KM-12: Corporate Actions

NQF Level 7
Corporate Actions NQF Level 7

• KM-12-KT01 Introduction to corporate actions (20 %)

• KM-12-KT02 Corporate action event types (50 %)

• KM-12-KT03 Corporate action timelines (30 %)

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Corporate Actions NQF Level 7
 KT01 Introduction to corporate actions (20%)

• KT0101 Introduction to corporate actions

• KT0102 Key definitions used in corporate actions

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Corporate Actions NQF Level 7
The role-players involved in corporate actions

• issuers, • CSD Participants,

• exchanges, • brokers,
• CSDs, • nominees,
• transfer secretaries, • fund managers
• sponsors, • the legal fraternity.
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Corporate Actions NQF Level 7
KT02 Corporate action event types (50%)

• KT0201 Corporate action events and their effect on existing shares

• KT0202 The effect of corporate events on an investment strategy

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Corporate Actions NQF Level 7
KT03 Corporate action timelines (30%)

• KT0301 Generic corporate actions timeline and general principles.

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Corporate Actions NQF Level 7
KT03 Corporate action timelines (30%)

including declaration date, entitlement,

finalisation date, record date
last day to trade, payment or withdrawal date
ex-date,
first day to trade with new
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Corporate Actions NQF Level 7
 Corporate action timelines JSE

Mandatory / Elective event timeline

CUM Ex

First Day to Payment or

Trade with New Withdrawal Date
Declaration Date Finalisation Date Last Date to Entitlement Record Date
Trade
RD -13 or earlier RD -8 RD -3 RD -2 RD -1 RD RD +1
LDT -10 LDT -5 LDT LDT +2 LDT +2 LDT +3 LDT +4

1 2 3 4 5 6 7

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Corporate Actions NQF Level 7
Corporate Actions
What is a Corporate Action?
Where a company does something that affects it’s investors e.g. Shareholders

These actions are generally agreed upon by the board of directors before being
authorised by shareholders

What are the main categories of Corporate actions?

Mandatory Mandatory with Voluntary

Investor has NO CHOICE
Obligatory – mandated by
the company
DOES NOT require any
intervention from investors
options
Investor has an ELEMENT OF
CHOICE
A DEFAULT OPTION is
given to shareholders if they
choose not to intervene by a
particular date
Investor has a DEFINITE
CHOICE to make
A DECISION MUST be
made to choose between
OPTIONS presented to
them
Sharenet -JSE Corporate Actions
CISI – Financial Products, Markets & Services
 Corporate Actions
What is a Corporate Action?
Where a company does something that affects it’s investors e.g. Shareholders

These actions are generally agreed upon by the board of directors before being
authorised by shareholders

What are the main categories of Corporate actions?

These classifications are used across Europe and by Euroclear and Clearstream
(Both International Central Securities Depositories

Mandatory Mandatory with Voluntary

Investor has NO CHOICE
Obligatory – mandated by
the company
DOES NOT require any
intervention from investors
options
Investor has an ELEMENT OF Investor has a DEFINITE
CHOICE CHOICE to make
A DEFAULT OPTION is A DECISION MUST be
given to shareholders if they made to choose between
choose not to intervene by a OPTIONS presented to
particular date them
 Securities Ratios
Before we take a closer look at different examples of corporate
actions, you need to know how corporate actions are expressed to
investors.

This is known as a securities ratio and it stipulates the terms of a

corporate action (What the shareholder should expect from the
company)

It can be expressed in different ways depending on the type of

corporate action:
Nature of corporate action Terms expressed as...
Dividends paid Amount of dividends paid per share (£)
Giving new shares to existing A ratio of the number of new shares received as a
shareholders proportion of the number of shares owned.

e.g. 1:4
(X new shares for each ‘Y’existing shares)
This method is used in Europe and Asia

In the USA the ratio is expressed differently:

The first number in the ratio states final holding after the event; the second number is the original number of shares
held.
e.g. If the securities ratio is 5:4 and an investor holds 1,000 shares, after the event, the investor now owns 1250 shares
compared with the 1000 they owned originally i.e. 1250:1000
 Examples of a Corporate Action – Rights Issue
A company wants to raise finance:
To expand
To repay bank loans
To repay bond finance

An existing shareholder has

pre-emptive rights to buy
shares so that their
proportionate holding is not
diluted.
Can react positively or negatively to
Rights Issue Shares are normally offered to
existing shareholders at a
Offer of new shares to existing discount to market price
shareholders (“Cash Call”)
The initial response to the
announcement of a planned
Shareholders rights issue will reflect the
market’s view of the scheme.
Share prices can RISE or
the rights issue FALL as a result

What can they do?

Mandatory with options
Sell the rights to another
Take up the Do Nothing Sell sufficient rights
investor
rights – buy (Default option to raise the cash to
(often transferrable –
the shares used) take up the rest
known as ‘renounceable’)
 Examples of a Corporate Action – Rights Issue
Completed Rights
Issue
Underwriters of a share issue agree, for a
fee, to buy any portion of the issue not
taken up in the market at the issue
Shares price.

