What is a corporate action exactly?
A corporate action is an event coming from a listed company that brings or could bring an actual change to the securities issued by the company.
Corporate actions are typically agreed upon by a company’s board of directors and authorized by the shareholders. For some events, shareholders or bondholders are permitted to vote on the event. Examples of corporate actions include stock splits, dividends, mergers and acquisitions, rights issues, or spin-offs.
Types of corporate actions
There are three types of corporate actions: mandatory, mandatory with choice, and voluntary.
- Mandatory corporate action: A mandatory corporate action is an event that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. Strictly speaking, the word “mandatory” is not appropriate because the shareholder is not required to do anything; they are just the passive beneficiary. There is nothing the shareholder must do or does in a Mandatory Corporate Action. An example of a mandatory corporate action is a cash dividend. A shareholder does not need to act to receive the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, and spin-offs.
- 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 a 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.
- Voluntary corporate action: A voluntary corporate action is an action where the shareholders decide to participate in the action. A response is required for the corporation to process the action. An example of voluntary corporate action is a tender offer. 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.
To dig further
- Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities) may have a direct financial impact on the shareholders or bondholders; another example is a call (early redemption) of debt security.
- Other corporate actions such as stock split 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 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.). For example, “Apple Computers” changed its name to Apple Inc.
Here is a table with some of the most common types of corporate actions:
Effect and consequences of a corporate action
Everyone may ask themselves whether Corporate Actions are positive or negative signs for a company issuing them. There is no good or bad action, in reality, as it is all very subjective and depends on the context.
Here are some examples of the types of corporate actions that we mentioned before:
A dividend payment of your Apple share, for instance. This is a passive corporate action, mandatory (after all, who says “no” to a dividend payment?). The dividend payment represents the redistribution of the earnings of a company to its shareholders. They are a reward, but that can be accompanied either by a stock price increase or decrease. After the dividend payment, the share price typically decreases, whereas, before it, it tends to increase as investors are forecasting the cash inflow.
A dividend option of your Apple share. This is a corporate action that is always mandatory with a choice. Like a cash dividend, it also represents the redistribution of the earnings of a company to its shareholders. But unlike them, you can choose which benefits you receive. For example, your dividend option for your Apple shares could either be cash or more shares.
A capital gains distribution of a mutual fund. If a fund were to sell stocks or other assets, then you would get a share of the profits from the transaction. It is not dependent on the fund’s overall profit, just on a particular sale.
A stock split of your Roche shares. By splitting shares, for instance by making 2 shares out of 1 share, the company will make each share more accessible for investors. For example, if you buy 1 Roche share, after a stock split, you will have 2. Each share will now cost less money to buy (i.e. 0.70 CHF instead of 1.40 CHF). The company will also be more liquid, although the company’s value will not change. So you could think, well, it might be because they were looking for new investors as they need money, or simply because it wants to diversify its shareholders. By dividing the share price, the company will be able to attract smaller investors, with a smaller budget who could not have invested otherwise, for example. A company might be looking for a better diversity of investors to avoid shareholder concentration.
It is the opposite of a stock split. This type of action is usually done to drive up the price of a share or to reduce the number of shareholders. Let’s say you have 3 Roche shares; you will now have only 1 and it will cost you more (2.10 CHF instead of 0.70 CHF). Same as for the example above, the company’s value will not change. If your share cannot be merged accurately then you will receive cash in exchange for your old shares. In the example from above, if you had 4 shares, then it could not be merged accurately – meaning that you do not have a multiple of 3 so the company would need to find a way to refund you in cash in case it cannot fraction its shares. Consequently, after the reverse stock split, you could have 1 Roche share and a cash payment for your remaining share.
A reverse stock split is often used by companies looking to appear with a higher trading price, to attract new investors. It can also help them meet the minimum bid price requirement to stay on a major stock exchange for example.
There is no right or wrong. The actual question to ask yourself is whether it impacts your investment directly or indirectly. For instance, if you receive a notification for a shareholders meeting, to vote for a dividend payment, this has an indirect impact on your investment. Whereas the actual dividend payment will have a direct impact as it will be more likely to change the share price.
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