Corporate Action and The Different Types of Corporate Action

Corporate action comprises crucial decisions made by companies, like mergers, acquisitions, stock splits, dividends, and rights issues. These choices greatly impact a company's direction and relationships with shareholders. Knowing about these actions is key to understanding how businesses grow and change in the world of commerce and finance.

In investment banking, corporate action plays a big role. Investment bankers pay close attention to these moves because they affect how companies are valued and seen in the market. Whether it's mergers, acquisitions, or dividends, these actions influence investment plans and strategies, making it important for bankers to understand them well.

This article will provide a clear understanding of corporate action types and their importance in both business and investment banking landscapes.

What is Corporate Action?

Corporate Action refers to significant actions undertaken by a company, impacting stakeholders like shareholders and investors. These actions have far-reaching implications for shareholder equity, voting rights, and overall investment value, necessitating a thorough understanding and effective management by investors, financial institutions, and the company itself. These actions are broadly classified into two types: Mandatory and Voluntary Corporate Actions.

Mandatory Corporate Action

These are non-discretionary events executed by a company without needing explicit consent from shareholders. Examples include stock splits, mergers, acquisitions, and rights issues. Shareholders are obliged to participate based on predefined conditions or legal requirements, without the option to opt in or out of these actions.

Voluntary Corporate Action

Contrarily, Voluntary Corporate Actions provide shareholders with the choice to participate or abstain from a proposed corporate event. Dividend payments, tender offers, rights offerings, and stock buybacks fall under this category. Shareholders have the freedom to decide whether to sell their rights, engage in buyback programs, or accept tender offers based on terms offered by the company.

It determines the level of control and decision-making power they have concerning different corporate events initiated by the company, influencing their involvement and potential impact on their investments.

Different Corporate Actions Explained

Here's a breakdown of different Corporate Actions:

Stock Splits

A Stock Split divides a company's current shares into several shares. For example, in a 2-for-1 split, investors receive an extra share for each share they own. This action doubles the number of shares for each investor but lowers the share price.

Despite the increase in quantity and decrease in price, the total market value of the company remains the same. Companies typically opt for stock splits to make their shares more affordable for investors, potentially increasing liquidity and trading activity in the market.

Dividend Distributions

Dividend Distributions are payments made by companies to their shareholders from their profits. These payments can be in the form of cash or additional shares. Cash dividends involve a set amount of money per share owned by the shareholder, providing them with a direct monetary return on their investment. 

Alternatively, companies may issue dividends in the form of additional shares, known as stock dividends. This rewards shareholders by increasing their ownership in the company without the company spending cash.

Mergers and Acquisitions

Mergers refer to the blending of two companies, combining their assets, operations, and resources to form a single, new entity. It's akin to a partnership where both companies agree to work together as equals, resulting in a new, unified organisation. In contrast, Acquisitions occur when one company purchases another outright. 

Here, one company, known as the acquiring or parent company, assumes control over the acquired or target company. This could happen for various reasons, such as expanding into new markets, gaining access to new technologies or products, or even removing a competitor from the market. 

Rights Issues

Rights Issues are an offering made by a company to its existing shareholders, granting them the chance to buy additional shares at a discounted price compared to the prevailing market rate. This opportunity is usually offered in proportion to the number of shares already held by each shareholder. 

Companies opt for Rights Issues to raise capital from their existing shareholders without involving external investors or incurring additional debt. By offering shares at a discounted rate, companies aim to incentivise their shareholders to invest more in the company, providing funds for various purposes like expansion, debt repayment, or new investments.

Contingent Value Rights (CVRs)

Contingent Value Rights (CVRs) are special rights granted to shareholders that offer additional benefits based on specific future events. These rights might be attached to an acquisition or merger deal, typically tied to specific milestones or achievements. 

For instance, if a pharmaceutical company acquires another company with a promising drug in its pipeline, CVRs might be issued to the acquired company's shareholders. The CVRs entitle shareholders to receive additional payments or benefits if the drug achieves certain regulatory approvals or sales targets within a specified timeframe. CVRs provide shareholders with the opportunity to potentially benefit from the success of a particular asset or event.

Spinoffs

Spinoffs occur when a company decides to separate a part of its business into a new, independent entity, creating a distinct company out of a division or subsidiary. These new entities operate independently from the parent company. Shareholders of the parent company often receive shares of the newly formed company in proportion to their holdings in the parent company. Spinoffs can allow companies to focus on their core businesses, unlock value in underappreciated divisions, or streamline operations.

Name or Trading Symbol Changes 

Companies might opt to change their name or trading symbol for various reasons, such as rebranding, mergers, acquisitions, or strategic shifts in business focus. Name changes usually reflect alterations in the company's identity and branding, or to align with new market strategies. Similarly, trading symbol changes occur to signify corporate changes, making it easier for investors to identify the company in the stock market.

Liquidation

Liquidation is the process of closing down a company's operations, selling its assets, paying off its debts, and distributing any remaining funds to its shareholders. This typically happens when a company is insolvent, unable to pay its debts, or when it decides to cease operations. Liquidation can be voluntary, as decided by the company's management or shareholders, or it can be forced through bankruptcy proceedings initiated by creditors.

Conclusion

Corporate Action is like a company's compass, guiding important choices that shape its path in the business world. These actions, whether it's mergers, dividends, or other changes, define how companies grow and affect their value for everyone involved. 

Getting certified, especially through programs like the Certified Investment Banking Operations Professional Course from Imarticus Learning, can really boost your career in banking. This certification isn’t just a fancy addition to your resume; it’s a deep dive into how Corporate Actions work alongside other crucial aspects of banking operations. So, if you're eyeing a thriving career in banking, this certification might just be the ticket to get you there.