Why it is important to understand the different types of Corporate Actions.
Any Corporate Action activity can lead to share price movement. It’s important to understand the different types of Corporate Actions a Company might initiate and how these could affect your investments. There are lots of things a company can do and some Corporate Actions move prices in a positive way while others may result in negative reaction. Understanding the main Corporate Action events and what impact they may have on your investments will put you in a better position to respond in a way that’s best for you. This might include selling or buying the stock, participate in the event or to take no action.
People starting out (or planning to start out) in Corporate Action Processing will find it helpful to get a more in depth understanding of each of the Corporate Action Types. This will ensure they are in a better position to serve their clients to the best of their abilities. As some Corporate Actions are more common than others, it may be useful to find information about the Events that are rare. In today’s global world with it’s very likely that Corporate Action Processors will have to process the same event across different markets in different ways.
A quick search on the internet returns that – depending on how you define and count – there are about 130 Corporate Action Event types currently in existence. To make it easier to understand them, they are often being categorised. The most commonly found categories are:
- Mandatory versus Voluntary
- Mandatory, Mandatory with Options and Voluntary
- Reorganisations, Distribution or General Event
Mandatory and Voluntary as well as Mandatory with Options (Choices) are defined from the investor’s point of view; they specify whether the Participation Type for the Investor in the sense that the investor needs to take action or not.
Reorganisation versus Distribution are defined from the Issuer’s point of view; they specify how the event will impact on the company itself. A general Event does not debit or credit anything to shareholders.
Historically, most countries had developed in their own ways resulting in numerous business practices around the world. This included which event types were defined and used.
There are several institutions that have had influence on harmonising and standardising the Event Types (but this might still differ per geography). The following organisations have had a profound impact on standardising the Event Types:
- Swift Messaging is widely used around the world for CA Processing and as such this has been a starting point to create standardisation in Corporate Action Event Categorisation as well as in the messaging used for Corporate Action Events.
- Securities Market Group Practice SMPG was created in July 1998 and since its inception has established a local presence in more than 30 countries through National Market Practice Groups (NMPG). These groups are comprised of broker/dealers, investment managers, custodian banks, central securities depositories and regulators. SMPG has been extremely successful in creating globally agreed harmonised market practices which, integrated with ISO standards has brought the securities industry closer to achieving Straight Through Processing (STP). One of the main achievements for Corporate Actions was a shared Corporate Actions Event Interpretation Grid. This grid includes the ISO 15022 and ISO 20022 Messaging Standards from Swift.
- In Europe: T2S Market Standards (based by and large on the SMPG guidelines)
Point of reference – Swift Message Categorisation
Swift currently holds 73 categories for Corporate Action Events in their Message Catalogue which can be found here.
SMPG follows the same structure and works them out in more detail and can be found here:
Please note that for each of the Event Types, there may be Event Sub-Types
Please also note that the authority of Swift and SMPG is not anchored anywhere in legislation.
So we see that Swift have their Message Catalogue and based on that the SMPG have finalised their Event Templates list. All Event Types are covered and worked out in further detail with examples provided as well as corresponding messaging. It’s fair to say that with the above information anyone can use their imagination and apply the information to their own situation. So what more would you need?
This question can be answered in several ways.
- www.corporate-actions.net has existed since 2007 and the page with “Event Types” in particular has continued to have daily visitors until this day. This means that not all people know how to find the websites of SWIFT and SMPG and navigate to the relevant sections. Or people are looking to to find out more.
- A lot of information is available online, however in many cases one would need to know what to look for. Most people start by querying a search term in a Search Engine, like for example Google or BING and the search results can differ every time. www.corporate-actions.net is a one-stop-shop and directs people to the relevant sites like SWIFT and SMPG and provides a holistic understanding.
- The list below is probably most useful for people who are new to the industry and as such the aim was to write in non-technical language and provide a little bit more “meat to the bone”.
