Corporate Actions: Common Types and What They Mean

What Is Corporate Action?

Any major change to a company that affects its stockholders, bondholders, and preferred shareholders is considered a corporate action.

The board of directors typically gives its blessing to such happenings, though shareholders may have a say in certain cases. There are corporate actions that call for shareholder input.

Corporate actions are processes initiated by a publicly traded company that have an effect on the company’s securities.

Changes to a company’s name or trading symbol are examples of corporate actions that necessitate updating a security’s CUSIP number, which serves as a unique identifier.

Other examples include bankruptcy and liquidation. A few examples of corporate actions are dividends, stock splits, mergers, acquisitions, and spinoffs.

Mandatory and voluntary corporate actions are both possible. Investments affected by mandatory corporate actions are automatically updated, while those affected by voluntary corporate actions require a response from the investor.

Examples of required corporate actions include stock splits, acquisitions, and name changes, while examples of discretionary corporate actions include tender offers, optional dividends, and rights issues.

A proxy statement is a document filed by a public company prior to its annual meeting that details the business transactions that will be brought before shareholders for approval. Corporate actions can also be revealed in 8-K filings for material events.

• A corporate action is any move made by a company that has far-reaching consequences for its constituents.
• Dividends, stock splits, tender offers, and mergers and acquisitions are all examples of common corporate actions.
• Corporate actions must often be approved by a company’s shareholders and board of directors.

Open a Libertex Account to start buying stocks and get a 100% welcome bonus today

Common Corporate Actions

Stock splits, dividends, mergers, acquisitions, rights offerings, and spin-offs are all examples of corporate actions. All of these are major decisions that typically need to be approved by the company’s board of directors and authorised by its shareholders.

• The stock price of a company can be affected by a cash dividend, which is a common corporate action. A cash dividend is a distribution of a company’s earnings to a designated class of its shareholders, and its payment is subject to the approval of the company’s board of directors. Let’s say, for the sake of argument, that the board of directors at Company ABC decides to pay out a $2 cash dividend to shareholders. The stock price of Company ABC would be $2 lower than its previous closing price on the ex-dividend date as a result of the corporate action.
• Another typical corporate action that affects existing shares is a stock split. The stock price is reduced by the same amount as the multiple by which the number of outstanding shares is increased in a stock split. For instance, Netflix Inc. announced a seven-for-one stock split in June 2015. So, while the total number of Netflix shares increased by a factor of seven, the price per share fell by a factor of seven. The Netflix share price was $702.60 on July 14, 2015, and the after-market price was $100.37. The stock split did not affect Netflix’s market capitalization, despite the significant movement in the stock price. If a company wants to artificially drive up its share price, it can do so by implementing a reverse split. If the stock price per share is $1, and the reverse split is 10 for 1, the shareholder will have only 1 share, but it will be worth $10. When a company resorts to a reverse split, it may be a sign that the stock price has dropped so low that management is trying to prop it up, or at least give the impression that it is stronger. The company may need to do anything to keep from being labelled a penny stock. Another reason a company might use a reverse split is to scare away individual shareholders.

• A third category of corporate actions that can significantly alter businesses is Mergers and Acquisitions (M&A). When two or more businesses join forces, it’s called a merger. In a merger, the existing shareholders of both companies keep their stakes in the combined entity. An acquisition, in contrast to a merger, is a takeover by one company (the acquirer) of another (the target company). When one company buys out another, the acquired company goes out of business but the acquiring company’s stock remains on the market.
• A spin-off is the separation of a public company into two separate entities through the sale of assets or the issuance of new shares. Rights issues are used to first offer the new shares to current shareholders before making them available to new investors. A company’s willingness to spin off a subsidiary could mean that it is ready to take on a new challenge or that it is shifting its focus.
• A rights issue is an exclusive offering of new stock to existing shareholders by a company. The existing shareholders are given the right to purchase or receive these shares before they are offered to the public. In most cases, a rights issue will take the form of a stock split, but it may also signal that current shareholders are being given the opportunity to benefit from a novel and exciting development.

Follow for the latest news and information Telegram Channel