Corporate Actions - A Concise Guide

An introduction to securities events

Francis Groves

• Éditeur: Harriman House
• Année: 2008
• ISBN:
  9780857192158
• Édition: 1
• Sujet: Betriebswirtschaft
• Sous-sujet: Investitionen & Wertpapiere

Corporate actions are normally considered as incidental to the business of investing and marketing investments, but in fact they are highly relevant. The aim of this concise guide is to define what corporate actions are, list and describe the main corporate actions and show how individual corporate actions are applied to investors' holdings of securities. This will give an overview of the way in which the corporate actions processing function works both in the UK and other important global markets.The guide is designed to be an introduction to corporate actions for investment industry practitioners in general. Those starting out in corporate actions processing will find it a helpful outline, but it is also designed to be useful for all who encounter corporate actions tangentially in disciplines such as fund management or financial advice provision. Different industry participants have differing interests in corporate actions, and for the sake of consistency the guide is (mainly) written from the point of view of the beneficial owners of securities. The first section of the book deals exclusively with equity corporate actions, providing the definitions of a corporate action and the legal framework(s) underpinning corporate actions, followed by a look at the most significant actions one by one, and then a detailed examination of the staging of some of these. The corporate actions of debt securities are given separate treatment later in the book. Next the focus moves from the corporate actions themselves to the industry that has grown up to process them, covering respectively the corporate actions industry, its efficiency and its progress (recent and future). After that the author takes a look at the impact of successive corporate actions on one particular share and shareholdings in it. This is then followed by a look at the scope investors have for influencing such events through shareholder voting. The final chapter looks at how corporate actions are treated in the context of stock indices, stock charts and a number of more complex investments. Those who simply require a handy and straightforward introduction to specific corporate actions will find the quick guide to the content and the glossary of corporate actions terms especially useful. This guide provides a snapshot of the current state of affairs in the corporate actions industry, alongside some of the forces for change that are at work. The aim has been to provide sufficient detail to give the reader a working model that is helpful in navigating the corporate actions universe.

1. Defining Corporate Actions

Investors may focus mainly on the purchase of securities and their re-sale but equities and debt securities are more than passive tokens of investment value. By means of corporate actions they acquire a life of their own, an ability to transform themselves and to make investors change their minds. Individual corporate actions for equities such as takeover bids or rights issues can have a significant effect on share prices. Over just a few years, the cumulative effect of a number of corporate actions can cause a share to undergo a complete metamorphosis.

The starting point of all corporate actions is the ownership of individual units of investment; shares, bonds or variations. For shares of common stock, the type of security on which we shall be concentrating chiefly, the overarching right is that of ownership of the company in question (the issuer) and from ownership spring the following specific rights:

1. To elect the board of directors
2. To vote for corporate actions that require shareholder approval
3. To share in corporate earnings in the form of dividends
4. To maintain the same proportion of the company’s common stock in the event of additional shares being issued

And, finally,

1. To receive a share of the residual assets of the company in the event of liquidation (which could be called the saddest corporate action of them all)

So, along with ownership come shared control, shared benefits and rules to protect the rights attached to each share. The shared control tends not to translate into power for the small investor or even large minority shareholdings and rules protecting the rights attached to each of a company’s shares do not necessarily protect the financial interests of the share’s owner. ^[3]

Further definitions

Definitions of “corporate action” vary depending upon whether the point of view is that of the issuer:

‘an event initiated by a company that affects its share,’ (Frances Maguire, The Banker, 1st June 2007)

‘A corporate action occurs when changes are made to the capital structure or financial position of an issuer of a security that affect any of the securities it has issued.’ (‘Transforming Corporate Action Processing’, Depository Trust & Clearing Corporation, 2003)

or the shareholder:

…where the owner of a security is given the opportunity to receive a benefit or participate in a reorganisation of the company.

A complete definition covering all types of corporate action may not be possible. The important point is that corporate actions all have their genesis in the entitlements that accompany owning the shares (no matter how few of them). It follows from this that, in order to put corporate actions into effect, comprehensive information about the ownership of all the shares concerned is required. This information is held in the company’s share register.

How are corporate actions decided?

For each company the workings of corporate actions will be set out in the articles of association. If one thought of a company as a country, the memorandum and articles of association would be the country’s constitution, the shares would be the voters and the place of Congress or Parliament would be taken by the shareholder meetings (annual or extraordinary general meetings). Although this looks like a “winner takes all” system of government, some proposals, known as “special resolutions”, require 75% support. ^[4] Proposals to change the memorandum and articles of association would be treated as special resolutions.

Chapter 8 will take another look at voting in shareholder meetings; how it works, how effective it is and moves afoot to improve the system.

