Greenshoe option meaning

A greenshoe option (also called an over-allotment option) is a contractual option used in IPOs and secondary offerings. It allows the lead manager or bookrunner to buy additional shares from the issuer or selling shareholders at the offer price to manage post-offer price stabilisation and to cover over-allotments. In practice, the option is commonly up to 15% of the base offer size and is exercisable for a limited period (often up to 30 days after pricing or admission). It operates alongside permitted stabilisation: the stabilising manager may over-allot and short-sell at pricing, then either buy shares in the market if the price falls, or exercise the greenshoe to obtain shares at the offer price if the price rises. In the UK, the term is defined in Article 1 of the UK Buy-back and Stabilisation Regulation (Retained Regulation (EU) 2016/1052), which supplements the UK Market Abuse Regulation and sets timing, volume and disclosure conditions for stabilisation. In Ireland, the equivalent EU Market Abuse Regulation and Commission Delegated Regulation (EU) 2016/1052 apply. Usage and legal effect are broadly consistent across England & Wales, Scotland, Northern Ireland and Ireland. A greenshoe option supports orderly market conditions immediately after admission and mitigates execution risk for issuers...