Are there any liabilities when short selling a stock with a corporate action?
Yes, there are substantial liabilities to be aware of when short selling a stock that then undergoes a corporate event like a merger, acquisition, tender offer or spin-off. These liabilities typically do not apply to long shareholders, exposing short sellers to risks outside of normal market forces.
What happens if there is a tender offer or buyout on a shorted stock?
If there is a tender offer to purchase shares at a set price, short sellers are usually obligated to buy shares at that price to cover their short position regardless of the initial short sale price. This can lead to losses if the tender price is higher than where you shorted the stock. Long shareholders can tender their shares but short sellers may have no choice.
What about mergers, acquisitions or spin-offs?
When a company is acquired or spins off shares, short sellers must buy back their shares to close out their position at the deal price even if it is higher than where they shorted. Long shareholders receive proceeds from the deal but short sellers realize losses buying at the higher price. Short sellers remain liable for costs to maintain the short but lose rights to benefits from the deal that long holders receive.
What happens if a shorted company declares bankruptcy?
In a bankruptcy, the value of a short seller's position becomes worthless but they remain on the hook for accumulated interest and fees to maintain the short position. Long shareholders may receive residual value from bankruptcy proceedings or file claims against the company while short sellers forfeit everything but still owe obligations to Redbridge.