Corporate Actions Glossary

Corporate Actions Glossary

What is a Corporate Action?

A Corporate Action is an activity initiated by a company that affects the nature and/or quantity of stock that you hold. Some actions may require a response from you while others may not.  It is important that you understand how a particular corporate action may affect your holding.

There are numerous types of Corporate Action. The main ones are:

What is a Takeover?

A takeover occurs when one company (usually a larger company, known as the Bidding company) attempts to take control over another company (usually a smaller company, known as the target company).

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What is a Rights Issue?

A Rights Issue is a mechanism by which companies raise additional capital to invest, expand or reorganise. The company issues existing shareholders at a specified date (ex date) tradable rights, which give the holders the right (but not the obligation) to purchase new shares - usually at a discount to the market price. These rights can be also be sold in the market or allowed to lapse and if lapsed, the holders may be entitled to lapsed rights proceeds depending on the success of the event and market conditions.

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What is an Open Offer?

Those clients who hold on ex date of an open offer will be entitled to purchase more Ordinary shares in the company at a price normally discounted to the market share price, in proportion to their existing holding.

Entitlements from an Open offer are not tradable and therefore an open offer is only available to existing shareholders.

An Open Offer gives only 2 options: Take up your entitlement or Lapse your entitlement. If you allow your entitlement in an Open Offer to lapse you will not receive any lapsed proceeds.

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What is a Conversion Opportunity?

A company sometimes issues stock that is convertible, such as preference shares or subscription shares that can be converted into other stocks, such as ordinary shares. The company usually gives the holder regular opportunities to convert. The company can either set regular opportunities to convert or give the opportunity to convert at any time (known as a rolling conversion opportunity). This is an elective event, which means you will have to reply

in order to take part in the conversion. Usually, the terms of the conversion are based on the share price, making the terms subject to change.

 If the opportunities are 'rolling' or monthly, the Corporate Action Team will diarise and write out to you at set opportunities, for example quarterly. However, if you wish to respond out with these set opportunities then please call 0845 941 2222* with your instruction. We will make the instruction on a best endeavours basis, depending on how much notice the Company require when an election to convert is made.

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What is a Return of Capital?

Return of Capital refers to Company returning surplus cash to shareholders. It is a transfer of value from the company to the owner (shareholder). For public companies the capital owners who receive the payments are the shareholders of the company.

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What is a Subdivision?

A Subdivision is where the number of shares in issue are  increased by a set ratio. In turn the nominal value of the shares and the market price per share of the shares will decrease by the same ratio.

A company will split each ordinary share into a set number of new ordinary shares, for example a shareholder may receive 5 new ordinary shares for 1 existing ordinary share. The nominal value of the shares will also be adjusted and in a 5 for 1 subdivision, if the shares were ordinary 50p shares then they would become ordinary 10p shares.

The market price per share will decrease to reflect that each share is worth a smaller part of the company. For example, before the Subdivision each ordinary 50p share might have been worth £1.00, and after the 5 for 1 subdivision they would have a value of 20 pence (subject to normal market movements).

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What is a Scheme of Arrangement?

A scheme of arrangement is a mandatory agreement between a company and either the holders of its securities or its creditors in which they receive cash or new stock in exchange for their existing holding.

The company may offer alternative options, for example the default option is to receive a combination of cash and stock but shareholders can elect to vary the proportion of cash and stock received, the scheme is still mandatory however and all shareholders existing shares will be exchanged.

In the event of a stock scheme of arrangement event, shareholders may have fractional share amounts. 

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What is a Merger?

A merger occurs when two or more companies decide join together to make a new company. Both companies will be of similar size so that one does not dominate the other when combined. Existing stockholders of both companies involved retain a shared interest in the newly formed company. This is a mandatory corporate action, which means once approved, event will take place regardless of your participation. The amount of shares you will receive in the new company usually reflect the value of the new company, compared to that of the two old companies. 

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What is a Demerger?

A company 'de-merges' when it splits into two or more companies, these will not necessarily be new companies.  The value of each of the new companies usually reflects the value of the old company.  Again similar to a merger the two new companies may well be worth more than the old company, however if the market thinks the de-merger will not benefit shareholders the new companies could be worthless.

You can find out more details on corporate action on our Ask A Question site.

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