Corporate action

Quick definition

A corporate action is an action taken by a company that materially affects its shareholders, such as a dividend payment or a merger.

Key details

• A corporate action is a decision that typically requires sign-off by a company’s board of directors
• Corporate actions tend to be significant events that affect its operations and the value of its shares
• The date a corporate action is due to take place usually has to be specified in advance

What is a corporate action?

The Business Dictionary defines corporate action as a situation created by a company that affects its stakeholders. Often the situation creates some kind of change from the perspective of the stakeholders. Corporate actions are huge developments and often attract attention from a wide audience.

Given their material significance, corporate actions require the blessings of the company’s Board of Directors. In addition, companies follow a set procedure to initiate and execute the action. The urgency of corporate action depends on the objective of the action and whether it is voluntary or mandatory. In most cases, corporate actions require shareholders to sign them off beforehand.

Examples of corporate actions

Some examples of corporate actions include:

• Mergers and acquisitions – Companies choose to merge their operations with others for multiple reasons, from growth objectives to survival instincts. If a company is facing insolvency, merging assets with a healthier company enables the new company to survive harder periods. Major acquisitions can offer an opportunity to grow operations and even expand a business to a much larger playing field. Such an action could result in material events such as name changes, reconstitution of senior management, and so on. As such, key stakeholders must sign off first.
• A stock split and/or reverse split – Company management might strongly feel that its stock is undervalued or overvalued. In the case of undervaluation, the company undertakes a reverse split where a number of shares are merged, with the hoped-for result that the price gets pushed up. On the other hand, stock splits entail dividing stocks by a certain multiple, which effectively lowers the price of a single share.
• Dividend payment – This is another major corporate action that has a material effect on a company’s financial position. Often the stock of a company will rise once the company announces a cash dividend payment.
• Other critical corporate actions, include the issuance of new shares to existing shareholders – A spin-off is another corporate action that entails a company divesting some of its assets. Clearly, all of the actions are quite significant to the company’s financials and by extension to the stakeholders.

Important dates associated with corporate actions

Given the significance of corporate actions, there are important dates that companies must observe. We discuss them below.

• Announcement/declaration dates – The first two important dates that a company sets are the announcement date (in case of a rights issue or a spin-off) and declaration date (in case of a cash dividend payment). Usually, the Board of Directors shoulders the responsibility of releasing the announcement date.
• Record date – In case of a stock offering, rights issue, or stock split, the record date entails recording the ownership of a security. In case of a dividend payment, the record date is the date on which an investor must appear on the record of the company’s list of stockholders. This comes after the Ex-Dividend Date, where purchasers of a certain stock do not have access to dividends.
• Effective date – At this juncture, the corporate action is formalised and declared official. If the action involved stock issuance, this is the date where new shareholders are officially recognised.
• Ex-dividend date – Also knows as “Ex-date”. At this date, investors can trade shares without any trappings to the corporate action. For dividend payment, shareholders receive their checks at this point, hence the Payment Date.