CISI – Financial Products, Markets & Services

Topic – Equities
(4.1.5 and 4.1.6) Corporate Actions

cisi.org
 Corporate Actions
What is a Corporate Action?
Where a company does something that affects it’s investors e.g. Shareholders

These actions are generally agreed upon by the board of directors before being
authorised by shareholders

What are the main categories of Corporate actions?

These classifications are used across Europe and by Euroclear and Clearstream
(Both International Central Securities Depositories

Investor has NO CHOICE Investor has an ELEMENT Investor has a DEFINITE

OF CHOICE CHOICE to make
Obligatory – mandated
by the company A DEFAULT OPTION is given A DECISION MUST be
to shareholders if they made to choose
DOES NOT require any choose not to intervene by between OPTIONS
intervention from a particular date presented to them
investors cisi.org
 Securities Ratios
Before we take a closer look at different examples of corporate
actions, you need to know how corporate actions are expressed to
investors.

This is known as a securities ratio and it stipulates the terms of a

corporate action (What the shareholder should expect from the
company)

It can be expressed in different ways depending on the type of

corporate action:
Nature of corporate action Terms expressed as...
Dividends paid Amount of dividends paid per share (£)
Giving new shares to existing A ratio of the number of new shares received as a
shareholders proportion of the number of shares owned.

e.g. 1:4
(X new shares for each ‘Y’existing shares)
This method is used in Europe and Asia
In the USA the ratio is expressed differently:

The first number in the ratio states final holding after the event; the second number is the original number
of shares held.
cisi.org
e.g. If the securities ratio is 5:4 and an investor holds 1,000 shares, after the event, the investor now owns
1250 shares compared with the 1000 they owned originally i.e. 1250:1000
Examples of a Corporate Action – Rights Issue
A company wants to raise finance:
To expand
To repay bank loans
To repay bond finance

An existing shareholder
has pre-emptive rights Rights Issue Shares are normally
offered to existing
to buy shares so that Offer of new shares to existing shareholders at a
their proportionate shareholders (“Cash Call”) discount to market price
holding is not diluted.
The initial response to the
announcement of a
Shareholders planned rights issue will
reflect the market’s view
Can react positively or of the scheme. Share
negatively to the rights issue prices can RISE or FALL as
a result
What can they do?

Sell the rights to another

Take up the investor Do Nothing Sell sufficient rights
rights – buy (often transferrable – (Default option to raise the cash
the shares known as used) to take up the rest
‘renounceable’) cisi.org
Examples of a Corporate Action – Rights Issue
Completed Rights
Issue
Underwriters of a share issue agree, for a
fee, to buy any portion of the issue not
taken up in the market at the issue
price.
Shares
They sell the shares they have bought
when market conditions seem
opportune to them (at a gain or a loss)

The share price changes to reflect the effect of the rights issue once the shares go ex-rights
(after the rights issue has happened)

This is the point at which the shares and the rights are traded as two separate instruments

This adjusted share price is known as the The rights can be sold and the price for these
theoretical ex-rights price rights is known as the premium.
(actual price will depend upon the
interaction of buyers and sellers in the market (theoretical ex-rights price - price of a new
at the time) share)

In the case of Con Air plc, the In the case of Con Air plc
theoretical ex-rights price was £3.77 cisi.org
£3.77 - £2.00 = £1.77
Examples of a Corporate Action – Bonus Issue

example securities ratio:

2:1
Scrip
2 new shares for every 1
existing
AKA
A company
gives existing Increases
shareholders
Lowers the
Bonus Issue
liquidity of
additional company
share – more
shares without share price
buyers!
AKA paying anything

Capitalisation Psychologically, a
Issue company’s share price can
become too high and less
attractive to investors
UK Cos. Like a share price
cisi.org
under £10
Examples of a Corporate Action – Dividends

The part of a company’s

DIVIDENDS profits passed to
shareholders

Interim Dividend
Final Dividend
First dividend
Second dividend paid after
declared by Many UK approval by shareholders at
directors and paid
company’s pay the AGM, after the end of
halfway through
them twice a year the financial year
the year

Dividends per share may vary according to

 Overall company profitability
 Plans for future expansion

SHAREHOLDERS Receive the dividends by:

 Cheque or
 Transfer straight into their bank
accounts
cisi.org
 Transfer via CREST (system)
Examples of a Corporate Action – Receiving dividends
When shares change hands, determining the correct person to receive dividends can be difficult

Procedures have been put in place to prevent mistakes in paying dividends to the wrong person
SHAREHOLDERS

Shares are bought and sold with the right to receive the next declared
dividend up to the date shortly before the dividend payment is made.

Cum-dividend (with) Ex-dividend (without)

If the shares are purchased At a certain point between the declaration date and
cum-dividend, the purchaser will the dividend payment date, the shares go ex-
receive the declared dividend. dividend. Buyers of shares are not entitled to the
declared dividend. THURSDAY is Ex-Dividend day
(Buying ex-dividend means shares fall in price by 8p

Standard settlement period across Europe is T+2

(A trade will be settled two business days after it is executed)
cisi.org
Cum and Ex Dividend Example
Holding plc calculates its interim profits (for the six months to 30 June) and decides to
pay a dividend of 8p per share.

Holding plc announces (‘declares’) the dividend on 1 September and

states that it will be due to those shareholders who are entered on the shareholders’
register on Friday 7 October (Record date, register date or books closed date).

(The actual payment of the dividend will then be made to those shareholders at a later
specified date.)

Given the record date of Friday 7 October, the LSE sets

the ex-dividend date as Thursday 6 October. Ex-Dividend
Date
On this day, the shares will go ex-dividend and should
fall in price by 8p. This is because any new buyers of
Holding plc’s shares will not be entitled to the dividend.

The actual payment of the dividend will then be made Record Date
Register Date
to those shareholders on the register at the record date
Books Closed Date
at a later specified date, say Wednesday 22 October.

cisi.org
Examples of a Corporate Action – Takeovers
A company can grow organically or take a different route – buy other
companies

TAKEOVER

The predator company is under

an obligation to report their share
purchases once they reach a
certain percentage
Predator Company
Target Company
(company bidding
(company bid for)
to buy another)

Hostile Takeover Friendly Takeover

Directors of the target Shareholders of the Success = predator Directors of the target
company consider target company can company “gains consider
the offer not choose whether control” by buying the takeover bid to be
attractive. to accept or reject more than 50% of acceptable, and
They recommend that the bid, a hostile the shares of the recommend
their shareholders
reject the offer.
takeover bid can still
be successful
target company
cisi.org
acceptance to
shareholders.
Examples of a Corporate Action – Mergers

MERGER

Company one Company two

The two companies agree to merge their

interests. In a merger it is usual for one
company to exchange new shares for the
shares of the other entity

Forms 1 single large company

cisi.org
 Corporate Actions Overview
Action taken Description Category of corporate
by the action
company
Dividend Shareholders receive payments (normally Mandatory
payment twice a year) based on company profits

Bonus/Scrip/ The Board issues new shares to existing Mandatory

Capitalisation shareholders for free, generally to increase
issue liquidity of shares so that the share price falls.

Rights issue The Board issues new shares to existing Mandatory with options
shareholders (First option) at a discount their
market price to raise finance

Merger Two companies agree to merge their interest Voluntary

to form one larger to company

Take-over A predator company bids for a target Voluntary

company and aims to buy the majority of
shares in the target. A take-over can either be
friendly (target shareholder approval) or hostile
(target shareholder rejects) cisi.org