Types of Corporate Actions
With settlement mechanics covered, we shift to the other half of this unit: corporate actions. These are events initiated by public companies that directly affect their securities and shareholders.
What Is a Corporate Action?
- A corporate action is an event initiated by a public company that affects its securities or shareholders
- Some corporate actions are mandatory (shareholders have no choice), while others are voluntary (shareholders decide whether to participate)
- Understanding the difference between mandatory and voluntary actions is a key exam distinction
Corporate Actions at a Glance
| Corporate Action | Definition | Mandatory or Voluntary? |
|---|---|---|
| Stock split | Increases shares outstanding; reduces price proportionally | Mandatory |
| Reverse stock split | Decreases shares outstanding; increases price proportionally | Mandatory |
| Stock buyback (repurchase) | Company buys back its own shares from the open market | N/A - company initiated |
| Tender offer | Public offer to buy shares from shareholders at a specified price (usually a premium) | Voluntary for shareholders |
| Exchange offer | Offer to exchange one security for another (e.g., new bonds for old bonds) | Voluntary for shareholders |
| Rights offering | Existing shareholders get the right to purchase additional shares at a discount before the public | Voluntary (exercise or sell the rights) |
| Merger | Two companies combine into one entity | May require shareholder vote |
| Acquisition | One company purchases another | May require shareholder vote |
Mandatory vs. Voluntary
Mandatory actions happen automatically; shareholders do not need to take any action:
- Stock splits and reverse splits apply to all shares
- The shareholder's total investment value does not change
Think of it this way: A stock split is like exchanging a $10 bill for two $5 bills. You did not choose it, but you still have the same amount of money.
Voluntary actions require the shareholder to make a decision:
- Tender offers: Accept the offer and sell shares, or decline and keep them
- Rights offerings: Exercise the rights, sell the rights, or let them expire
- Exchange offers: Accept the new security or keep the existing one
Shareholder vote required: Some actions need approval before they proceed:
- Mergers and acquisitions typically require shareholder approval
- Shareholders vote via proxy (covered in a later section)
Exam Tip: Gotchas
- Stock splits are mandatory; tender offers and rights offerings are voluntary. The mandatory vs. voluntary distinction is frequently tested.
- A stock split changes the number of shares and the price per share, but NOT the total value of a shareholder's position.
Stock Buybacks
- The company uses its own cash to repurchase shares on the open market
- Reduces the number of shares outstanding, which increases earnings per share (EPS)
- Does NOT require shareholder action; the company initiates and executes the repurchase
- Often signals that management believes the stock is undervalued
Exam Tip: Gotchas
- A buyback is NOT a voluntary corporate action for shareholders. Shareholders do not decide whether to participate. The company buys shares on the open market like any other buyer.
- Buybacks reduce shares outstanding, which increases EPS even if total earnings stay the same.