HOME

TheInfoList



OR:

A corporate action is an event initiated by a
public company A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange ( ...
that brings or could bring an actual change to the
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other value to a business ** Home equity, the diff ...
or
debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
—issued by the company. Corporate actions are typically agreed upon by a company's
board of directors A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit orga ...
and authorized by the
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal o ...
s. For some events, shareholders or bondholders are permitted to vote on the event. Examples of corporate actions include
stock split A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of mark ...
s,
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
s,
mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...
,
rights issue A rights issue or rights offer is a dividend of subscription rights to buy additional securities in a company made to the company's existing security holders. When the rights are for equity securities, such as shares, in a public company, it can b ...
s, and
spin-off Spin-off may refer to: *Spin-off (media), a media work derived from an existing work *Corporate spin-off, a type of corporate action that forms a new company or entity * Government spin-off, civilian goods which are the result of military or gov ...
s. Some corporate actions such as a
dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
(for equity securities) or coupon payment (for debt securities) may have a direct financial impact on the
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the legal o ...
s or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as
stock split A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of mark ...
may have an indirect financial impact, as the increased liquidity of shares may cause the price of the stock to decrease. Some corporate actions, such as name changes or
ticker symbol A ticker symbol or stock symbol is an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. In short, ticker symbols are arrangements of symbols or characters (generally Latin letters ...
changes to better reflect a company's business focus, have no direct financial impact on the shareholders; securities may be listed under a different security identifier (e.g.
ISIN Isin (, modern Arabic: Ishan al-Bahriyat) is an archaeological site in Al-Qādisiyyah Governorate, Iraq. Excavations have shown that it was an important city-state in the past. History of archaeological research Ishan al-Bahriyat was visited ...
,
CUSIP A CUSIP is a nine-digit numeric (e.g. 037833100 for Apple) or nine-character alphanumeric (e.g. 38259P508 for Google) code that identifies a North American financial security for the purposes of facilitating clearing and settlement of trades. ...
, Sedol) however. For example, "Apple Computers" changed its name to Apple Inc.


Overview


Types

There are three types of corporate actions: voluntary, mandatory, and mandatory with choice. * Mandatory corporate action: A mandatory corporate action is an event initiated by the
board of directors A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit orga ...
of the corporation that affects all shareholders. Participation of shareholders are mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. A shareholder does not need to act to receive the dividend. Other examples of mandatory corporate actions include
stock split A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of mark ...
s, mergers, pre-refunding,
return of capital Return of capital (ROC) refers to principal payments back to "capital owners" (shareholders, partners, unitholders) that exceed the growth (net income/taxable income) of a business or investment. It should not be confused with Rate of Return (ROR ...
, bonus issue, asset ID change, and
spin-offs Spin-off may refer to: *Spin-off (media), a media work derived from an existing work *Corporate spin-off, a type of corporate action that forms a new company or entity * Government spin-off, civilian goods which are the result of military or gov ...
. Strictly speaking, the word "mandatory" is not appropriate because the shareholder is not required to do anything; the shareholder is just a passive beneficiary in all the cases cited above. There is nothing the shareholder has to do or does in a Mandatory Corporate Action. * Voluntary corporate action: A voluntary corporate action is an action where the shareholders elect to participate in the action. A response is required for the corporation to process the action. An example of a voluntary corporate action is a
tender offer In corporate finance, a tender offer is a type of public takeover bid. The tender offer is a public, open offer or invitation (usually announced in a newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded corp ...
. A corporation may request shareholders to tender their shares at a predetermined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the corporation's agents, and the corporation will send the proceeds of the action to the shareholders who elect to participate. * Mandatory with choice corporate action: This corporate action is a mandatory corporate action where shareholders are given a chance to choose among several options. An example is cash or stock dividend option with one of the options as default. Shareholders may or may not submit their elections. In case a shareholder does not submit the election, the default option will be applied. Some market participants use a different method to distinguish the corporate action types. For example, "mandatory corporate action" and "mandatory with choice corporate action" may be used together. DTC uses the terms distributions, redemptions and reorganizations.


