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CORPORATE ACTIONS

What is a Corporate Action (

Event initiated by an issuer of securities (equity or debt) which is usually that:

affects the security and the holder of the security;

causes a material change in the companys capital/debt structure e.g. name, price, shares, capitalization etc.

There are several viewpoints to look from:

Issuers point of view

Shareholders point of view

The point of view from any party between or related to the above parties

There are three main types of events for Corporate Actions:

Mandatory


The event is mandatory for the shareholders, so they have no choice in whether to participate when the issuer
calls for it.

A shareholder does not have to do anything in a mandatory corporate action.

Depending upon the nature, mandatory corporate actions are often subject to shareholders approval at the
Annual General Meeting (AGM) though.



Examples include scrip/bonus issue, cash dividend, stock split, reverse stock split (consolidation), spin-off.

Voluntary


The event is voluntary for the shareholder, so they can elect and make their choice known by sending an
instruction.

Shareholders may choose to take no action which will leave their securities unaffected by the corporate
action.



Examples include repurchase offer by issuer, proxy voting on AGM/EGM

Mandatory with Option(s)

The event is mandatory for the shareholder but they are being presented with options.

In case the shareholder does not make his choice known by sending an instruction, often the default option
will be applied

One example is bonus rights, cash dividend with scrip dividend option.

Some common Corporate Action events / types:

Cash Dividend (Mandatory / Option in Mandatory) (

The company pays out a cash amount to distribute its profits to shareholders upon a resolution by the board of
directors.

Three important dates for dividends

Announcement Date (Declaration Date)

The specific day a company announces that its stocks will be paying dividends

The amount of the dividends will also be announced on this date

Ex-Dividend (Ex-Div or Ex-) Date

The first date on which a security is traded without entitling the buyer to receive distributions
previously declared
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In fund accounting, if we hold the equity in our book as of Ex-Date (even if we sold on Ex-Date, but
not settled and transferred title), we are entitled to the dividend announced.




Book accrued dividend on Ex-Date

Payment Date


The date on which the announced dividend is paid out to shareholders

In fund accounting, when we receive cash payment on Payment Date, we book cash dividend and
reverse the entry for previously accrued dividend.

Scrip Dividend (Option in Mandatory) (

In UK or HK, this could be an alternative for the shareholder version of an optional dividend.

No stock dividends / coupons are issued but the shareholder can elect to receive either cash or new shares based on
the ratio or by the net dividend divided by the re-investment price.

The default is usually cash.

Stock Dividend (Mandatory Event) (

A dividend paid as additional shares of stock rather than as cash

Almost identical to bonus issues where additional shares in either the same or different stock is issued to
shareholders of the underlying stock

If dividends paid are in the form of cash, those dividends are taxable. When a company issues a stock dividend,
rather than cash, there are no tax consequences until the shares are sold usually.

Companies may decide to distribute stock to shareholders of record if the company's availability of liquid cash is in
short supply. These distributions are generally acknowledged in the form of fractions paid per existing share. An
example would be a company issuing a stock dividend of 0.05 shares for each single share held

In fund accounting, e.g. 5% stock dividend, at Ex-Date, we adjust the number of existing shares by 1.05 times, and
adjust the cost by 1/1.05.

Scrip or Bonus Issue (Mandatory)

Shareholders are awarded additional securities (shares, rights or warrants) free of payment.

The nominal value of shares does not change.

Rights Issue / Offering (Mandatory with Option) (

Sometimes when a company identifies a special project with promising profits, it needs additional cash to finance
the project.

Issuance of "rights" to current shareholders, allowing them to purchase additional shares usually at a

discount to market price, not only help raise the needed cash but also benefit existing shareholders if the project
turn out to be successful.

Shareholders who do not exercise these rights are usually diluted by the offering.

Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to
exercise them.

For public companies, detailed rights offering information can be obtained from Bloomberg.

For example for a

rights issue offering with each 2 existing shares entitled to buy 1 additional share at $0.2, Bloomberg will list out
the details including:


Action: Entitlement
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Announce Date:

Ex Date:

Issue Date:

Currency:

Subscr. Price: 0.2

Terms: 1 per 2

Tot Shares Offered:

Amt to be Raised:

Options Attached (Strike: 0.2)

Subscription Dates (Start:

, End:

In terms of fund accounting, existing shareholders can either exercise the right to buy the new shares at strike price
or just forgo the right.

If the rights are exercised, we should book the new shares at the exercise price (the strike

price specified in the offering document). No adjustment is needed for the existing shares.

