Mandatory corporate actions include cash dividends, stock splits, and bond interest payments. Voluntary actions require investor decisions, like tender offers, exchanges, and proxy voting. Derivatives are also affected, such as option contract adjustments during stock splits. Understanding these actions is important for informed investing.

1. Corporate Actions
DEREK PRZYWALNY, M.S.

2. About me
 Strong financial background in NY and London
 Worked as head of corporate actions for Deutsche Bank

3. Mandatory corporate actions for stocks
Mandatory means it will happen anyway
 Cash dividends
Declaration date
March 1st
Ex-dividend date
April 5th
Record date
April 7th
Payment date
April 15th

4. What are corporate actions?
 As an investor, you’ll be exposed to various corporate actions.
 To be a well-informed investor, you need to understand how these affect your
investments.
 The corporate actions are divided into two broad kinds: mandatory and
voluntary. In addition, they differ for equities, fixed income products, and
derivatives.

5. “
”
The ex-dividend date is usually a couple of trading days before the
stock dividend record date. Based on the record date, companies
know who gets the declared dividends. So, on the ex-dividend date,
the dividend’s value is dropped from the price of a stock. If the stock
is bought on this date or after, no dividend will be paid because the
standard settlement takes three business days.
The Educated Investor’s Handbook (Vol. 1): What you
need to know first

6. Stock splits- mandatory event
Regular stock split Reverse stock split
 There are also reverse stock splits, such as 1-10. Here
for 10 shares, the investor gets only one, while the
stock price increases tenfold. If there are fractional
shares, typically investors get cash for them.
 So, if an investor holds 11 shares this would represent
1.1 new shares. In that case, cash would be paid for a
fraction of 0.1 of a share.
 Generally, companies do reverse splits when their stock
price drops below $1. Often, this is done to maintain
NASDAQ listing. Many penny stock companies do it.
Reverse stock splits are generally badly received by
investors as they indicate that the company isn’t doing
well and doesn’t expect its stock price to rise.
 These don’t increase the
intrinsic value of a company,
but investors like them. If
there’s, for example, 3-1 split,
for every share the investor
will get three shares

7. Stock dividends
 Some companies reward their shareholders with stock dividends.
Technically, when shareholders receive extra shares, it doesn’t
create any value as more shares are outstanding and the stock
price drops.
 Example: If there’s a 10% stock dividend, an investor who has
100 shares will get 10 extra shares.
Source: The Educated Investor’s Hanbook: What You Need to Know First

9. Stock spin-offs
 Companies may decide to spin-off one of their divisions. In such cases,
shareholders can get shares of a new company, and still hold the shares of the old
company.
 Technically, the shares they originally had lost value as spin-off makes the original
company less valuable, but that is replaced in value arising from the issuance of
new shares.
 A major reason for a spin-off is to unlock the value of a division that’s being spun
off.
 Generally, this is perceived as a positive development by the shareholders.
Source: The Educated Investor’s Hanbook: What You Need to Know First

10. Mergers & Acquisitions
 When a merger happens, two companies combine to form a single
company. Often, stocks A and B will be combined into stock C.
 When an acquisition happens, one company buys the other. If the
other company is also publicly listed, the shareholders of the
acquired company get shares of the buying company, although in
some situations they get cash.
 Sometimes, when an acquisition happens, the shares of the buyer
drop, while the shares of the seller rise, especially if a price paid for
the target was well above its market price.

11. Liquidating dividends
 These dividends are uncommon.
 Usually, when a company decides to close operations
(i.e. go out of business), it will return capital to
shareholders.
 On the other hand, a company that intends to operate
will sell one of its divisions or some assets, and then
distribute cash to its shareholders.

12. Voluntary Corporate Actions for Equities
 With voluntary corporate actions, investors (or their portfolio
managers) need to decide which option to choose.
 Depending on corporate action, not choosing to respond can
result in a default option being automatically selected or in
nothing happening (as with some tender offers).

13. Tender offers
 When a tender offer is made to investors, the price offered is normally
somehow above the current market price. For example, if shares of a
company trade at $8, a tender can be made at $9 in order to motivate
investors to give up their shares.
 There are various reasons for a tender. Some tender offers are made by
companies to their shareholders as part of share buyback programs. Here,
companies use excess cash to buy back some of their own shares.

14. Dutch Auctions
 In a Dutch auction, there’s a limited number of shares to be
bought and those willing to sell their shares submit their offers.
 At first, the lowest offers to sell get their shares allocated to
buyers, then remaining shares are allocated to higher offers to
sell until all the shares have been allocated to buyers.
 Every allocated bidder gets shares at the same price, which is
the lowest sell price at which the last shares were allocated.
 Due to uncertainties as to the final price, Dutch auctions come with
price limits. For instance, a buyer may specify the highest price he or
she is willing to pay.