Purpose

The primary reasons companies use corporate actions are: * Return profits to shareholders: Cash dividends are a classic example where a
public company A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange ( ...
declares a dividend to be paid on each outstanding share.
Bonus Bonus commonly means: * Bonus, a Commonwealth term for a distribution of profits to a with-profits insurance policy * Bonus payment, an extra payment received as a reward for doing one's job well or as an incentive Bonus may also refer to: Plac ...
is another case where the shareholder is rewarded. In a stricter sense, the bonus issue should not impact the share price but in reality, in rare cases, it does and results in an overall increase in value. * Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock suffers. Stocks priced too high will not be affordable to all investors and stocks priced too low may be
delisted In corporate finance, a listing refers to the company's shares being on the list (or board) of stock that are officially traded on a stock exchange. Some stock exchanges allow shares of a foreign company to be listed and may allow dual listing, su ...
. Corporate actions such as
stock split A stock split or stock divide increases the number of shares in a company. For example, after a 2-for-1 split, each investor will own double the number of shares, and each share will be worth half as much. A stock split causes a decrease of mark ...
s or
reverse stock split In finance, a reverse stock split or reverse split is a process by which shares of corporate stock are effectively merged to form a smaller number of proportionally more valuable shares. A reverse stock split is also called a stock merge. The "r ...
s increase or decrease the number of outstanding shares to decrease or increase the stock price respectively. Buybacks are another example of influencing the stock price where a corporation buys back shares from the market in an attempt to reduce the number of outstanding shares thereby increasing the price. * Corporate restructuring: Corporations restructure in order to increase profitability. Examples include
mergers Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...
(where two companies that are competitive or complementary join forces) and
spin-offs Spin-off may refer to: *Spin-off (media), a media work derived from an existing work *Corporate spin-off, a type of corporate action that forms a new company or entity * Government spin-off, civilian goods which are the result of military or gov ...
(where a company breaks itself up in order to focus on its core competencies).


Impact

As an owner, the impact of a corporate action is usually measured in terms of changes to the
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
and/or cash positions, so corporate actions can be divided into two categories: * Benefits: Actions that result in an increase to the position holder’s securities or cash position, without altering the underlying security. Examples include bonus issues, which is a Mandatory With Options Action/Event. * Reorganizations: Actions that reshape or restructure the beneficial owner's underlying securities position, which sometimes also results in a cash payout. Examples include equity restructures, conversions, and
subscriptions The subscription business model is a business model in which a customer must pay a recurring price at regular intervals for access to a product or service. The model was pioneered by publishers of books and periodicals in the 17th century, and ...
.


Notification requirement

In order to keep investors and the market informed of corporate actions, they need to be announced. For
public companies A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
listed on exchanges, the exchanges themselves handle the announcement, notifying shareholders as well as making information about the corporate action available online. For companies that trade in the
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...
(OTC) marketplace, U.S. federal securities regulators task
Financial Industry Regulatory Authority The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) that regulates member brokerage firms and exchange markets. FINRA is the successor to the National Associat ...
(FINRA), a self-regulatory organization, with processing the corporate action announcement. The event information flow for public companies where shareholders or bondholders can vote usually involves numerous parties. The information is first announced by the company to the exchange. Financial data vendors collect such information and disseminate it via their own services to banks,
institutional investor An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked ...
s, financial data processors, and other market participants. In addition, the
central securities depository A central securities depository (CSD) is a specialized financial organization holding securities like shares, either in certificated or uncertificated ( dematerialized) form, allowing ownership to be easily transferred through a book entry rather t ...
(CSD) of the respective market collects the data and informs the CSD participants holding the respective share or bond in custody about the upcoming corporate action. The CSD sets a deadline for its participants by which the elections must be returned. The CSD participants then further disseminate the information to its clients (e.g. banks, institutional investors or private clients), which in turn must submit their election by the deadline set by the CSD participant.


References

{{reflist


External links

*Securities Market Practice Group List of Corporate Action Events
Actions WG/A_Final Market Practices/4_SMPG_CA_EventTemplates_SR2014_V1_1.docx
*Corporate Actions Glossary

*List of voluntary corporate actions

*ISO15022 MT564 message format for corporate actions data message

*SIX Financial Information Corporate Actions data offering

*Assessing the Risk in the Corporate Actions Process: Industry Insigh

Financial markets Financial_metadata