Decisions on corporate actions or changes to the articles of association are not the only purpose of shareholder meetings; they also (for example) vote to approve the remuneration of directors, to elect directors, or re-elect them when their terms of office expire.

In the analogy of a country the directors are, of course, the government. In almost all circumstances it is they who make proposals on various corporate actions for the shareholder meetings to decide on.

Generally speaking, ensuring that a company has sufficient capital and cash to carry on its business successfully will be the responsibility of the company’s Chief Financial Officer (CFO) and its treasury department. Recommendations about items such as the dividend, share or bond issues and share buybacks will originate from this quarter. Patterns of organisation and chains of command vary from one company to the next, but a company’s annual report should explain how the treasury function is carried out.

Who writes the rules?

The picture of the sovereignty of shareholder meetings over the affairs of the company distorts reality by ignoring the importance of national (and international) legislation in regulating companies’ affairs. In the United Kingdom legislation in the form of Statutory Instruments (SIs) taking one or other of the various companies acts or other statutes as their authority have an all important effect on companies’ responsibility for corporate governance generally and corporate actions in particular. Companies also have to comply with regulation emanating from the Financial Services Authority (FSA), such as the Combined Code on Corporate Governance. Increasingly, this legislation and regulation is itself subject to Europe-wide policies in the form of EU directives.

In the United States, corporation law is mainly a state matter so there can be variations from one US state to the next. However, the situation is made simpler by the fact that a large proportion of American companies are incorporated in the State of Delaware (the state allows out of state incorporations and does not tax trading activities that take place outside the state), so Delaware’s General Corporation Law applies to a lot of US companies. ^[5] In addition, some 16 of the states conform to the Revised Model Business Corporation Act (1984) either wholly or substantially. ^[6]

Shaftesbury PLC, an AGM in practice

A look at Shaftesbury PLC, a property investment company in London’s West End, gives a flavour of how one particular company’s 2005 AGM altered the company’s articles of association.

Among the changes to the company’s articles of association proposed to the AGM in January 2005 were a proposal relating to uncertificated (ie, non-hard copy) shares, another allowing for electronic communication with shareholders, a third adjusting the rules for announcing changes to the time or place of a general meeting and a fourth altering (downwards) the amount of borrowing the directors could authorise without the specific authority of a general meeting of shareholders.

The explanatory notes make clear that the first two items comply with specific pieces of legislation. ^[7]

How big is the corporate action universe?

Before looking at particular types of corporate action, it is worth pausing for a moment to consider the sheer numbers of corporate actions taking place every year.

In 2004 the number of corporate actions taking place worldwide was estimated to be close to one million. ^[8] Given that each corporate action affects thousands of shareholders and that processing every corporate action involves several organisations in communicating and checking information, it will be clear that corporate actions administration requires huge effort and constitutes a complex industry. This industry is carried on away from the attention of the media, and the investor, for the most part. According to SWIFT the volume of corporate actions message traffic was 45 million in 2005, double the amount of 2002. ^[9] Completing corporate actions takes a lot of work and represents a substantial hidden cost for investors.

Endnotes

3 The shareholder’s lack of control over events affecting their investment will be looked at in more detail in Chapter 7. [return to text]

4 The significance of the 75% hurdle for special resolutions was demonstrated at the Northern Rock EGM in January 2008 when a number of rebel resolutions received the support of the simple majorities of shareholders represented, but failed because support fell short of the 75% level. As a rule, reporting on shareholder meetings in the press is strong on comment and short on detail. The most detailed source of information is likely to be the website of the company in question. [return to text]

5 This is available on the web at: http://delcode.delaware.gov/title8/c001/sc01/. The general distinction between corporate governance, a state matter, and securities trading, a federal one, has become less clear cut since the passing of the Sarbanes-Oxley Act in 2002, the biggest incursion of federal power into corporate law since the 1930s. These variations between the states are more than cosmetic. For example, states like North Carolina would allow creditors to make claims against shareholders who had received ‘excessive dividends’, limited liability notwithstanding. [return to text]

6 These include Florida, Georgia, Indiana, Virginia and Washington. [return to text]

7 Although company borrowing does not fall under the heading of corporate actions, technically speaking, and does not affect shareholders directly, as an alternative to share issues as a method of raising capital it merits the same kind of consideration by shareholders as real corporate actions. This area will be considered in more depth in the following chapter. [return to text]

8 ‘Corporate Action Processing, What Are the Risks?’ (Oxera, 2004) estimated that there were 935,200 corporate actions relating to equities that year, of which approximately two-thirds were North American and one-fifth European. [return to text]

9 Society for Worldwide Interbank Financial Telecommunication. Part of the increase is due to the recovery of stock markets from the bursting of the dotcom bubble. The volume of corporate actions...