Corporate Action

What is a Corporate Action?

Corporate actions are the measures implemented by listed companies to confer specific qualifications on shareholders, such as preferential share option allocation, dividend distribution, dividends, etc.

For example, corporate actions of Hong Kong stock include share splits/consolidations, share allotments, share grants, and dividend payments. When it comes to actions affecting shareholders' rights, investors must be aware of the timing of different actions.

Any activity that results in a significant change for shareholders, including common and preferred stock and bondholders in an organization, and affects their stakeholders is considered such action.

These activities usually require approval by the company's board of directors; however, shareholders may be allowed to vote on some of them. Some actions necessitate a response from shareholders.

When a shareholder buys a company's stock, they need to know how the company's stock will be affected by any outstanding corporate action. Public companies are required to announce corporate actions. After the announcement is made, a date for the specific execution of the movement must be determined.

Corporate Action Examples

These actions typically include stock splits, dividends, mergers and acquisitions, rights issues, and spin-offs. All of these are significant decisions that usually require approval by the Company's Board of Directors and authorization by the shareholders.

1. Change in name or trading symbol

These changes will appear in customer account statements and account holdings. To more closely reflect a firm's business focus or ownership or to distinguish itself from other firms, a firm may make these changes.

Firms may require a new CUSIP to handle these changes, namely the unique 9-symbol identifier assigned to most financial instruments.

2. The stock split

During a stock split, the value of the stock held by the shareholder remains the same, but the number of positions changes. There may be a temporary ticker symbol created during the stock split process, but it all reverts to one ticker symbol at the end.

The act of dividing the value of each outstanding share of a company is called a stock split, also known as a bonus share.

• Note that cautious investors may be concerned that repeated stock splits can lead to the creation of an excessive number of shares.

3. The joint stock / The reverse split

The share consolidation is the opposite process of share splitting, where multiple shares are combined into one share.

A reverse split may indicate that a company's stock has fallen so low that its executives want to prop up the price or at least give the impression that the store is stronger. In other cases, a company may use a reverse split to drive away small investors.

4. Dividends

A company's dividend payments can be in the form of cash or stock. They are typically paid over a specific period, quarterly or annually. Essentially, these are part of the profits produced by the company to the stock owners.

Dividend payments affect the equity of the company. Dividend payments cause distributable equity to be reduced. By analyzing the distribution of cash dividends, an investor can learn that the company has a large amount of retained earnings from which shareholders can directly benefit.

However, when a growth stock starts paying dividends, many investors conclude that the once fast-growing company has stabilized and is achieving a steady but unimpressive growth rate.

5. Rights issues

A rights issue is a way for a listed company to raise capital by making a rights offer to existing security holders so that they can subscribe to securities in proportion to their current holdings. When a company announces a rights issue, existing shareholders will receive the rights. If the shareholders do not want the rights issue, they can sell their rights in the market (for tradable rights only, non-tradable rights cannot be sold) or renounce their rights.

A share placement is a placement of shares by a listed company to its shareholders. Share placements follow a unique sequence of events:

1. All clients on the day before the ex-rights date will participate in the share placement if they hold shares of the listed company.
2. On the ex-rights day, the stock price of the listed company will fall. Shareholders will see their holdings in an unfavorable position before the market's opening.
3. This loss will be converted into equity and distributed to the shareholder's position.
4. The equity will be credited to the shareholder's position after the close of business on the day of the distribution.

Companies implementing a rights issue only offer additional or new shares to existing shareholders. Existing shareholders have the right to purchase or acquire these shares before they are provided to the public.

In any case, a rights issue, usually in the form of a stock split, can indicate that this allows existing shareholders to acquire a promising new development.

