Corporate Action 

Corporate actions are events that companies undertake and affect their securities. In essence, any action that a company makes, whether through merger, acquisition, dividend, stock split, etc., gives precious information regarding a corporation’s financials and direction. Knowing corporate actions is essential for investors and market participants to navigate the stock market. 

This article covers corporate actions, including their definitions, types, impacts, and practical examples. It is straightforward for beginners. 

What is Corporate Action? 

Corporate action refers to any decision or activity undertaken by a publicly traded company that changes its securities or stakeholders. Examples include financial transactions, structural changes, and many more, as these are usually aimed at improving shareholder value, restructuring the company, or reaching strategic objectives. 

Corporate actions are usually the board of directors-approved company actions that sometimes involve input or consent from the shareholders. They communicate to investors which activities are most important in operations and finance for the company, thereby being a part of every market analysis. 

Key Characteristics of Corporate Actions 

1. Approval by the Board: Most corporate actions are sanctioned by the board to enable their alignment with corporate strategy.
2. Stakeholder Impact: They sometimes impact the common and preferred shareholders, bondholders, and employees.
3. Many Kinds: Corporate actions are categorised as such based on the mode of implementation and implication for the shareholder.

Understanding Corporate Action 

Corporate actions represent a company’s strategy to accomplish a set of objectives, such as raising capital, rewarding shareholders, or improving market competitiveness. Investor scrutiny is keen because such actions often reveal the company’s financial health and intent. 

Why do Corporate Actions Matter? 

• Indication of Financial Health: Declaring a dividend payment or stock split often signals profitability and liquidity. 

• Positive corporate actions would raise investor confidence, and negative corporate actions could lead to uncertainty. 

• Investors are better placed because these actions will help them make proper portfolio decisions. 

Corporate actions are conveyed through regulatory filings, press releases, and official announcements in a transparent and compliant manner with the financial regulations. 

Types of Corporate Actions 

Corporate actions fall into three categories: mandatory, voluntary, and mandatory with options. Let’s illustrate each category with examples to better describe it. 

1. Mandatory Corporate Actions

Mandatory corporate actions are performed automatically, and shareholders must not provide any input. Shareholders are only considered partakers in such actions because they own the corporation’s shares. 

Examples 

Dividends: Part of the corporation’s profits are paid to the shareholders as cash or additional shares. 

• Example: Apple Inc. announced a quarterly cash dividend of US$0.24 per share in 2024. Shareholders were paid automatically and did not have to do anything. 

Stock Splits: Existing shares are split into multiple new shares, lowering the price per share but keeping the total market value the same. 

• Example: Tesla Inc. issued a 3-for-1 stock split in 2022, tripling the number of shares held by each shareholder but proportionally lowering the share price. 

Mergers and Acquisitions (M&A): Two firms merge into one, or one firm buys another. 

• Example: In 2016, Dell acquired EMC Corporation. The deal was automatically transferred to shareholders’ shares; Dell Technologies was formed through the merger. 

2. Voluntary Corporate Actions

Voluntary corporate actions require shareholder consent or voting. Investors can participate in accordance with their investment goals and market trends. 

Examples 

Rights Issues: The issuing house allows shareholders to buy further shares at a discounted price. 

• Example: In 2021, DBS Group Holdings in Singapore issued rights issues to raise capital, allowing the shareholder to buy a share below the market price.  

Tender Offers: A firm offers to acquire shares from shareholders at a particular price, often a premium. 

• Example: Microsoft launched a tender offer in 2020 to buy back USD 5 billion shares from its shareholders. 

3. Compulsory Corporate Actions with Choices

Under this category, shareholders are offered choices regarding the form or structure of their involvement in corporate action. 

Example 

Cash or Stock Dividends: Shareholders can receive dividends in cash or as additional shares. 

• Example: ExxonMobil offers a dividend reinvestment programme in which investors may re-invest their cash dividends in additional shares. 

Impact of Corporate Actions 

Corporate actions deeply affect the stock price, the sentiment of investors, and the performance of the market in general. These actions, respectively, affect various stakeholders in the following ways: 

1. Shareholders

• Share Price Movement: Corporate actions can cause short-term changes in stock prices. The few positive corporate actions include the declaration of dividends and buybacks of shares, which in turn have a short-term positive effect on the price of the shares, showing excellent financial health and possibly rewarding the shareholders. Actions like rights issues usually have a short-term depressing effect on stock prices, as it would water down the value of outstanding shares. 

• Dilution Risk: Shareholders who do not act will see a dilution of their percentage ownership when voluntary actions, such as rights issues or new stock issuances, occur. This means that their proportional stake in the company shrinks, which may, in turn, reduce the value of their holdings. 

2. Bondholders

Actions undertaken by corporations, such as mergers and acquisitions and debt restructuring, might influence a company’s financial health, hence influencing its creditworthiness. These, in turn, may bring about some kind of change in the risk profile of the bond held. This would lead to changes in bond price and yield due to upgrades or downgrades, thereby influencing the return on investment by bondholders. 

3. Market Perception

Corporate actions shape the market’s perception of the company. Any announced stock buyback, dividend hike, or merger is a positive action that informs the market that the company is thriving and expanding. This will increase investors’ confidence and stimulate further investments. 

However, some corporate actions, such as layoffs on a large scale or restructuring or rights issues, can cast serious doubt on the company’s financial soundness, causing a loss of confidence among investors and a declining stock price. 

Examples of Corporate Action  

1. Dividends

For example, Procter & Gamble (P&G) recently announced its quarterly cash dividend for 2024, US$0.94 per share. Shareholders of record received the distribution, which raised their total return on investment. Dividends send a message to investors about corporate financial health and the ability and willingness to pay dividends. 

2. Stock Splits

Example: Alphabet Inc. (Google) did a 20-for-1 stock split in 2022. From US$3,000, the current share price was US$150. This made the stock accessible to more retail investors and, therefore, increased liquidity and trading volume. 

3. Consolidations and Mergers

For example, in 2019, Walt Disney Company bought 21st Century Fox for US$71 billion. Integration brings rights issues along with enhancing the company’s media portfolio, which positively affects the company’s market position. 

4. Rights Issue

Example: In 2021, Singapore Airlines (SIA) issued a rights issue to raise SGX 6.2 billion. In this, shareholders were allowed to buy more shares at a discounted price. The move helped SIA get the much-needed capital during the COVID-19 pandemic but diluted ownership for non-participating shareholders. 

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