Undivided (Eastern) Account: What it Is and How It Works
An undivided account—also called an eastern account—is a syndication arrangement used in initial public offerings (IPOs) and new-issue underwriting. In this structure, multiple underwriters share collective responsibility for selling any unsold portion of the offering rather than being liable only for the slice they were originally allotted.
How it works
- The issuing company hires underwriters to manage pricing, marketing, and distribution of the new securities.
- Underwriters form a syndicate. In an undivided (eastern) account, each syndicate member agrees to help place any shares that other members fail to sell.
- Example: If a firm is allocated 15% of the issue but the syndicate still has unsold shares, that firm must assist in placing the remainder proportionally.
- The syndicate manager administers the offering and coordinates allocations and settlements.
Eastern vs. Western accounts
- Eastern (undivided) account: Members share collective responsibility for unsold securities. Risk and potential reward are pooled across participants.
- Western account: Each underwriter is responsible only for selling its assigned portion. Liability is divided according to individual allotments.
- Eastern accounts are more common because they let participants share profits while each commits less capital upfront—at the cost of greater joint liability.
Syndicate agreements and key terms
- Syndicate (underwriting) agreement: Specifies fee structure, each member’s percentage commitment, allocation rules, and other terms.
- Market-out clause: Allows an underwriter to be released from purchase obligations if a specific adverse development impairs the issuer or the securities’ quality. It typically does not cover adverse market conditions or mere overpricing.
- Common types of underwriting arrangements that the syndicate manager may choose:
- Firm commitment: Underwriter buys the entire issue and resells it—full purchase risk on the underwriter.
- Best efforts: Underwriter agrees to sell as much as possible but doesn’t guarantee sale of the entire issue.
- Mini-max: A hybrid where a minimum must be sold for the offering to proceed, up to a maximum.
- All-or-none: The offering proceeds only if all shares are sold.
- Standby: Used in rights offerings—underwriter buys any shares that current shareholders do not subscribe to.
Risks and benefits
- Benefits:
- Risk-sharing allows smaller capital commitments per firm while providing access to underwriting fees and potential profits.
- Syndicate members can leverage collective distribution networks to improve placement.
- Risks:
- Greater joint liability in eastern accounts if other members underperform.
- Exposure to underwriting losses if the issue fails to place or market conditions deteriorate.
Key takeaways
- An undivided (eastern) account makes syndicate members jointly responsible for unsold shares in an IPO.
- It contrasts with western accounts, where liability is limited to each underwriter’s allotment.
- Syndicate agreements govern allocations, fees, and protections like market-out clauses.
- Eastern accounts are common because they spread both rewards and risk among participants.