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Corporate Actions – Types & Purpose
What are Corporate Actions
They are actions taken by publicly listed companies that typically have some impact on shareholders. Corporate Actions (CAs) can be either mandatory or voluntary and the common CAs include cash dividends, dividend reinvestments, stock splits, rights issues, share buybacks and mergers and acquisitions.
Mandatory vs Voluntary
|Mandatory Corporate Actions||Voluntary Corporate Actions (VCA)|
|Do not require any action from shareholders.||Require shareholders to make a decision, including choosing not to participate in the CA.|
|Common Mandatory CAs include: ||Common Voluntary CAs include: |
|Ex-date||The date on which you must own the stock, in order to be eligible for the CA. For example, in dividend-related CAs, you must purchase the share before the ex-dividend (“ex-div”) date to be entitled to the dividend.|
|Record date||The date the company determines the shareholders on record who are eligible for the CA.|
|Payment date||The date the CA entitlements (e.g. cash, stocks) are credited to the investor’s account.|
Common Types of Corporate Actions
Dividend Choice / Reinvestment
Shareholders may choose to receive dividends in the form of shares or cash. If you do not take action by the deadline, the default option will apply.
Why do companies issue scrip dividends? For the company, it serves to retain cash for future business expansion. For the shareholders, it provides opportunity to increase shareholding in the company, and usually at a discount to the prevailing market price.
Gives existing shareholders the right to buy additional shares of a company. The new shares are usually issued at a discount to their prevailing market price.
A company typically initiates a rights issue when it wants to raise capital. However, instead of taking up a bank loan (which would increase the company’s debt ratio) or issuing new shares to the public via a private placement (which would dilute existing investors’ holdings), the company approaches existing investors instead.
The number of new shares you can buy is proportionate to your existing holdings. For example, a “3-for-10 ratio” means you can purchase 3 new shares for every 10 existing shares.
There are two main types of rights issue: renounceable and non-renounceable.
- Renounceable rights can be traded on the stock exchange during the rights trading period. You can exercise your rights, sell your rights, let your rights lapse, purchase additional rights from the market, or subscribe for more rights from the company.
- Non-renounceable rights are non-tradeable. You can only exercise your rights or let them lapse.
Important Note: A company’s share price will usually adjust downwards 1 day after the Ex-Date of the rights issue. If you do not exercise or sell your rights, i.e. let the rights lapse, you will suffer a loss in market value of the share. In some situations, this loss may be substantial.
An offer made by an acquirer to buy all or part of the shares in a company from its existing shareholders, in order to gain control of the company. Usually associated with an acquisition or takeover bid, a prospective acquirer looks to buy the shares of its target company by going directly to shareholders like you, and offering you cash in exchange for your shares. In certain merger and acquisition (M&A) transactions, you may be offered shares of the acquiring company in exchange for your shares of the company being acquired.
A tender offer can be conditional or unconditional.
- A conditional offer refers to a takeover offer which is subject to certain conditions being fulfilled. If certain conditions are met (for example, the prospective acquirer gets 51% of all shares), the deal goes through. Otherwise, it is deemed to have failed and you will keep your shares.
- The offer will become unconditional if all conditions are met or if no conditions were attached to it initially.
The price offered for the shares is usually higher than the prevailing market price.
If you accept the tender offer
If enough shares are tendered (for example, the prospective acquirer receives acceptance from 51% or more of shares), the transaction is completed. Your shares will be sold and you will receive cash or shares of the acquiring company.
If fewer than the required shares are tendered, the offer is withdrawn and nothing changes. You will keep your original shares.
If tendered shares exceed what the acquirer wants, the accepted amount will be pro-rated.
*Percentages are for illustrative purposes only
If you reject the offer
If the company is taken private or merged with the acquiring company, you may still be forced to sell your shares or convert them into shares of the acquiring company.
Sometimes, the prospective acquirer may make another offer if it did not receive enough shares or want to acquire additional ownership. In that case, you can have the opportunity to participate again in the tender offer.
As a shareholder of a company, you can vote for or against a resolution. You may also appoint someone else (called a “proxy”) to attend a company meeting (for example, an Annual General Meeting) to vote on your behalf.
Matters requiring voting include approving a dividend declaration, re-election of directors, directors’ fees, and M&A activities.
Stock Split / Reverse Stock Split
A stock split refers to the situation where a company decides to sub-divide existing shares into a larger quantity. For example, a 1-for-2 stock split means every share you hold will become 2 shares. However, the share price will be adjusted, such that the total market value of your shareholdings remains unchanged. In this example, the share price will be halved.
Companies usually declare a stock split if their share price has become too high and less easy for investors to trade the share
A reverse stock split, on the other hand, occurs when a company decides to consolidate existing shares into a smaller quantity. For example, a 10-for-1 reverse stock split means every 10 shares you hold will become 1 share. In this case, the share price will be adjusted to 10 times of the previous price, such that the total market value of your shareholdings remains unchanged.
Impact on shares: Quantity and Price
|Impact to |
Quantity of Shares
|Impact to |
|Cash Dividend||No||Possible, if dividend is large|
|Scrip Dividend||Yes||Possible, if dividend is large|
|Stock Split / Reverse Stock Split||Yes||Yes|
|#Impact to share price as a direct result of the CA, and not market movements due to announcement of the CA.|