- The list below may also be used by more seasoned professionals to refresh their memory or as a point of reference.
- The list below is also written from multiple perspectives. Compared to the list of events from SMPG and SWIFT, the list on www.corporate-actions.net is also meant for professionals other than the ones that work purely in the Corporate Actions Industry.
Last but not least, the SMPG guidelines were made by industry professional – often with a high level of seniority. It is possible for everyone to provide feedback and questions on the list below on www.corporate-actions.net and therefore this list can grow into something that is tailored to the audience.
List of Corporate Actions (Alphabetical)
A company adopting a growth strategy, can use several means in order to seize control of other companies. More about Acquisition.
Every publicly traded company has an annual general meeting where management presents several decisions that need shareholder approval. The approval is given by means of voting for or against each decision. Shareholders may attend the meeting in person or vote by proxy – electronically or by mail via their brokers and custodian.
Absorption of a new issue of stock into the parent security where the original shares did not fully rank pari passu with the parent shares. After the event, the assimilated shares rank pari passu with the parent. Also referred to as funging of shares. More about Assimilation.
The company announces bankruptcy protection and the legal proceedings start in which it will be decided what pay-outs will be paid to stakeholders. More about Bankruptcy
Shareholders are awarded additional securities (shares, rights or warrants) free of payment. The nominal value of shares does not change. More about Bonus Issue.
Distribution of rights which provide existing shareholders the privilege to subscribe to additional shares at a discounted rate. This corporate action has similar features to a bonus and rights issue. More about Bonus Rights.
Offer by the issuing company to existing shareholders to repurchase the company’s own shares or other securities convertible into shares. This results in a reduction in the number of outstanding shares.
The company pays out a cash amount to distribute its profits to shareholders. More about Cash Dividend.
A lawsuit is being made against the company (usually by a large group of shareholders or by a representative person or organisation) that may result in a payment to the shareholders.
Convertible bonds are being converted in the underlying shares
The issuer of the bond pays interest according to the terms and conditions of the bond, ie interest rate and intervals of payment.
The company announces that its securities will no longer be listed on a Stock Exchange and that they may be booked out of shareholders accounts. More about Delisting
One company de-merges itself into 2 or more companies. The shares of the old company are booked out and the shares of the new companies will be booked in according to a set ratio.
Similar to cash stock option. In this case however, the company first pays the cash dividend after which shareholders are offered the possibility to reinvest the cash dividend in new shares.
A Dutch Auction Offer specifies a price range within which a fixed number of shares will ultimately be purchased. Shareholders are asked to submit instructions as to what price they are willing to sell. Once all instructions have been counted, the shares of the shareholders who voted to sell at the lowest prices will be bought until either a fixed number of shares is reached or the upper limit of the price range is reached.
The issuer of the bond repays the nominal prior to the maturity date of the bond, normally with accrued interest.
The issuer of the bond repays the nominal of the bond, normally with accrued interest.
An event used by the company to notify its shareholders of any events that take place. This event type is used to communicate several types of information to the shareholders.
This is the first corporate actions event in the history of any company. The first time that a company gets listed on a stock exchange is regarded as an event in itself. Underwriters will try to get as many buyers for the newly listed shares for a price as high as possible. Any shares they can not sell, will be bought by the underwriters.
Liquidation proceedings consist of a distribution of cash and/or assets. Debt may be paid in order of priority based on preferred claims to assets specified by the security e.g. ordinary shares versus preferred shares.
The issuer redeems selected holdings before the maturity date of the bond (early redemption).
Conversion of securities (often convertible bonds or preferred shares) into a set number of another form of securities (usually common shares).
Merger of 2 or more companies into one new company. The shares of the old companies are consequently exchanged into shares in the new company according to a set ratio.
Merger of 2 or more companies into one new company. The shares of the old companies are consequently exchanged into shares in the new company according to a set ratio. Shareholders of both companies are offered choices regarding the securities they receive. This can be seen as a sub-type of a Merger.
