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.
- 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:
- Preferred and/or common shareholders
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:
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.
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.
Thank you for reading CFI’s guide to Corporate Action. To keep learning and advancing your career, the following CFI resources will be helpful: