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1.4.4 Corporate Actions

Having a share in your portfolio means that all possible changes on the share or stock exchange will also affect your positions. Corporate actions are events that materially impact its stakeholder. Common corporate actions include the payment of dividends, stock splits, tender offers, mergers, and acquisitions. We will not touch on all these items here, but we will explain to you the most common corporate actions.

Most corporate actions will affect the value of your position, without proper knowledge of what is really happening it is difficult to evaluate the impact on your position.

Corporate actions C2M15

List of common corporate actions:

  • Stock splits
  • Dividends
  • Mergers and acquisitions 
  • Right issues 
  • Spin-offs 

The most important corporate action is the Dividend.  We will explain dividends later on in this course.

Dividend can be received in two ways:                                                                                                                                                                                                                                                          In cash or in shares

All of the above corporate actions are major decisions that typically need to be approved by the company’s board of directors and authorized by its shareholders.

There are three types of corporate actions: Voluntary, Mandatory, and Mandatory with choice

  1. Mandatory with corporate action: An mandatory corporate action is an event initiated by the board of directors of the corporation that affects all shareholders. Participation of shareholders is mandatory for these corporations. An example of a mandatory corporate action is a cash dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, the return of capital, bonus issue, asset ID change, and spin-offs. Strictly speaking, the word ”mandatory” is not appropriate because the shareholder is not required to do anything; the shareholder is just a passive beneficiary in all the cases cited above. There is nothing the shareholder has to do or does in a Mandatory Corporate Action.
  2. Voluntary corporate action: A voluntary corporate action is an action where the shareholders elect to participate in the action. A response is required for the corporation to process the action. An example of voluntary corporate action is a tender offer. A corporation may request shareholders to tender their shares at a predetermined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the corporation’s agents and the corporation will send the proceeds of the action to the shareholders who elect to participate.

3. Mandatory with choice corporate action: This corporate action is a mandatory corporate action where shareholders are given a chance to choose among several options. An example is a cash or stock dividend option with one of the options as default. Shareholders may or may not submit their elections, the default option will be applied.

Some market participants use a different method to distinguish the corporate action types. For example, ”mandatory corporate action” and ”mandatory with choice corporate action” may be used together. DTC uses the terms distributions, redemptions, and reorganizations.