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First published as hardback in Great Britain in 2008, this paperback edition published in 2012.
Copyright © Harriman House Ltd
The right of Francis Groves to be identified as the author has been asserted
in accordance with the Copyright, Design and Patents Act 1988.
ISBN: 978-0-85719-215-8
British Library Cataloguing in Publication Data
A CIP catalogue record for this book can be obtained from the British Library.
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No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employer of the Author.
About the Author
Francis Groves studied modern history at the London School of Economics and has many years of experience working for legal and financial publishers including, Reuters, the Financial Times and Butterworths. He has written on overseas property investment and created financial literacy training materials. The interaction of politics and finance is a particular interest for him.
Francis is also the author of Exchange Traded Funds: A Concise Guide to ETFs (Harriman House, 2011).
Preface
What the book covers
Corporate actions are normally considered as incidental to the business of investing and marketing investments, but the aim of this concise guide is to look at the subject of corporate actions in the round, defining what corporate actions are, listing and describing the main corporate actions and showing how individual corporate actions are applied to investors’ holdings of securities. This will give an overview of the way in which the corporate actions processing function works both in the UK and other important global markets. Detailing all the differences between jurisdictions is beyond the scope of this guide, though the UK is taken as a starting point to help describe and explain significant national distinctions, particularly for the United States and the rest of the European Union.
Who the book is for
The guide is designed to be an introduction to corporate actions for investment industry practitioners in general. Those starting out in corporate actions processing will find it a helpful outline, but it is also designed to be useful for all who encounter corporate actions tangentially in disciplines such as fund management or financial advice provision. Different industry participants have differing interests in corporate actions, and for the sake of consistency the guide is (mainly) written from the point of view of the beneficial owners of securities.
How the book is structured
Those who simply require a handy and straightforward introduction to specific corporate actions will find the quick guide to the content and the glossary of corporate actions terms especially useful.
The first three chapters deal exclusively with equity corporate actions. These chapters cover definitions of a corporate action and the legal framework(s) underpinning corporate actions, followed by a look at the most significant actions one by one, and then a detailed examination of the staging of some of these. The corporate actions of debt securities are given separate treatment in Chapter 11.
In Chapters 4, 5 and 6 the focus moves from the corporate actions themselves to the industry that has grown up to process them. These three chapters cover respectively the corporate actions industry, its efficiency and its progress (recent and future).
Chapter 7 looks at the impact of successive corporate actions on one particular share (Encore Oil) and shareholdings in it. This is followed by a look at the scope investors have for influencing such events through shareholder voting.
The final chapter looks at how corporate actions are treated in the context of stock indices, stock charts and a number of more complex investments.
Although change in the corporate actions industry is sometimes slow (it has been described as glacial) the process is always evolving, and so this guide can only aim to be a snapshot of the state of affairs at the time of writing, together with an outline of some of the forces for change that are at work. The aim has been to provide sufficient detail to give the reader a working model that is practically helpful in navigating the corporate actions universe.
Introduction
Corporate actions have been sidelined for too long and deserve to be treated with more respect. No type of investment security can be fully understood without knowledge of its corporate actions. All corporate actions have implications for the sustainability of an investment’s performance, but more beguiling investment preoccupations put them into the shade.
The corporate actions processing industry is in deeper shadow than even the actions themselves. Together with bank clearing and exchange settlement systems, the administration of corporate actions is one of the key co-operative functions tying our highly competitive global finance industry together. In the financial markets of the developed world the efficiency and “risklessness” of corporate actions processing is entirely taken for granted. Yet the volume of complex corporate actions and a common sense estimate of the likelihood of mistakes occurring suggest that industry practitioners and investing clients may be deluding themselves.
Figures for the annual number of equity and debt security corporate actions stand at approximately one million and three million respectively. [1] For equities it is estimated that corporate actions that can be classed as complex comprise 10-15% of the total. It has also been estimated that every year 18,000 corporate actions have the potential to cause significant share price movements in the world’s 25 most important stock markets. Although this represents just a small percentage of the total number of corporate actions, it nevertheless equates to several dozen price moving corporate events each trading day. In the realm of debt securities the payment events of structured debt caused a huge increase in the volume and complexity of corporate actions in the 2003-07 period. [2] Corporate actions processing faces challenges in delivering entitlements to investors accurately and in good time and meeting these challenges is important to the securities industry. Despite this corporate action practitioners have been left to themselves, carrying on their craft quietly behind a high wall.
If knowledge of corporate actions brings us to fully understand the securities they relate to, some familiarity with corporate actions processing is important in gaining an insight into the workings of the securities industry as a system. With the exceptions of accountancy and financial regulation, no other activity involves as many kinds of investment industry participant as corporate actions processing.
The current state of corporate actions underscores the incompleteness of the globalisation of financial markets. The corporate actions industry is global