A look at corporate actions at this time will give food for thought in several directions. As the financial institutions take stock, re-examining their points of reference, it will be interesting to see whether corporate action entitlements receive more of the limelight than they have up until now.
The corporate actions industry needs to improve its efficiency; what needs to change to affect this, and will the major players be able or willing to put up the investment necessary? As the balance of economic power shifts eastwards, what kind of corporate actions environment will investors meet with when they invest outside their own region? In sum, a better acquaintance with the current state of corporate actions will allow a greater understanding of changes in the securities industry.
Endnotes
1 For the 12 months from March 2003 there were estimated to be 935,000 equity corporate actions (‘Corporate Action Processing, What Are The Risks’, a study carried out by the consultancy Oxera on behalf of the Depository Trust and Clearing Corporation). Figures on the volume of complex actions and those with the potential to cause share price movements are from the same report. [return to text]
2 ‘Transforming Structured Securities Processing’ (Depository Trust & Clearing Corporation white paper, September 2007). [return to text]
Quick Guide to Locating Information on Specific Corporate Actions
1. Defining Corporate Actions
Investors may focus mainly on the purchase of securities and their re-sale but equities and debt securities are more than passive tokens of investment value. By means of corporate actions they acquire a life of their own, an ability to transform themselves and to make investors change their minds. Individual corporate actions for equities such as takeover bids or rights issues can have a significant effect on share prices. Over just a few years, the cumulative effect of a number of corporate actions can cause a share to undergo a complete metamorphosis.
The starting point of all corporate actions is the ownership of individual units of investment; shares, bonds or variations. For shares of common stock, the type of security on which we shall be concentrating chiefly, the overarching right is that of ownership of the company in question (the issuer) and from ownership spring the following specific rights:
1 To elect the board of directors
2 To vote for corporate actions that require shareholder approval
3 To share in corporate earnings in the form of dividends
4 To maintain the same proportion of the company’s common stock in the event of additional shares being issued
And, finally,
1 To receive a share of the residual assets of the company in the event of liquidation (which could be called the saddest corporate action of them all)
So, along with ownership come shared control, shared benefits and rules to protect the rights attached to each share. The shared control tends not to translate into power for the small investor or even large minority shareholdings and rules protecting the rights attached to each of a company’s shares do not necessarily protect the financial interests of the share’s owner. [3]
Further definitions
Definitions of “corporate action” vary depending upon whether the point of view is that of the issuer:
‘an event initiated by a company that affects its share,’ (Frances Maguire, The Banker, 1st June 2007)
‘A corporate action occurs when changes are made to the capital structure or financial position of an issuer of a security that affect any of the securities it has issued.’ (‘Transforming Corporate Action Processing’, Depository Trust & Clearing Corporation, 2003)
or the shareholder:
…where the owner of a security is given the opportunity to receive a benefit or participate in a reorganisation of the company.
A complete definition covering all types of corporate action may not be possible. The important point is that corporate actions all have their genesis in the entitlements that accompany owning the shares (no matter how few of them). It follows from this that, in order to put corporate actions into effect, comprehensive information about the ownership of all the shares concerned is required. This information is held in the company’s share register.
How are corporate actions decided?
For each company the workings of corporate actions will be set out in the articles of association. If one thought of a company as a country, the memorandum and articles of association would be the country’s constitution, the shares would be the voters and the place of Congress or Parliament would be taken by the shareholder meetings (annual or extraordinary general meetings). Although this looks like a “winner takes all” system of government, some proposals, known as “special resolutions”, require 75% support. [4] Proposals to change the memorandum and articles of association would be treated as special resolutions.
Chapter 8 will take another look at voting in shareholder meetings; how it works, how effective it is and moves afoot to improve the system.
Decisions on corporate actions or changes to the articles of association are not the only purpose of shareholder meetings; they also (for example) vote to approve the remuneration of directors, to elect directors, or re-elect them when their terms of office expire.
In the analogy of a country the directors are, of course, the government. In almost all circumstances it is they who make proposals on various corporate actions for the shareholder meetings to decide on.
Generally speaking, ensuring that a company has sufficient capital and cash to carry on its business successfully will be the responsibility of the company’s Chief Financial Officer (CFO) and its treasury department. Recommendations about items such as the dividend, share or bond issues and share buybacks will originate from this quarter. Patterns of organisation and chains of command vary from one company to the next, but a company’s annual report should explain how the treasury function is carried out.
Who writes the rules?
The picture of the sovereignty of shareholder meetings over the affairs of the company distorts reality by ignoring the importance of national (and international) legislation in regulating companies’ affairs. In the United Kingdom legislation in the form of Statutory Instruments (SIs) taking one or other of the various companies acts or other statutes as their authority have an all important effect on companies’ responsibility for corporate governance generally and corporate actions in particular. Companies also have to comply with regulation emanating from the Financial Services Authority (FSA), such as the Combined Code on Corporate Governance. Increasingly, this legislation and regulation is itself subject to Europe-wide policies in the form of EU directives.
In the United States, corporation law is mainly a state matter so there can be variations from one US state to the next. However, the situation is made simpler by the fact that a large proportion of American companies are incorporated in the State of Delaware (the state allows out of state incorporations and does not tax trading activities that take place outside