As a shareholder, you may come across the issuance of dividends, change of name, or acquisition by the company with which you are tied. All these involve corporate actions usually enacted by publicly listed companies.
What are corporate actions?
Corporate actions (CAs) are actions or events taken by publicly traded companies, and these actions have an impact on shareholders and a company’s financial structure. The issuer of securities initiates these actions that may have a positive or negative impact on the shareholders.
The board of directors makes the decisions regarding CAs for the benefit of the company and shareholders. Some prime examples of corporate actions are bonus issues, cash dividends, right issues, stock splits, mergers and acquisitions, share buybacks, and spin-offs. CAs can be mandatory or voluntary.
Mandatory and Voluntary corporate actions
Mandatory corporate actions are events held by the board of directors of a company, and they affect all the shareholders, who don’t have to take any action. Mandatory CAs include cash dividends, Bonus Issues or stock dividends, Mergers and Acquisitions, capital repayments, spin-offs, and stock splits.
Voluntary corporate actions require shareholders to decide whether they are willing to participate in the CA or not. Nevertheless, the shareholders’ response is essential to proceed with the CA. Some common examples of voluntary corporate actions are right issues, tender offers, buyback of shares, and proxy voting.
Get to know some types of corporate actions
Here are the most common types of CAs you need to know.
1. Right Issues
With this type of CA, the existing shareholders are given the right to purchase additional new shares or stocks of a company. The extra shares are generally offered at a discount. When a company needs to raise funds or capital, it goes for the right issue.
Nevertheless, it is an alternative to taking a bank loan or issuing new shares to the public, for the debt ratio of the company increases in the former case or the existing investors’ holdings would dilute in the latter case. The right issue can be renounceable and non-renounceable.
- As for the renounceable right issue, you can trade them on the stock exchange. However, it is up to you to exercise your right, buy more right issues in the market, allow them to lapse, and sell your right issues.
- You cannot trade non-renounceable right issues; instead, they are used to exercise your right or allowed to lapse.
2. Dividend Choice
Companies offer dividends on shares. If the dividend is offered as cash or shares, it is called a dividend choice. Shareholders are supposed to take action and if not until the deadline, the company applies the default option. The objective of a company to issue scrip dividends is to keep the money for expansion in the future. The shareholders have an opportunity to buy additional shares at a discount and increase their shareholdings in the company.
3. Tender Offer
When an acquirer makes an offer to purchase all or part of the shares of a target company directly from its shareholders, it results in a tender offer. In a typical takeover bid or acquisition, a prospective acquirer directly approaches the shareholders to buy all the shares of a target company in exchange for cash. There are some merger and acquisition (M&A) transactions in which the shareholders trade their existing shares for the new shares of the acquiring company.
4. Stock Split or Reverse Stock Split
When the existing shares are divided, it becomes a stock split. For instance, if a company splits its every share into two, you will get two shares for every share you hold, without any change in the market value of the shares. Companies go for a stock split when the share prices are too high to easily trade in the market.
A reverse stock split is vice versa. Here the existing shares are consolidated to make smaller quantities, without any change in the value of shares.
In short, corporate actions affect the shareholders, and hence, it is essential to have a clear understanding of them to know about the company.