Corporate action
Encyclopedia
A corporate action is an event initiated by a public company
that affects the securities (equity
or debt
) issued by the company. Some corporate actions such as a dividend
(for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholder
s or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as stock split
may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise.
Some corporate actions such as name change have no direct financial impact on the shareholders.
Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share. Bonus 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 de-listed. Corporate actions such as stock split
s or reverse stock split
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 re-structure in order to increase their profitability. Mergers are an example of a corporate action where two companies that are competitive or complementary come together to increase profitability. Spinoffs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies.
Mandatory Corporate Action: A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital
, bonus issue, asset ID change, pari-passu and spinoffs. Strictly speaking the word mandatory is not appropriate because the share holder per se doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder 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 by the corporation to process the action. An example of a voluntary corporate action is a tender offer
. A corporation may request share holders to tender their shares at a pre-determined 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.
Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For example in case of a cash or stock dividend option, the shareholder can elect to take the proceeds of the dividend either as cash or additional shares of the corporation. (these are commonly known as Mandatory Events with Options, as a dividend is mandatory but a shareholder has the option to elect for the cash or to re-invest their cash dividend into the shares)
Other types of Voluntary actions include rights issue, making buyback offers to the share holders while delisting the company from the stock exchange etc.
Mandatory with Choice Corporate Action: This corporate action is a mandatory corporate action where share holders are given a chance to choose among several options. An example is cash or stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied.
Corporate Actions Glossary: http://www.tdwaterhouse.co.uk/learn/shares/actions_glossary.cfm
List of voluntary corporate actions: http://www.gainskeeper.com/WebHelp/Record_Trades_Stock_Voluntary_Corporate_Actions.htm
ISO15022 MT564 message format for corporate actions data messages:http://www.iso15022.org/uhb/uhb2008/finmt564.htm
SIX Telekurs Corporate Actions data offering: http://www.telekurs-financial.com/tkfich_index/tkfich_home/tkfich_products/tkfich_products_processing_products/tkfich_products_processing_products_vdf.htm
Mergent Corporate Actions data offering in REST API form: http://www.mergent.com/servius/
Assessing the Risk in the Corporate Actions Process: Industry Insight http://industryinsights.bissresearch.com/blog/_archives/2010/2/7/4456558.html
Public company
This is not the same as a Government-owned corporation.A public company or publicly traded company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets...
that affects the securities (equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
or debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
) issued by the company. Some corporate actions such as a dividend
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
(for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholder
Shareholder
A shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
s or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as stock split
Stock split
A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included....
may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise.
Some corporate actions such as name change have no direct financial impact on the shareholders.
Purpose
The primary reasons for companies to use corporate actions are:Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share. Bonus 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 de-listed. Corporate actions such as stock split
Stock split
A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included....
s or reverse stock split
Reverse stock split
On a stock exchange, a reverse stock split or reverse split is a process by a company of issuing to each shareholder in that company a smaller number of new shares in proportion to that shareholder's original shares that are subsequently canceled. A reverse stock split is also called a stock merge...
s increase or decrease the number of outstanding shares to decrease or increase the stock price respectively. Buybacks
Treasury stock
A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ....
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 re-structure in order to increase their profitability. Mergers are an example of a corporate action where two companies that are competitive or complementary come together to increase profitability. Spinoffs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies.
Types
Corporate actions are classified as voluntary, mandatory and mandatory with choice corporate actions.Mandatory Corporate Action: A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital
Return of capital
Return of capital refers to payments back to "capital owners" that exceed the growth of a business. It should not be confused with return on capital which measures a 'rate of return'....
, bonus issue, asset ID change, pari-passu and spinoffs. Strictly speaking the word mandatory is not appropriate because the share holder per se doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder 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 by the corporation to process the action. An example of a voluntary corporate action is a tender offer
Tender offer
Tender offer is a corporate finance term denoting a type of takeover bid. The tender offer is a public, open offer or invitation by a prospective acquirer to all stockholders of a publicly traded corporation to tender their stock for sale at a specified price during a specified time, subject to...
. A corporation may request share holders to tender their shares at a pre-determined 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.
Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For example in case of a cash or stock dividend option, the shareholder can elect to take the proceeds of the dividend either as cash or additional shares of the corporation. (these are commonly known as Mandatory Events with Options, as a dividend is mandatory but a shareholder has the option to elect for the cash or to re-invest their cash dividend into the shares)
Other types of Voluntary actions include rights issue, making buyback offers to the share holders while delisting the company from the stock exchange etc.
Mandatory with Choice Corporate Action: This corporate action is a mandatory corporate action where share holders are given a chance to choose among several options. An example is cash or stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied.
Corporate Actions Information
When a company announces a corporate action, registered shareholders are told of the event by the company's registrar. Financial data vendors collect such information and disseminate it either via their own services to institutional investors, financial data processors or via online portals in the case of individual investors.External links
Corporate Actions Glossary: http://www.tdwaterhouse.co.uk/learn/shares/actions_glossary.cfm
List of voluntary corporate actions: http://www.gainskeeper.com/WebHelp/Record_Trades_Stock_Voluntary_Corporate_Actions.htm
ISO15022 MT564 message format for corporate actions data messages:http://www.iso15022.org/uhb/uhb2008/finmt564.htm
SIX Telekurs Corporate Actions data offering: http://www.telekurs-financial.com/tkfich_index/tkfich_home/tkfich_products/tkfich_products_processing_products/tkfich_products_processing_products_vdf.htm
Mergent Corporate Actions data offering in REST API form: http://www.mergent.com/servius/
Assessing the Risk in the Corporate Actions Process: Industry Insight http://industryinsights.bissresearch.com/blog/_archives/2010/2/7/4456558.html