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 shareholders 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.
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.
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 splits or reverse stock
splits 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. Spin-offs are an
example of a corporate action where a company breaks itself up in order to focus on its
core competencies. Corporate actions includes, name changes, spin-offs, cash stock
mergers, forward and reverse stock splits. Corporate Actions are the benefits given to the
shareholders by their companies.
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, 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 share
holders 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 corporations 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/stock dividend option, the shareholder can
elect to take the proceeds of the dividend either as cash or additional shares of the
corporation. 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 : A Mandatory with Choice corporate action
is a mandatory corporate action where share holders are given a chance to choose among
several options. An example is cash/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 or via online portals
in the case of individual investors.
Stock split
A stock split or stock divide increases or decreases 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.
Overview
Take, for example, a company with 100 shares of stock priced at $50 per share. The
market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There
are now 200 shares of stock and each shareholder holds twice as many shares. The price
of each share is adjusted to $25. The market capitalization is 200 × $25 = $5000, the
same as before the split.
Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is
possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors
will sometimes receive cash payments in lieu of fractional shares.
It is often claimed that stock splits, in and of themselves, lead to higher stock prices;
research, however, does not bear this out. What is true is that stock splits are usually
initiated after a large run up in share price. Momentum investing would suggest that such
a trend would continue regardless of the stock split. In any case, stock splits do increase
the liquidity of a stock; there are more buyers and sellers for 10 shares at $10 than 1 share
at $100.
Other effects could be psychological. If many investors believe that a stock split will
result in an increased share price and purchase the stock the share price will tend to
increase. Others contend that the management of a company, by initiating a stock split, is
implicitly signaling its confidence in the future prospects of the company.
In a market where there is a high minimum number of shares, or a penalty for trading in
so-called odd lots (a non multiple of some arbitrary number of shares), a reduced share
price may attract more attention from small investors. Small investors such as these,
however, will have negligible impact on the overall price.
On a stock exchange, a reverse stock split or reverse split is the opposite of a stock
split, i.e. a stock merge - a reduction in the number of shares and an accompanying
increase in the share price.[1] The ratio is also reversed: 1-for-2, 1-for-3 and so on.
There is a stigma attached to doing this so it is not initiated without very good reason.
Many institutional investors and mutual funds, for example, have rules against
purchasing a stock whose price is below some minimum, perhaps $5. An extreme case
would be when a share price has dropped so low that it is in danger of being delisted from
its stock exchange.
It is also possible that a reverse stock split could be used as a tactic to reduce the number
of shareholders. In a hypothetical 1-for-100 reverse split any investor holding less than
100 shares would simply receive a cash payment and no shares of stock. If the resulting
number of shareholders has then dropped below some threshold, it may be placed into a
different regulatory category; such as an S corporation which is required by law to have
less than 100 shareholders.
Typically, the stock will temporarily add a "D" to the end of its ticker during a reverse
stock split.
Spin-Offs
A spin-off is a new organization or entity formed by a split from a larger one, such as a
television series based on a pre-existing one, or a new company formed from a university
research group or business incubator. In literature, especially in milieu-based popular
fictional book series like mysteries, westerns, fantasy or science fiction, the term subseries is generally used instead of spin-off, but with essentially the same meaning.
Spin-offs as a descriptive term can also include a dissenting faction of a membership
organization, a sect of a cult, or a denomination of a church. In business, a spin-off is
essentially the opposite of a merger. In computing, a spin-off from a software project is
often called a fork.
A spin-off product is a product deriving elements of design, branding or function from
an existing product, but which is itself a new distinct product.
Corporate spin-off
The common definition of spin out is a division of a company or organization that
becomes an independent business.
Government spin-off
Civilian goods which are the result of military or governmental research are also known
as spinoffs.
Media spin-off
Media spin-off is the process of deriving new radio, video game, film series, book series
or television programs from existing ones.
Research spin-off
A research spin-off is a new company based on the findings of a member or by members
of a research group at a university.
The term is also used for concepts or products spun off a research project, for example
methods or materials pioneered during the Manhattan Project (spin-off: Commercial
Nuclear Power) or during the Space Race (spin-offs: Many, Integrated Circuits and hence
most modern electronics, freeze-dried foods, satellites, et-cetera, and et al.).