Name changes are normally proposed and approved at the Company’s General meeting. This has no effect on the capital and shareholders of the company. More about Namechange.
In case shares are tradable in so called board lots of for example 100 shares only and a shareholder has an amount of shares that is not a multiple of the board lot, then this additional quantity is called odd lot. An odd lot tender is an offer to shareholders with odd lots to sell the shares in the odd lot at a given price. So for example, if the board lot is 100 and a shareholder holds 150 shares, an odd lot tender will give the shareholder to dispose of 50 shares at a given price. The board lot of 100 will still be tradable as normal.
Shareholders are offered the choice to receive the dividend in cash or in additional new shares of the company (at a discount to market). Reinvesting often carries a tax shield.
An event in which the holder of the put options has the option to exercise the put option in order to sell the underlying security at a given price.
Any event that does not fit any of the other descriptions.
The issuer of the bond repays part of the nominal prior to maturity, normally with accrued interest.
Similar to stock splits where the share nominal value is changed which normally results in a change in the number of shares held.
A cash amount will be paid to investors in combination with a nominal value change of the shares. More about Capital Return
The number of outstanding shares of the company gets reduced by an ‘X’ number while the nominal value of the shares increases by ‘X’. For example a ‘BMW’ 1 for 2 reverse stock split, where the BMW shares’ nominal value increases from EUR 0.50 to EUR 1.00. The total value of the outstanding shares remains the same. More about Reverse Split.
Rights to buy new shares are being auctioned – shareholders who submit the highest prices at which they are willing to buy new shares will get the new shares.
Rights are issued to entitled shareholders of the underlying stock. They allow the rights holder to subscribe to additional shares of either the same stock or another stock or convertible bond, at the predetermined rate/ratio and price (usually at a discount to the market rate). Rights are normally tradeable and can be sold/bought in the market, exercised or lapsed. More about Rights Issues.
Occurs when a parent company takes over its subsidiaries and distributes proceeds to its shareholders.
The UK version of an optional dividend. No stock dividends / coupons are issued but the shareholder can elect to receive either cash or new shares based on the ratio or by the net dividend divided by the reinvestment price. The default is always cash.
Shareholders are awarded additional securities (shares, rights or warrants) free of payment. The nominal value of shares does not change.
A distribution of subsidiary stock to the shareholders of the parent corporation without having cost to the shareholder of the parent issue. More about Spin Off.
A distribution of subsidiary stock to the shareholders of the parent corporation without having cost to the shareholder of the parent issue whereby the shareholders are offered choices regarding the resultant stock. This can be seen as a subtype of the regular Spin-Off Event.
Almost identical to bonus issues where additional shares in either the same or different stock is issued to shareholders of the underlying stock. More about Stock Dividend
A stock split is a division of the company shares into ‘X’ number of new shares with a nominal value of ‘1/X’ of the original share. For example a ‘BMW’ 2 for 1 stock split, where a BMW share par value decreases to EUR 0.50 from EUR 1.00, whilst the number of share doubles. The total value of the outstanding shares remains the same. More about Stock Split
Offer to existing shareholders to subscribe to new stock or convertible bonds.
One company taking control over another company (usually by acquiring the majority of outstanding shares voting rights). More about Takeovers.
Offer from Company A to shareholders of Company B to tender their shares to company A at a given price. The given price can be payable in cash only, stock in Company A only or a combination of cash and stock. More about Tender Offers.
Offer to exchange shares of security A into cash or into Security B
An event in which the holder of the warrants has the option to exercise the warrant in accordance with the terms and conditions of the warrant.
An event that notifies the holder of the warrant that the warrant is about to expire and the holder of the warrant is given the option to exercise the warrant.
Warrants are issued according to a specific ratio. The warrants give the right to sell or buy the underlying security at a given price within a given timeframe.
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