Any action that encourages or furthers processes that directly affects the assets issued by a company
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What is a Corporate Action?
A corporate action is a move – enacted by a publicly-traded company – that encourages or furthers processes that have a direct impact on whatever assets the company issues. In other words, any actions (conducted by a company) that materially alter or otherwise change the company can be considered corporate actions.
Summary:
- A corporate action is any action taken by a company – generally enacted by its board of directors – that has a material impact on the company and its shareholders.
- Corporate actions involve either changing a company’s name/brand, mergers, acquisitions, spinoffs, or issuing dividends.
- Corporate actions fall into one of three categories: (1) Mandatory (shareholders effectively have no choice as to their participation); (2) Mandatory with options (the board of directors carries out an action but provide shareholders with a choice of options); and (3) Voluntary (each shareholder decides if he will participate in the action or not).
How It Works
Publicly-traded companies are frequently overseen by a board of directors – individuals closely tied to the company – who are elected to serve in various positions. The directors approve any corporate actions taken, most commonly through a vote. (In some cases, the company’s shareholders are given the opportunity to vote on some or all corporate actions the company takes).
Corporate actions, however, exert an impact on the individuals that are tied to a company. The concerned parties include:
Examples of Corporate Actions
There is a substantial range of actions that can be considered corporate actions. Examples include (but are not limited to):
- Changing a company’s name or the design of the brand
- Handling pertinent financial issues (such as the company needing to liquidate or file for bankruptcy)
- Merging with or acquiring another company
- Forming spin-off companies
Types of Corporate Actions
The three basic types of corporate actions include:
1. Mandatory
Mandatory corporate actions are enacted by a company’s board of directors. A mandatory action – such as the issuance of a cash dividend – affects all of the company’s shareholders. It is performed by the governing body of the company. Shareholders need to do nothing aside from collecting the cash dividend on their shares.
In addition to dividends, other actions classified as mandatory include spin-offs, stock splits, and mergers. “Mandatory,” in this context, means that shareholders have no choice but to accede to the action being taken.
2. Mandatory (with several options)
Mandatory corporate actions with options offer shareholders a choice between different options. Using the example of dividends again, with this type of action, the company offers dividends in the form of stock shares or cash dividends, with the former being the default option. The shareholder may choose the form of a dividend payout. In the event that the shareholder doesn’t submit a choice, the default option (shares of company stock) is the form that the dividend will be provided in.
3. Voluntary
Voluntary corporate actions involve an activity in which shareholders opt to be participants. In order for the company to move forward with the corporate action, the shareholders must respond.
A prime example of voluntary action is a tender offer. Because it is voluntary, shareholders may participate in the tender offer or refuse. Each shareholder must submit a response regarding his or her participation. Any shareholder who chooses to tender shares at the predetermined price will then receive a payout from the sale.
Additional Resources
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FAQs
Examples of corporate actions include stock splits, dividend distributions, mergers and acquisitions, rights issues, Contingent Value Rights (CVRs), spinoffs, name or trading symbol changes, and liquidation.
What is corporate action in simple words? ›
A corporate action is any action taken by a company – generally enacted by its board of directors – that has a material impact on the company and its shareholders. Corporate actions involve either changing a company's name/brand, mergers, acquisitions, spinoffs, or issuing dividends.
How long do corporate actions take? ›
A corporate action is a change initiated by a company that affects shareholders by adjusting the organization's structure of debt or equity. Corporate actions, such as stock splits or reverse stock splits, mergers, and acquisitions, typically take anywhere from 1-6 business days to fully process.
What is mandatory with choice corporate action? ›
Definition. Mandatory With Choice Corporate Action. A Corporate Action event which is going to happen but there are choices to be made by the Security Holder. There is usually some default, e.g. if you don't choose by the payment date there is some default e.g. the issue currency.
What are the risks of corporate actions? ›
An additional risk is the damage to a company's reputation caused by mismanaged corporate action. Once the reputation of a company gets tarnished it immediately casts doubt on the company's dependability in the eyes of both present and potential clients.
What is the primary reason for corporate action? ›
The primary reasons companies use corporate actions are: Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share. Bonus is another case where the shareholder is rewarded.
What is a priority issue in corporate action? ›
A priority issue is a form of open or public offer where, due to a limited amount of securities available, priority is given to existing shareholders. Term. Purchase offer.
What are the corporate actions process? ›
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.
Who initiates a corporate action? ›
A corporate action takes place when a company's board of directors decides to initiate a process that directly affects the securities issued by that company. Corporate actions can range from urgent financial matters – including bankruptcy or liquidation, to a firm changing its name or trading symbol.
Who is liable for corporate actions? ›
The board of directors of the corporation begins a mandatory action. For instance, mergers and stock splits may be included. Shareholders are beneficiaries of these acts even if they are not required to take any action. On the other hand, a voluntary event happens when shareholders choose to participate in an activity.
11.1 – Corporate Actions
This chapter will examine the five most important corporate actions and their impact on stock prices. A corporate action is initiated by the board of directors and approved by the company's shareholders.
What is a cash tender offer? ›
A tender offer is a structured liquidity event that typically allows multiple sellers (including employees and early investors) to sell their shares either to another investor, a group of investors, or back to the company at a predetermined price.
What is an example of a corporate action? ›
Examples of corporate actions include stock splits, dividends, as well as mergers and acquisitions. Corporate actions can be either mandatory or voluntary. Voluntary corporate actions are actions in which eligible shareholders are provided the opportunity to help choose a specific outcome.
What is an example of corporate Behaviour? ›
Transparency, fairness, and accountability are examples of good corporate behaviour that can strengthen a company's ethos. This type of conduct indicates a dedication to ethics and integrity and conveys to employees that the company values these principles.
Why do companies go for corporate actions? ›
Companies take corporate actions for various reasons, such as rewarding shareholders, increasing profitability, corporate restructuring, etc.
What is an example of corporate control? ›
Examples include corporate strategy planning, business analytics, and market research.
