What Is a Corporate Action?
A corporate action is any activity that carries material change to an organization and effects its stakeholders, including shareholders, both common and preferred, as well as bondholders. These events are generally approved by the company's board of directors; shareholders might be permitted to vote on certain events too. A few corporate actions expect shareholders to present a response.
Grasping Corporate Actions
When a publicly traded company issues a corporate action, it is starting an interaction that straightforwardly influences the securities issued by that company. Corporate actions can go from squeezing financial issues, like bankruptcy or liquidation, to a firm changing its name or trading symbol, where case the firm must frequently refresh its CUSIP number, which is the identification number given to securities. Dividends, stock splits, mergers, acquisitions and side projects are common examples of corporate actions.
Corporate actions can be either mandatory or voluntary. Mandatory corporate actions are consequently applied to the investments required while voluntary corporate actions require a financial backer's response to be applied. Stock splits, acquisitions and company name changes are examples of mandatory corporate actions; tender offers, discretionary dividends and rights issues are examples of voluntary corporate actions.
Corporate actions that must be approved by shareholders will ordinarily be listed on a firm's proxy statement, which is documented in advance of a public company's annual meeting. Corporate actions can likewise be revealed in 8-K filings for material events.
Common Corporate Actions
Corporate actions incorporate stock splits, dividends, mergers and acquisitions, rights issues and side projects. These are major decisions that regularly should be approved by the company's board of directors and authorized by its shareholders.
- A cash dividend is a common corporate action that changes a company's stock price. A cash dividend is subject to endorsement by a company's board of directors, and it is a distribution of a company's earnings to a predefined class of its shareholders. For example, expect company ABC's board of directors endorses a $2 cash dividend. On the ex-dividend date, company ABC's stock price would mirror the corporate action and would be $2 not exactly its previous closing price.
- A stock split is another common corporate action that changes a company's existing shares. In a stock split, the number of outstanding shares is increased by a predetermined different, while the share price is diminished by a similar factor as the numerous. For example, in June 2015, Netflix Inc. announced its decision to go through a seven-for-one stock split. Subsequently, Netflix's share price diminished by a factor of seven, while its shares outstanding increased by a factor of seven. On July 14, 2015, Netflix closed at $702.60 per share and had an adjusted closing price of $100.37. In spite of the fact that Netflix's stock price changed substantially, the split didn't influence its market capitalization.
- A reverse split would be carried out by a company that needs to force up the price of its shares. For example, a shareholder who possesses 10 shares of stock valued at $1 each will have just a single share after a reverse split of 10 for one, yet that one share will be valued at $10. A reverse split can be an indication that the company's stock has sunk so low that its executives need to support the price, or possibly make it create the impression that the stock is more grounded. The company might even have to try not to get sorted as a penny stock. In different cases, a company might be utilizing a reverse split to drive out small investors
- Mergers and acquisitions (M&A) are a third type of corporate action that achieve material changes to companies. In a merger, at least two companies synergize to form another company. The existing shareholders of combining companies keep a shared interest in the new company. In opposition to a merger, an acquisition includes a transaction wherein one company, the acquirer, takes over another company, the target company. In an acquisition, the target company stops existing, yet the acquirer accepts the target company's business, and the acquirer's stock keeps on being traded.
- A [spin-off](/side project) happens while an existing public company sells a part of its assets or disseminates new shares to make another independent company. Frequently the new shares will be offered through a rights issue to existing shareholders before they are offered to new investors. A side project could demonstrate a company ready to take on another test or one that is pulling together the activities of the principal business.
- A company carrying out a rights issue is offering extra or new shares just to current shareholders. The existing shareholders are given the right to purchase or receive these shares before they are offered to the public. A rights issue routinely takes place as a stock split, and regardless can show that existing shareholders are being offered a chance to take advantage of a promising new development.
- A corporate action is an event carried out by a company that materially influences its stakeholders (for example shareholders or creditors).
- Corporate actions must frequently be approved by a company's shareholders and board of directors.
- Common corporate actions incorporate the payment of dividends, stock splits, tender offers, and mergers and acquisitions.