Undivided Account: What It Is and How It Works

Key takeaways

• An undivided account (also called an eastern account) is an IPO syndicate arrangement in which each underwriter shares responsibility for selling any unsold portion of the offering.
• In a western account, each underwriter is liable only for the shares it was assigned.
• Eastern accounts spread both greater potential profits and greater risk among syndicate members.
• Syndicate terms — including fees, allocations and exceptions — are set out in the underwriting (syndicate) agreement.

What an undivided (eastern) account is

When a company goes public, investment banks and broker-dealers (underwriters) form a syndicate to market and sell the new shares or bonds. In an undivided (eastern) account, all participating underwriters agree to share the liability for any portion of the issue that remains unsold: each member helps place unsold shares regardless of its original allocation. This contrasts with a western account where each underwriter is responsible only for its own allotment.

How it works in practice

• The lead manager allocates percentages of the total issue to syndicate members (for example, 15%, 25%, etc.).
• If some portion of the offering is not placed with investors, every member of an eastern account shares the obligation to sell or finance that unsold portion according to the syndicate agreement.
• Syndicate members receive a share of underwriting fees and profits proportional to their participation.

Risks and rewards

• Eastern accounts concentrate both upside and downside across the syndicate: members can earn fees and profits without committing the full capital up front, but they also assume collective responsibility for coverage if sales fall short.
• Western accounts limit exposure because each firm covers only its allocated share, reducing potential liability but also limiting the ability to share in larger syndicate profits.

Syndicate agreements and important clauses

• The underwriting or syndicate agreement defines allocations, fee splits, and each member’s obligations.
• A common protective provision is the market-out clause, which releases underwriters from purchase obligations if a specified material event occurs that impairs the securities or the issuer. Typical market disruptions (poor market sentiment or pricing disagreements) generally do not qualify.
• The syndicate manager decides whether to run the offering on an eastern or western basis and administers other practical details.

Types of underwriting structures (examples)

Underwriting arrangements can take several forms in addition to eastern/western allocation methods:
* Firm commitment — underwriters buy the entire issue and resell to the public (primary risk with firm money).
Best efforts — underwriters agree to sell as much as possible but do not guarantee the total proceeds.
Mini-max, all-or-none, and standby agreements — variations that allocate risk and conditions differently depending on issuer needs and market circumstances.

Bottom line

An undivided (eastern) account is a syndicate structure that pools responsibility among underwriters for unsold IPO shares, increasing both shared profit opportunities and collective risk. The choice between eastern and western structures, along with the specific underwriting agreement terms, determines how liability, fees, and protections are allocated among syndicate members.