Corporate actions and your investments
Owning part of a company, whether a small or a large shareholding, brings certain responsibilities. Although day-to-day management is delegated to the management team and oversight to the board of directors, occasionally investors will participate in ‘corporate actions’ that may involve making decisions.
A corpo /content/siteing/en/Individuals/my-money/categories/invest/what-owning-shares-in-a-company-actually-means.htm rate action is defined as any event that brings a /content/siteing/de/Individuals/my-money/categories/invest/what-owning-shares-in-a-company-actually-means. material change to a company. There are two main types – mandatory and voluntary. A mandatory action does not require anything from shareholders, but they will be affected – for instance, actions such as stock splits, or consolidations. A voluntary event is when shareholders are asked to participate in the action and the company cannot move forward without the shareholders’ response.
While some of these issues may be administrative and require little in-depth consideration on the part of shareholders, others such as mergers or acquisitions may have a significant bearing on the future of the company – and on the value of investors’ shares .
While corporate actions are mainly associated with shareholdings, they can involve bondholders as well. For example, a company may ‘call in’ bonds before their maturity date. If interest rates have fallen, for example, companies look to save money by reimbursing existing bondholders and issuing new debt at a lower rate.
Some decisions will be relatively straightforward. For example, if a company decides to pay a dividend, shareholders may choose to take it as cash, or to be paid in extra shares known as a ‘scrip’ dividend.
Those opting to receive dividends in the form of shares stand to benefit from the compounding effect – future dividends will be paid on the new, increased level of shareholding. If these are also reinvested to buy yet more shares, it can create a virtuous circle for investors, assuming the company continues to prosper. However, this option will not be suitable for investors dependent on dividends to provide income.
A stock split - another common corporate action - usually happens when a company’s share price has risen a long way and the company management believes that the high price per share might deter investors. For example, US-based video streaming group Netflix recently conducted a 7-for-1 share split.
In a stock split, shareholders receive more shares but the value of their holding remains the same because the price of each share is lower – in theory when the number of outstanding shares increases by a certain multiple, the share price will fall in the same proportion. Conversely, companies whose shares have fallen greatly in price may decide to reduce the number of outstanding shares by the reverse process. This action may be prompted by stock exchange rules that require shares to stay above a minimum price or face the threat of being delisted.
In a rights issue, a company offers additional shares at a special – i.e. discounted – price to existing shareholders when the company wants to raise money, often to finance an acquisition or to pay down debt. Rights issues can offer a good opportunity for shareholders to add to their investment at a level below the current market price, sometimes substantially so.
Mergers and acquisitions
Merger and acquisition activity is becoming more common as companies try to expand their business more quickly than is possible through ‘organic’ growth, or see better perspectives as part of a larger organisation. Companies may merge with each other, take over other companies, or be taken over by other companies.
When a deal takes place, investors in the company being acquired will be asked to decide whether they want to sell their shares to the bidder at the stipulated price.
In many cases, mergers and acquisitions bring significant changes to the management team or to the way companies are run, which may affect whether investors want to continue holding the shares.
Often, as part of the merger deal, existing shareholders will be offered shares in the new entity, or a mix of shares and cash. When Vodafone sold its stake in US telecoms group Verizon, for example, shareholders were offered cash and/or shares in Verizon as part of the deal. The choice largely depended on shareholders’ opinion of Verizon and its future prospects.
Sometimes shareholders will not have the option of continuing to hold shares in the resulting company if the bidder plans to delist it from the stock market, as is usually the case with M&A backed by private equity firms.
Corporate actions can have a significant impact on the value of investments. It’s important that shareholders, and sometimes bondholders, understand their options and rights in order to be able to take decisions in their own best interests.
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A share is a unit of ownership delivered by a capital company. In most cases, it is a commercial company with a limited liability. Holding one of several shares – in other words, being a shareholder – means that you own a part of the company’s capital but you are not held personally liable for the company’s debts.
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