What Is a Corporate Action?
A corporate action is any activity that brings material change to an organization and impacts its stakeholders, including shareholders, both common and preferred, as well as bondholders. These events are generally approved by the company's board of directors; shareholders may be permitted to vote on some events as well. Some corporate actions require shareholders to submit a response.
What Are Corporate Actions?
Understanding Corporate Actions
When a publicly traded company issues a corporate action, it is initiating a process that directly affects the securities issued by that company. Corporate actions can range from pressing financial matters, such as bankruptcy or liquidation, to a firm changing its name or trading symbol, in which case the firm must often update its CUSIP number, which is the identification number given to securities. Dividends, stock splits, mergers, acquisitions and spinoffs are all common examples of corporate actions.
Corporate actions can be either mandatory or voluntary. Mandatory corporate actions are automatically applied to the investments involved while voluntary corporate actions require an investor's response to be applied. Stock splits, acquisitions and company name changes are examples of mandatory corporate actions; tender offers, optional dividends and rights issues are examples of voluntary corporate actions.
Corporate actions that must be approved by shareholders will typically be listed on a firm's proxy statement, which is filed in advance of a public company's annual meeting. Corporate actions can also be revealed in 8-K filings for material events.
- A corporate action is an event carried out by a company that materially impacts its stakeholders (e.g. shareholders or creditors).
- Common corporate actions include the payment of dividends, stock splits, tender offers, and mergers and acquisitions.
- Corporate actions must often be approved by a company's shareholders and board of directors.
Common Corporate Actions
Corporate actions include stock splits, dividends, mergers and acquisitions, rights issues and spin-offs. All of these are major decisions that typically need to be approved by the company's board of directors and authorized by its shareholders.
- A cash dividend is a common corporate action that alters a company's stock price. A cash dividend is subject to approval by a company's board of directors, and it is a distribution of a company's earnings to a specified class of its shareholders. For example, assume company ABC's board of directors approves a $2 cash dividend. On the ex-dividend date, company ABC's stock price would reflect the corporate action and would be $2 less than its previous closing price.
- A stock split is another common corporate action that alters a company's existing shares. In a stock split, the number of outstanding shares is increased by a specified multiple, while the share price is decreased by the same factor as the multiple. For example, in June 2015, Netflix Inc. announced its decision to undergo a seven-for-one stock split. Therefore, Netflix's share price decreased by a factor of seven, while its shares outstanding increased by a factor of seven. On July 14, 2015, Netflix closed at $702.60 per share and had an adjusted closing price of $100.37. Although Netflix's stock price changed substantially, the split did not affect its market capitalization.
- A reverse split would be implemented by a company that wants to force up the price of its shares. For example, a shareholder who owns 10 shares of stock valued at $1 each will have only one share after a reverse split of 10 for one, but that one share will be valued at $10. A reverse split can be a sign that the company's stock has sunk so low that its executives want to shore up the price, or at least make it appear that the stock is stronger. The company may even need to avoid getting categorized as a penny stock. In other cases, a company may be using a reverse split to drive out small investors
- Mergers and acquisitions (M&A) are a third type of corporate action that bring about material changes to companies. In a merger, two or more companies synergize to form a new company. The existing shareholders of merging companies maintain a shared interest in the new company. Contrary to a merger, an acquisition involves a transaction in which one company, the acquirer, takes over another company, the target company. In an acquisition, the target company ceases to exist, but the acquirer assumes the target company's business, and the acquirer's stock continues to be traded.
- A spin-off occurs when an existing public company sells a part of its assets or distributes new shares in order to create a new independent company. Often the new shares will be offered through a rights issue to existing shareholders before they are offered to new investors. A spin-off could indicate a company ready to take on a new challenge or one that is refocusing the activities of the main business.
- A company implementing a rights issue is offering additional or new shares only to current shareholders. The existing shareholders are given the right to purchase or receive these shares before they are offered to the public. A rights issue regularly takes place in the form of a stock split, and in any case can indicate that existing shareholders are being offered a chance to take advantage of a promising new development.