Tag: Common Corporate Actions

What is a corporate action? Any event that significantly alters a company's relationships with its constituents, such as ordinary and preferred shareholders and bondholders, is considered a corporate action. The board of directors often blesses such happenings, while some shareholders may have a say. For example, shareholders may be asked to make written comments in reaction to certain business acts. What are corporate actions? Understanding Corporate Actions A corporate action is a formal procedure initiated by a publicly listed corporation that affects the firm's securities. For example, changes to a company's name or trade symbol are examples of corporate activities that require updating a company's CUSIP number, which is used to identify securities uniquely. Other examples of corporate actions include bankruptcy and liquidation. In addition, corporate activities include things like dividends, stock splits, mergers, acquisitions, and spinoffs. Required and optional corporate activities exist. Investments affected by mandatory corporate activities are immediately updated, whereas those affected by optional corporate actions need a response from the investor. For example, required corporate activities include stock splits, acquisitions, and name changes, whereas discretionary corporate actions include tender offers, optional dividends, and rights issues. A proxy statement is a document issued by a public corporation before its annual meeting that details the business transactions that will be brought before shareholders for approval. 8-K filings are not the only way that significant corporate activities may be made public. MAIN POINTS When a firm takes any action that significantly affects its investors, creditors, or other parties, we call it "corporate" (e.g., shareholders or creditors). Dividends, stock splits, tender offers, and mergers and acquisitions are all examples of everyday business acts. In many cases, a company's shareholders and board of directors must provide their approval before corporate action may be taken. Common Corporate Actions Stock splits, dividends, mergers, acquisitions, rights offerings, and spin-offs are all examples of corporate activity. These significant corporate actions generally need the backing of the board of directors and the shareholders' approval. One frequent business move affecting a stock price is the cash dividend distribution. A cash dividend is the distribution of a company's profits to a designated group of its shareholders and is often subject to approval by the board of directors. Say, for argument's sake, the board of directors of Company ABC decides to pay out a $2 cash dividend to shareholders. The stock price of Company ABC would be $2 lower than its previous closing price on the ex-dividend date as a result of the corporate action. Another frequent business activity that affects existing shares is a stock split. Stock splits include a drop in the per-share price and an increase in the total number of outstanding shares by a predetermined multiple. For instance, in June 2015, Netflix Inc. announced it would split its shares in seven ways. Consequently, the market value of a share of Netflix stock declined by a factor of seven while the number of outstanding shares grew by a factor of seven. As a result, the Netflix share price was $702.60 on July 14, 2015, and the after-market price was $100.37. Market capitalization was unaffected by the stock split, even if Netflix's stock price fluctuated significantly. Forcing up the price of one's shares is the reason a firm would undertake a reverse split. For example, a reverse split of 10 for one would result in a shareholder with ten shares of $1 stock having just one share after the split, but the value of that share would increase to $10. When a company's stock undergoes a reverse split, it may indicate that the stock price has dropped so low that management is attempting to prop it up or at least give the impression that it is more robust. Avoiding being labeled a penny stock may be necessary for the organization. A firm may also use a reverse split to push away smaller investors. Third among business actions that cause significant changes in a company's status is mergers and acquisitions (M&A). When two or more businesses join together, it's called a merger. Existing shareholders from both firms retain equal ownership in the resulting corporation. An acquisition, as opposed to a merger, is a takeover by one corporation (the acquirer) of another (the target company). While the acquired firm ceases to exist, the acquiring corporation's stock continues to be traded on the stock market since it has assumed the business of the acquired company. A spin-off is when an existing public business sells off some of its assets or distributes new shares to form an independent firm. Before making the new stock available to new investors, it is common practice to provide a rights issue to the current owners. An organization's willingness to spin off a subsidiary might indicate that it is ready for a new challenge or reorganizing its core operations. A rights issue is a firm's exclusive issuance of new stock to existing shareholders. Before these shares are made available to the general public, they are first offered to the current shareholders. In most cases, a rights issue takes the form of a stock split. Still, it can also signal that current shareholders are being allowed to benefit from a novel and viable business strategy.

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By Forex Crypto Apr 26, 2023

Common Corporate Actions and What They Mean

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