What are Corporate Actions?
By: Tim Bennett
01.06.2017
Tim Bennett offers a short tour of some of the key decisions that are regularly required from shareholders.
Here’s a puzzle. Whilst the total number of firms listed globally has never been higher, thanks largely to the rapid expansion of stock exchanges in Emerging Markets, the number of firms listing in the world’s largest economy – the US – is shrinking and has been doing so for some time. The key questions for investors are why and the implications of this trend for global portfolios.

A broad definition

Investopedia.com gives a good working definition – “any event that brings material change to a company and affects its shareholders”.
For shareholder the main ones may be grouped as follows;
Let’s take each one in turn. What follows is only an overview – there is plenty more to know in practice.

Election needed

RIGHTS ISSUES AND OPEN OFFERS

Companies seeking to raise more money may decide to approach their existing shareholders via a rights issue. The name comes from the fact that these shareholders have a legal right to decide whether they want to participate ahead of anyone else. As a shareholder your basic choices are;

·         Take up the offer and buy more shares

·         Allow the offer to lapse

·         See on your rights “nil paid”

Rights shares are usually issued at a discount to the current share price to attract interest. So sometimes a shareholder can raise some cash by selling on their right to new shares. Where this option is not made available the event is usually referred to as an open offer.

TENDER OFFER

In many ways the reverse, this is where a firm decides to return money to its shareholders by buying back shares, typically at a premium to their current market price. Existing shareholders do have a choice about whether, or not, to accept the offer although in practice it is rare for them to refuse. That’s because any remaining shares may lack influence and/or become illiquid.

WARRANT EXERCISE

Sometimes companies will give away small numbers of warrants when they issue shares in order to encourage take-up. These warrants confer the right to buy shares in the firm at a fixed price later. Should the market share price rise above this warrant “strike” price a warrant may be exercised. Typically warrants have a fixed expiry date after which they lapse.

TAKEOVER

When one company wants to take over another it needs to make an offer to the target firm’s shareholders that will encourage them to sell. As a shareholder who is approached in such circumstances you have a choice about accepting the deal – which may involve cash and/or shares in the predator firm – or rejecting it, perhaps in the hope of a better deal coming along. It is usually a good idea to take advice on whether or not to accept the terms of a takeover,

CONVERSION

In some firms debt holders have the option to convert their bonds into shares – a “debt to equity” swap or conversion. These opportunities typically come at fixed points in time. Deciding whether to do so involves weighing up the costs and benefits of holding onto existing debt versus converting it. Failure to do so may trigger an automatic debt repayment on fixed terms so the decision needs to be weighed up carefully.

No election needed

BONUS ISSUE/CONSOLIDATION

Sometimes a firm will want to either increase, or decrease, the number of shares it has in issue. This is typically done in the UK by way of a bonus issue (increase) or a consolidation (decrease). Since neither action involves cash changing hands and shouldn’t change the overall value of a share holding they are not usually seen as elective.

REPAYMENT/REDEMPTION

Firms may wish to pay back capital to bondholders (on the maturity of a particular bond for example) and/or shareholders. These events can be mandatory or elective as they may, or may, not involve a choice. For example, where a firm seeks to repay capital to shareholders, it may offer a choice about the form, perhaps a dividend or a capital repayment, in which case a decision is needed. Since this may have an impact on the tax treatment of this corporate action from the perspective of a shareholder, it is wise to take advice on the best course of action.