Bonus Share

What does Bonus Share mean in American Law?

The definition of Bonus Share in the law of the United States, as defined by the lexicographer Arthur Leff in his legal dictionary is:

Bonus share [or stock]

Two meanings. One refers to the securities industry equivalent of retailing”s “buy two, get the third free” merchandizing, i.e., a way of decreasing the net cost of a commodity without openly cutting its per unit cost. This is a useful technique when selling debt securities, which may then be sold at par at a not too horrendous interest rate if the buyers are also given, as a “bonus,” some equity interest in the company, i.e., some entitlement to profits over and above the stipulated interest. This bonus, however, is obviously not “free” or a gift; if it were not “thrown in,” the buyers would not buy at the same price.

In the second usage, however, “bonus” does mean free; it refers to stock issued for no, or almost no, consideration, usually as part of a fraudulent scheme by insiders. As such, “bonus stock” means roughly the same as watered stock.