Corporate actions Flashcards
Income events
• Coupons from bonds - Fixed - Floating rate bonds • Dividends from equities - Ordinary shares – variable - Preference shares – fixed
Capital events
• Redemption of bonds - Callable and putable issues - Bullet issue – fixed repayment of capital at end - Sinking funds – where the principal is paid in part before final redemption date • Shares - Rights issues - Bonus issues - Splits and consolidations
What is before and after ex-div date?
Cum-div period. Buyer of security will be entitled to receive next div payment.
Ex-div period. Buyer of security not entitled to next dividend payment. Entitlement to next dividend payment remains with the seller.
Record date:
The record (books closed) date is the date on which a company inspects the register of members in order to establish which shareholders will be sent the dividend.
Special ex-date:
A trade where the share is bought/sold without the dividend that takes place in the cum-div period. It is permitted for up to 10 days before the ex-div date.
Special cum-date:
A trade where the share is bought/sold with the dividend that takes place in the ex-div period. It is permitted up to the day before the dividend payment
date.
Claim Generation:
A trade occurs cum-dividend, but the settlement is delayed until after the record date. On the dividend payment date, the company will pay the dividend
to the selling investor instead of the buyer, as it will use the name of the registered holder on the record date to determine the recipient of the dividend. The buyer’s broker will then make the claim.
Special ex date:
XD - 10 business days.
Rights issue features:
A follow on issue of shares giving existing shareholders the right to subscribe to more shares in proportion to their existing holding
- Mitigates the risk of diluting ownership
- Share typically offered at a discount to current market price
Why is a rights issue attractive?
• There is no dilution of shareholders’ interest (assuming they take up their rights)
• The issue is at a discount to the current market price to make it attractive
• A shareholder who does not want to subscribe more cash and take up their rights can sell them
• Such issues are generally underwritten
It is possible for shareholders to waive pre-emption rights through a special resolution at a general meeting of UK-listed companies. Even in these situations, it is considered best practice to limit such issuance to 5% in any single year unless the resolution state otherwise.
Open Offer
An open offer is very similar to a rights issue, but the investor are not permitted to sell their rights nil-paid. Instead they have only two choices:
• Take the rights
• Allow the rights to lapse
Theoretical nil-paid price
Theoretical nil paid price = Theoretical ex-rights price - Subscription price
Pre-emptive rights:
Every existing shareholder will receive a provisional allotment letter indicating the new shares they have the right to buy.
The shareholder has four choices:
• Take up the rights
• Sell the rights
• Split the rights
• Allow the rights to lapse
The investor will normally get at least 10 business days to make their choice
When calculating maximum subscription at nil cost what must you do?
Sell more rights to buy fewer shares.
Features of a bonus/scrip issue:
• A follow on issue of shares to existing shareholders in proportion to their existing holding
- Share issued free of charge
- Significantly dilutes the share price
Alterations in share capital
Any adjustment to the issued shares affects these accounts, e.g.:
• Issue of new shares
- Share capital increases
- Share premium increases
When a company issues new shares, the nominal value of each share must be covered in the share capital account; even if no new capital has been raised. This value is often referred to as the called-up share capital.
Share buy-backs: Background
• A company uses its own money to buy back shares from existing investors
• Reasons for company buy-backs:
- To rationalise its capital structure
- To substitute dividend payouts with share repurchases
- To deploy excess cash flow and return it to shareholders
• Approval required from shareholders
• Methods of company buy-backs:
- Block trades
- Accelerated book-building
- Best efforts
• Back stop price – maximum purchase price
- Bought deal
Stake building: Background
- An investor may want to buy a stake in a company because: - They merely want to own the shares - They are building a strategic link - They are attempting to acquire the target company
- Acquire more than 30% or more of the shares in a company, then takeover or merger proceedings will be announced to the market
- If more than 50% is acquired, the takeover was successful
- A merger is where two similar sized companies come together
FCA’s Disclosure and Transparency Rules
• Notifiable interest = 3% or more of its shares. Triggers an obligation to inform the company
– Once above 3%, notification required if the holding rises or falls through
a whole percentage point.
Indirect exposure to shares, such as options on shares and contracts for differences (CFDs) are included in these disclosure requirements.
Dawn Raid
A direct acquisition technique. Acquirer (predator) instructs brokers to purchase shares in a target company as soon as the market open. The purpose is to take legal control before public disclosures need to be made.
