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Understanding Corporate Actions

Proxy voting isn’t the only way to exercise your shareholder rights. From time to time, companies will execute a “corporate action,” which may afford you the opportunity to take advantage of a change to the underlying security or stock.

Sometimes corporate actions are quite simple, like a change to the ticker symbol. Other times they’re more substantive, like in the event of a merger or acquisition.

This article explains the different types of corporate actions and how they can impact your shares.

Mandatory vs voluntary  

Broadly speaking, there are two main categories of corporate actions: Mandatory and voluntary. Despite the name, mandatory corporate actions do not require anything of the shareholder. These corporate actions execute regardless of shareholder activity or preference. Voluntary corporate actions, by contrast, require an affirmative action or response from the shareholder.

Examples of mandatory corporate actions

These are the common corporate actions that do not require action from shareholders.

Name change or CUISP change. Companies will occasionally change their name or identification number.

Stock splits. In order to affect the price of the stock, companies may elect to divide outstanding shares into multiples. For example, a 10-1 stock split turns 1 outstanding share into 10 shares, thus multiplying the number of outstanding shares by 10. This drives the share price down (but it does not impact aggregate value or market cap). Companies also sometimes do a “reverse stock split,” consolidating several outstanding shares into one. They do this to drive the share price higher and, in some instances, avoid penny stock status.

Bond calls. When a company decides to pay back bonds early, this is called a bond call. Usually the bond is paid back at face value with interest to date. After the bond call no more interest is paid.

Dividends. Companies will sometimes pay shareholders based on available profits. Dividends can be paid in cash or as stock. In some cases, companies may offer an “optional divided,” giving shareholders a choice whether they want to receive the dividend in stock or cash.

Mergers and acquisitions. When two companies join into one, the shares of one company will automatically be exchanged into shares of the other company at a set ratio.

Examples of voluntary corporate actions

These are common types of corporate actions that do require action from shareholders.

Tender offer. In order to increase the value of outstanding shares, companies may elect to “buy back” their own shares. They can either purchase shares on the open market, or they can make a “tender offer” to buy shares from existing shareholders, usually at a higher-than-market price. Shareholders do not have to participate and may decline the tender offer.

Rights offer. The inverse of a tender offer is a “rights offer,” which gives shareholders the option to buy shares at a predetermined price. Usually shares are offered below market price.

Bond consent. Occasionally companies will ask bond holders to restructure the terms of the bond.

In general, your broker should notify you of a pending corporate action. And, if it’s a voluntary offer, provide the opportunity to take advantage. Otherwise, you’ll just receive notification that the action executed.

Want more?

Corporate actions aren’t the only way to exercise your shareholder rights. Proxy voting is a great way to participate too.

Discover five reasons to vote your next proxy.