6. Mergers and Acquisitions

• Mergers: A merger occurs when two or more companies combine under conditions agreed upon by all parties involved. Usually, one company hands over its stock to another company. Among other factors, a merger may signal:
  • A sign of expansion and future unrealized synergies.
  • Or, the industry is shrinking and the company must annex competitors to keep growing.
• Reverse mergers: are also possible where a private company acquires a publicly traded company, usually unprofitable. Thus, this private company has just transformed into a public company without going through the cumbersome process of an initial public offering. It has the authority to change its name and issue new shares.
• Acquisitions: a company buys the majority of the target company's shares. These shares are not exchanged or merged in any way. Acquisitions can be friendly or hostile.
• Privatizations: are usually initiated by a controlling shareholder who buys all of the shares from other minority shareholders for cash or securities with a cash option.
  • A listed company may complete privatization through a "takeover" or "arrangement by agreement."
  • The listed company will apply to the stock exchange to withdraw its listing status.

7. The spin-off

A spin-off is the sale of some of the assets of an existing public company or the distribution of new shares to create a new independent company.

Often, new shares are offered through a rights issue to existing shareholders before being offered to new investors. A spin-off occurs when a company prepares for a new challenge or refocuses its primary business activities.

Types of Corporate Actions

Some actions, such as dividend or coupon payments, may have a direct financial impact on shareholders or bondholders. Other actions, such as stock splits, may have an indirect financial impact, as increased stock liquidity may result in a lower stock price.

There are three common corporate actions listed below:

1. Mandatory

Mandatory corporate actions are events initiated by a company's board of directors that affect all the shareholders. For these actions, shareholder participation is compulsory. An example of a mandatory action is a cash dividend. Shareholders are not required to take any action to receive the dividend.

Other examples of mandatory actions include:

• Stock splits
• Mergers
• Advance refunds
• Return of capital
• Payment of dividends
• Changes in asset identification
• Spin-offs

Strictly speaking, this action is not mandatory, as the shareholder is not required to do anything. In all of the above cases, the shareholder is a passive beneficiary.

In a mandatory action, the shareholder has nothing to do and is not required to do anything.

2. Voluntary

A voluntary corporate action is one in which shareholders have the right to choose whether or not to participate in the action. The company is required to be responsive when dealing with the action.

A tender offer is an example of voluntary action. A company may ask shareholders to tender their shares at a predetermined price. Shareholders can choose whether or not to participate in the tender offer. Shareholders send their responses to the company's agent, and the company sends the proceeds of the action to those shareholders who choose to participate.

3. Mandatory with choice

This corporate action is mandatory in which shareholders must choose between several options.

An example is the cash or stock dividend option, where one option is the default. Shareholders may or may not submit their choice. The default option will be used if the shareholder does not submit an election.

Purpose and Impact of Corporate Actions

Generally, companies will take different activities to improve their employees' awareness and working ability. Next, we will discuss the purpose and meaning of the company's activities in the financial market.

1. Purpose

The company's main activity is to improve everyone's cohesion and inform stakeholders on what the company is working towards. Once a company plans to take corporate action there will be a direct impact on the share price.

Shareholders must understand how the action will work and how it will affect the company's share price and performance. This understanding can help shareholders decide whether to buy or sell a particular stock.

There are three main purposes of a corporate action:

1. To give the policy back to the shareholders:
   • A cash dividend is a typical example of a public company declaring a corporate action.
2. To influence the share price:
   • Share prices are not affected by dividend payments, but in rare cases, they can affect share prices and increase overall value.
   • The liquidity of a stock can be affected by whether the stock is overpriced or underpriced.
3. Corporate Restructuring:
   • Corporate restructuring can improve profitability. Examples of this include mergers and spin-offs.

2. Impact

The company's directors make decisions on corporate actions to increase the company's profitability and the interests of its stakeholders.

The company's shareholders will further authorize it. Some examples of popular actions include issuing rights, dividends, stock splits, mergers and acquisitions, and spin-offs.

An action that results in an increase in the security or cash position of a position holder without changing the underlying security. Examples include a dividend issue and a mandatory action/event with an option.

The act of reshaping or restructuring a beneficiary's position in underlying security can sometimes result in a cash payment. Examples include equity reorganizations, conversions, and subscriptions.

Researched and authored by Zezhao Fang | LinkedIn

Reviewed and Edited by Justin Prager-Shulga | LinkedIn