That cost to the short seller would decrease the potential profit of a short trade, but would insure against the liability of covering the shortage of the warrants at some future date when the stock loan is repaid. I think it is that simple...am I missing something here? If the warrants ever trade in the open market, the short seller could buy enough to hedge against the delivery obligation when the loan is repaid.
Agreed! Now I wonder why this wouldn't make those shorts even MORE determined to hold down the stock price until AFTER the warrant exercise date? Make 'em expire worthless...then they can again cover. Of course, one would think this couldn't go on FOREVER, but long enough to escape this trap.
One nuance to this: I don't think the warrants can be exercised until the later of Sept. 1, 2014 or when the common stock underlying the warrants are registered. I'm not sure how to quantify the value of an out of the money warrant that is not currently exercisable.
You are correct, if the warrants do not expire worthless the short will have to cover the cost. If they do expire wortheless the short is not out anything. So if you have someone short 10000 shares they could be on the hook for 1000 warrants/shares @ $8.50 per. Really not a good time to be short. I think GE is about to teach some shorties a lesson!!!! COVER or Pay really BIG!!!
The shorts sold to someone. The brokearage loaned shares for them to sell from someone. So if I was the original owner I want my warrants. If I purchased shares on the open market and unknown to me they were from a short I want my warrants. The shorts do not own the shares so they have nothing coming to them. But we do have a problem with the original owner of shares and the buyer of shares from a short? Not sure what happens.....
The shorts did not sell to anyone. They merely loaned their shares. The owner of record gets the warrants.
PS - The warrants are a sword with two edges. They tend to bring the underlying price up toward the strike price but put a cap on the stock at that same strike price. If MHR does well then they effectively sell a bunch of stock at $8.50.