15. Voluntary exchange corporate actions
 Voluntary exchange is also known as optional conversion.
 It is an offer to shareholders (or bondholders) to exchange one
type of security for another.
 For example, stocks can be exchanged for some other
financial instruments or cash.
Source: The Educated Investor’s Hanbook: What You Need to Know
First

16. Rights auctions and rights issues
 During rights auction, the rights to purchase new
shares are offered to the highest bidders. In a
rights issue, existing shareholders of record are
offered the rights to buy additional shares at a fixed
price.
 Often, this happens during secondary offerings so
existing shareholders can maintain their
percentage stakes of the company’s ownership.
 Typically, the rights of a publicly-listed company
can be sold in the market before their expiration.

17. Subscription offers
 During a subscription offer,
the existing shareholders (or
bondholders) are given an
option to subscribe to a new
issue at a predetermined
price.

18. Proxy voting
 Common shareholders (with shares that entitle to voting) can
participate in proxy voting. This includes voting for the Board of
Directors, approving or disapproving management’s proposals,
as well as other critical issues.
 If it’s an annual meeting, shareholders can actually attend it,
vote remotely, or via their broker. Brokerage houses inform
their clients about such events.
 When it comes to mutual funds, portfolio managers get to vote
on behalf of their clients.
 Such custodian rights give large institutional investors some
leverage over companies.

19. Fixed-income corporate actions
 When it comes to corporate actions for fixed-income
products, such as bonds, there are both mandatory
and voluntary events.

20. Mandatory corporate actions for bonds
 Interest (coupon) payments are among the most common ones.
In the United States, bonds typically have semiannual interest
payments based on fixed coupon rates. For example, if coupon
is 6% of par value, and par of 100 represents $1,000, then there
will be two semiannual payments in a given year of $30 each.
 Final redemption is when at bond maturity the principal is
returned to investors. Typically, the principal amount is $1,000
but it can differ for some issues.
 At times, convertible bonds get converted into stocks. This can
happen at the choosing of a company (so then it’s a mandatory
event) or at the option of investors (a voluntary event).

21. Voluntary corporate actions for bonds
 If there’s a tender offer for bonds, investors can offer their bonds in
return for cash.
 Let’s say bonds were issued at $1,000, but their current value in the
market is $920. (This can happen if interest rates went up significantly
and/or when the credit rating deteriorated).
 In such situations, a buyer (which could be the issuer or someone else
such as a fund buying distressed securities) offers to buy bonds. To
encourage sellers, a price above the current market price could be
offered.
 Another voluntary corporate action would be an exchange offer where
bondholders are offered to exchange their bonds for some other
security such as a stock of the issuer.

22. Corporate actions for derivatives
 Derivative: something whose value is base don underlying instrument (i.e.
call option on a stock, futures contract on oil)

23. Stock splits and option contracts
 When it comes to American options, a standard option contract on a
stock represents 100 shares.
 If there’s a stock split, the contract gets adjusted. For instance, if
there’s an option for 100 shares of company XYZ at $20 strike price,
and there’s a 2-for-1 stock split, the strike price will be changed to
$10, and there will be two contracts for one.
 However, if there’s a 3-for-2 stock split, each contract will represent
150 shares and the strike price will be adjusted to $13.33.

24. Calls and puts on bonds
 There are also options on bonds. Calls allow the issuer to
redeem the options prior to maturity at a specified price by
a specified date, while puts allow the bondholders to sell
their bonds to the issuer also at a specified price prior to a
specified date.
 If a company exercises a call, it is a mandatory action.
 However, put exercises are up to bondholders, therefore,
they are considered to be voluntary actions.

25. Corporate actions related to warrants
 Stock warrants can also be considered as options. The corporate
actions related to warrants include warrant issues, exercises, and
expiries. Companies issue warrants for various reasons such as
raising additional capital (when a warrant is issued and exercised
into shares at a set price).
 Warrants have exercise prices and expiration dates. If, for instance,
warrants can be exercised at $20 for a share of a stock, and the
stock trades at $30, then the warrants are in-the-money and can be
exercised, traded in the market, or held in expectations that the
stock price will rise further prior to their expiration date.
 If warrants are out-of-the-money (the exercise price is higher than
the stock price), then they’re likely to expire worthlessly. Out-of-the-
money warrants can also be sold in the market to other investors,
but their value will be limited to their time value, which is time left to
expiration during which there’s a possibility that the stock will rise.

26. Thank you for your time / Please
subscribe for more