Unit 2 - 6. Corporate Actions

Question 1

Income Events

Unit 2 - 6. Corporate Actions

Answer 1

Corporate actions are events that directly impact the securities of the company who has caused them.

Income events

• Bonds - coupon is paid to bondholders
• Shares - company pays a dividend to its shareholders

Question 2

Capital Events

Unit 2 - 6. Corporate Actions

Answer 2

Bond repayments = repayment of the principal amount to bondholders (if principal is paid all at once its called a bullet payment, if over time its a sinking fund)

Equity capital events
- bonus issue (scrip or capitalisation)
where a company issues new shares for no consideration, to reduce the current share price.
bonus issue: the nominal value of the company’s share capital will increase.

• stock split
• reverse stock split

bonus issue will increase the share capital line in the accounts, with a corresponding movement from reserves. A stock split will not alter the share capital line, but will be subdivided into a larger number of shares, each with a smaller nominal number.

Question 3

Capital Raising Events (rights issue)

Unit 2 - 6. Corporate Actions

Answer 3

Rights issue (way to raise cash for a company)

Pre-emptive rights = legally required in many jurisdictions around the world and give existing shareholders the right to subscribe for new shares. Shareholders influence cannot be diluted without prior knowledge.

Rights issue can avoid negative effects of dilution as either shareholder takes up right and keeps original share, or they sell the right and receive compensation for the dilution.

ex-rights price = [(no. shares held cum-rights x cum rights share price) + (no. rights allocated x rights issue price)]/ total no. shares held assuming rights exercised

new shares offered in proportion to existing shareholdings (shares cum-rights), usually at a discount to the current price, via provisional allotment letter.

nil-paid = difference between the theoretical ex-rights price and the rights issue price (theoretical value of the right to buy a share in a rights issue)

Shareholders options (10 working days)

• take up the rights in full
• sell the rights nil-paid in full
• sell part of rights nil-paid to preserve current stake without dilution
• take no action

Selling some rights to take up others (swallowing the tail)
- sell some rights, use the cash to take up the other rights. No additional funds are invested.

calculation for number of nil-paid rights to be sold to take up the balance at nil cost is given by:

(issue price of new shares x number of shares allocated) / theoretical ex rights price

Question 4

Share Capital and Change to Share Ownership

Unit 2 - 6. Corporate Actions

Answer 4

• Share buybacks
  uses cash to repurchase shares from existing shareholders
  (either excess cash to return to shareholders or change capital structure (less equity for same debt))

Stakebuilding 
Strategic stakes (shareholding) may be accumulated to prevent being taken over by a competitor and to influence the company. Stakebuild to start an acquisition. Significant rules on disclosure on stakebuilding. 

Takeovers and mergers
takeover (acquisition), one company buys a majority stake in another company

merger
two firms come together to form a larger merged entity.