They sell the shares they have bought

when market conditions seem opportune
to them (at a gain or a loss)

The share price changes to reflect the effect of the rights issue once the shares go ex-rights
(after the rights issue has happened)

This is the point at which the shares and the rights are traded as two separate instruments

This adjusted share price is known as the theoretical The rights can be sold and the price for these rights is
ex-rights price known as the premium.
(actual price will depend upon the interaction of buyers
and sellers in the market at the time) (theoretical ex-rights price - price of a new share)

In the case of Con Air plc, the theoretical In the case of Con Air plc
ex-rights price was £3.77 £3.77 - £2.00 = £1.77
Examples of a Corporate Action – Bonus Issue

Mandatory
example securities ratio:
2:1
Scrip
2 new shares for every 1
existing
AKA
A company gives
existing Increases
shareholders
Lowers the
Bonus Issue liquidity of
additional company
share – more
shares without share price
buyers!
AKA paying anything

Capitalisation Psychologically, a company’s

Issue share price can become too high
and less attractive to investors
UK Cos. Like a share price
under £10
Examples of a Corporate Action – Dividends

DIVIDENDS The part of a company’s profits

passed to shareholders

Interim Dividend
Final Dividend
First dividend
Second dividend paid after
declared by directors
approval by shareholders at the
and paid Many company’s pay
AGM, after the end of the
halfway through the them twice a year
financial year
year

Dividends per share may vary according to

 Overall company profitability
 Plans for future expansion

SHAREHOLDER Receive the dividends by:

S  Cheque or
 Transfer straight into their bank
Mandatory accounts
 Transfer via CREST (system)
Examples of a Corporate Action – Receiving dividends
When shares change hands, determining the correct person to receive dividends can be difficult

Procedures have been put in place to prevent mistakes in paying dividends to the wrong person
SHAREHOLDER
S

Shares are bought and sold with the right to receive the next declared dividend up to
the date shortly before the dividend payment is made.

Cum-dividend (with) Ex-dividend (without)

If the shares are purchased
cum-dividend, the purchaser will
receive the declared dividend.
At a certain point between the declaration date and the dividend
payment date, the shares go ex-dividend. Buyers of shares are
not entitled to the declared dividend. THURSDAY is Ex-
Dividend day (Buying ex-dividend means shares fall in price
by 8p

Standard settlement period in South Africa is T+2

(A trade will be settled three business days after it is executed)
 Cum and Ex Dividend Example
Holding plc calculates its interim profits (for the six months to 30 June) and decides to pay a dividend of
8p per share.

Holding plc announces (‘declares’) the dividend on 1 September and

states that it will be due to those shareholders who are entered on the shareholders’ register on Friday
7 October (Record date, register date or books closed date).

(The actual payment of the dividend will then be made to those shareholders at a later specified date.)

Given the record date of Friday 7 October, the LSE sets the ex-
dividend date as Thursday 6 October. Ex-Dividend
Date
On this day, the shares will go ex-dividend and should fall in price
by 8p. This is because any new buyers of Holding plc’s shares will
not be entitled to the dividend.

The actual payment of the dividend will then be made to those Record Date
Register Date
shareholders on the register at the record date at a later specified
Books Closed Date
date, say Wednesday 22 October.
Examples of a Corporate Action – Takeovers
A company can grow organically or take a different route – buy other companies

TAKEOVER Voluntary
The predator company is under an
obligation to report their share
purchases once they reach a certain
percentage
Predator Company
Target Company
(company bidding to buy
(company bid for)
another)

Hostile Takeover Friendly Takeover

Directors of the target Shareholders of the Success = predator Directors of the target
company consider target company can company “gains consider
the offer not attractive. choose whether control” by buying the takeover bid to be
They recommend that to accept or reject the more than 50% of the acceptable, and
their shareholders reject bid, a hostile takeover shares of the target recommend acceptance to
the offer. bid can still be successful company shareholders.
Examples of a Corporate Action – Mergers

MERGER

Voluntary
Company one Company two

The two companies agree to merge their interests. In a

merger it is usual for one company to exchange new
shares for the shares of the other entity

Forms 1 single large company

 Corporate Actions Overview
Action taken by Description Category of corporate
the company action
Dividend Shareholders receive payments (normally twice a year) Mandatory
payment based on company profits

Bonus/Scrip/ The Board issues new shares to existing shareholders for Mandatory
Capitalisation free, generally to increase liquidity of shares so that the
issue share price falls.

Rights issue The Board issues new shares to existing shareholders Mandatory with options
(First option) at a discount their market price to raise
finance

Merger Two companies agree to merge their interest to form one Voluntary
larger to company

Take-over A predator company bids for a target company and aims Voluntary
to buy the majority of shares in the target. A take-over
can either be friendly (target shareholder approval) or
hostile (target shareholder rejects)