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Bonus Rights (Mandatory with Option) (

Distribution of rights which provide existing shareholders the privilege to subscribe to additional shares, usually at
a discounted rate.

This corporate action has similar features to a bonus and rights issue.

One example is issuance of bonus warrants as a form of dividend.

Stock Split (Mandatory) (

A stock split is a decision by the company's board of directors to increase the number of shares that are outstanding
by issuing more shares to current shareholders.

This is usually done by companies that have seen their share price increase to levels that are either too high or are
beyond the price levels of similar companies in their sector. The primary motive is to make shares seem more
affordable to small investors even though the underlying value of the company has not changed.

It is a division of the company shares into Xs number of new shares with a nominal value of 1/X of the original
share.

For example, in a 2-for-1 stock split, every shareholder with one stock (with par value $0.10) is given an

additional share. So, if a company had 10 million shares outstanding (par value $0.10 each) before the split, it will
have 20 million shares outstanding (par value $0.05 each) after a 2-for-1 split.

In practice, in the above 2-for-1 split example, the $0.10 par shares are cancelled and shareholders are re-issued
double $0.05 par new shares by the company/issuer.

The total value of the outstanding shares, i.e. capitalization, remains the same.

A stock's price is also affected by a stock split. After a split, the stock price will be reduced since the number of
shares outstanding has increased. In the example of a 2-for-1 split, the share price will be halved. Thus, although
the number of outstanding shares and the stock price change, the market capitalization remains constant.

In fund accounting, at Ex-Date, for example, if it is a 2-for-1 split, we should adjust the unit cost base to 50% of the
initial purchase price and double the number of shares in the accounting system

Reverse Stock Split / Stock Consolidation (Mandatory) (

The number of outstanding shares of the company gets reduced by an 1/X number while the nominal value of the
shares increases by X. The total value of the outstanding shares remains the same.
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For example, in a reverse 5-for-1 split, 10 million outstanding shares at 50 cents each would now become two
million shares outstanding at $2.50 per share. In both cases, the company is worth $50 million with unchanged
capitalization.

Note that sometimes people write the above example as 1-for-5 reverse split.

So use your common sense to

interpret what the exact corporate action is.

This procedure is typically used by companies with low share prices that would like to increase these prices to
either gain more respectability in the market or to prevent the company from being de-listed (many stock
exchanges will de-list stocks if they fall below a certain price per share).

Spin-off (Mandatory) (

A spin-off occurs when a company separates a portion of its business into a newly created subsidiary and
distributes shares of that subsidiary to its parents shareholders on pro rata basis without having cost to them.

From accounting point of view, spin-off looks like as separation of assets and liabilities of subsidiary and removing
them from the balance sheet of the parent company at their historical amounts (without adjustment).

The spin-offs balance sheet inherits the historical cost of the assets and liabilities transferred.

The reasons for spin-off are as follows:

An easy way to dispose of a problem subsidiary without recognizing any gain or loss

Spin-offs often pay special dividends to their parent companies as part of the spin-off transaction. In addition,
the debt of the spin-off is removed from the parent companys balance sheet. The result is lower parent
company debt and, possibly, financial leverage.

If the spin-off was losing money (or had low profitability), the parent company reports either higher income
or, at least higher profit margin

In terms of fund accounting, usually Bloomberg will show detailed information on the spin-off deal, including
Terms, Adjustment Factor, Spun-Off Company Ticker.


Terms show how many parent shares entitle you to get 1 Spun-Off Company share.

For example, 1 per 3

tells you each 3 parent shares are entitled to 1 spun-off share.

Adj. Factor tells that you should adjust the total original cost of the parent companys shares with this factor
and your total cost for the entitled spun-off shares is the total original cost of the parent companys shares
times (1-factor).

Sometimes if Bloomberg doesnt provide Adj. Factor information, we can calculate the

factor based on the historical closing prices of the parent company and spun-off company prior to Ex-Date.

Exchange Offer (

An exchange offer is a form of tender offer, in which securities are offered as consideration instead of cash.

For instance, in a bond exchange offer is an offer made by an issuer/corporation to retire its securities from the
market by exchanging the outstanding security for another type of security.

An exchange offer is made when a corporation decides to change its capital structure.

It may need to eliminate

costly, obsolete, or restrictive features offered with the outstanding security issue.

If it is a mandatory event, book on Ex Date of the Corporate Action. Calculate the new shares to be purchased by
multiplying prior to Ex Date holdings to share ratio.

If it is a voluntary event, book on Expiry Date.

Calculate the new shares to be purchased by multiplying the

existing holders response to share ratio.