Corporate Action

Corporate action refers to an event that that brings material change to a company and affects its stakeholders. The corporate action is a decision or an event that leads to a significant material change in the company. The shareholders included are both common and preferred, as well as bondholders. The corporate action events are approved by the company's board of directors. In some events even the shareholders are permitted to vote. The bondholders of a company are also subject to the effects of corporate actions, which might include calls or the issuance of new debt. Some of the examples of corporate actions are splits, dividends, mergers, acquisitions and spinoffs.

There are primary reasons for the use of corporate actions in a company. The first reason is to return profits to shareholders. A classic example of this is cash dividends where a public company declares a dividend to be paid on each outstanding share. Another example is bonus where a shareholder is rewarded. The next reason is to influence the share price. Some of the examples of corporate actions under this are stock splits or reverse stock splits and buybacks. The third reason is corporate restructuring. Companies go for restructuring because it increases profitability.

There are various types of corporate actions. Mandatory corporate action is an event that is initiated by the corporation by the board of directors that affects all shareholders. Cash dividend is an example of this type. The shareholders should mandatory participate in this event. Voluntary corporate action is an event where the shareholders elect to participate in the action. Tender offer is an example. The last type is the Mandatory with choice corporate action wherein it is a mandatory corporate action where share holders are given a chance to choose among several options. A cash/stock dividend option with one of the options as default is an example.

Questions

• What is a corporate action?
• What are its types?