What is a Corporate Action?
A corporate action takes place when a company’s board of directors decides to initiate a process that directly affects the securities issued by that company.
Corporate actions can range from urgent financial matters – including bankruptcy or liquidation, to a firm changing its name or trading symbol. Corporate actions generally fall into two categories: voluntary or mandatory.
Common Types of Mandatory Corporate Actions:
Forward Stock Split
A forward stock split results in an increase in the number of shares of a corporation’s stock without a change in the shareholders’ equity. Companies often split shares of their stock to make them more affordable to investors. Unlike issuing new shares, a forward split does not dilute the ownership interests of existing shareholders. For example, if you own 100 shares of a company that trades at $100 per share and the company declares a two-for-one forward split, you will own 200 shares at $50 per share immediately after the split. If the company pays a dividend, your dividends paid per share also will fall proportionately.
Reverse Stock Split
Inversely, when a company completes a reverse stock split, each outstanding share of the company is converted into a fraction of a share. For example, if a company declares a one-for-ten reverse stock split, every ten shares that you own will be converted into a single share. If you owned 10,000 shares of the company before the reverse stock split, you will own a total of 1,000 shares after the reverse stock split.
A company may declare a reverse stock split in an effort to increase the trading price of its shares – for example, when it believes the trading price is too low to attract investors to purchase shares, or in an attempt to regain compliance with the minimum bid price requirements of an exchange on which its shares trade. In some reverse stock splits, small shareholders are “cashed out” (receiving a proportionate amount of cash in lieu of partial shares) so that they no longer own the company’s shares. Investors may lose money as a result of fluctuations in trading prices following reverse stock splits.
Although the SEC has authority over a broad range of corporate activity, state corporate law and a company’s articles of incorporation and by-laws generally govern the company’s ability to declare a reverse stock split.
Spin-Off
A spin-off occurs when a company creates a new, independent company. During a spin-off shareholders receive a portion of the new company’s shares, while also maintaining shares in the original company.
Contingent Value Right (CVR)
Contingent Value Rights (CVR’s) are generally given to shareholders during mergers, as a placeholder for possible future cash distributions or additional shares of stock. CVR’s come with a contingency that certain pre-agreed-upon parameters are met. Otherwise, the CVR’s expire and are worthless.
Dividends
A company’s pass-through payment of income to its shareholders. Dividend payments are typically paid on a basis of quarterly, monthly, or annually.
Common Types of Voluntary Corporate Actions:
Tender Offer
A company has solicited its shareholders for a buyback of its own securities in exchange for a specific price per share.
Exchange Offer
Allows a shareholder to exchange their shares for shares of a new security instead of cash.
Dutch Auction
A company solicits a buyback of a number of shares within a designated timeframe and sets a price range for which shareholder bids will be accepted.
Rights Offering
Allows shareholders to purchase additional shares of a company at a specified price within a certain timeframe. Depending on the offering, rights may or may not be transferrable and tradeable.
Warrants
Allows shareholders the ability to purchase a certain number of shares at a specific price during an extended timeframe. Warrants are generally transferrable, and tradeable.
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