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green shoe option noun

(FINANCE) an option to allocate more shares than those included in the public issue and to operate a post-listing price stabilizing mechanism for a period of up to 30 days
The initial public offering (IPO) has a green shoe option attached which allows for the total offering size to be increased by 15 percent.

Hello and welcome to TransLegal's lesson of the week.

My name is Greg and today I'm here to talk to you about the Legal English term, green shoe option.

Now sometimes you'll see it written like this, which is green shoe with two words or sometimes you'll see greenshoe together as one word. Just so you know.

The technical term is an over allotment option which you will see sometimes it referred to in prospectuses or in contracts or in underwriting agreements with the underwriter of a particular issue of shares.

Now before we get too much into that; when you think of green shoes there are a number of famous green shoes that we think of through the years. The first of course is unquestionably the greatest basketball player in the world, Mr. Larry Bird who played for the Boston Celtics in the 1980s and had green high top sneakers and second is everybody's favourite childhood character, Kermit the Frog that we all know from The Muppet Show. Actually I think I mixed up to the two pictures but you get the idea and I know what you're thinking, Kermit the Frog? Yeah he had green feet but did he have green shoes? I don't think so. Well, you're forgetting about when he played tennis and he did have green shoes. So those are some famous green shoes. I don't know if you can think of others.

The green shoe option, getting back to this, when a company is publicly issuing shares for the first time in an initial public offering or otherwise, they generally enlist the help of an underwriter and an underwriter is either a bank, or a financial institution or an investment house who assists in the issuance – really underwrites the new issuance of shares in an IPO or otherwise and they really work with the issuer of the shares to determine the price, the number of shares which are going to be issued and the process and which investors will be targeted, things of that nature.

The green shoe option is an option on behalf of the underwriter or an option for the underwriter to issue more shares if necessary, that is if demand exceeds what was initially anticipated by the issuer, the underwriter or both. This enables the underwriter to generally issue up to 15 percent more shares than originally anticipated or originally scheduled and it’s a means of not only dealing with increased demand but also a means of stabilising the price of shares after the shares are listed.

The green shoe option was named after the Green Shoe Company, who was the first company to come up with these type of options or introduce these type of options and that's another famous green shoe.

And I know you're probably thinking, Greg, this is all great but are you wearing green shoes today? I am not, but I am wearing green socks.

This has been the lesson of the week. My name is Greg. Thanks.

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