An introduction to corporate actions
22 April 2021
When you’re investing in companies you start to see something new: corporate actions.
These are exactly what they sound like—actions a corporation takes. The reason you hear about them is that corporations tell their shareholders whenever they do something that may affect the share price. After all, as a part-owner of a company, you deserve to know about big decisions that might affect your investment.
Corporate actions are split into two main categories:
mandatory actions, where shareholders have to participate
voluntary actions, where shareholders get a choice about whether or not they participate.
Public companies are required to tell people about their corporate actions. They typically do this by making a market announcement on an exchange.
We thought we’d run through some of the more common corporate actions, as well as a few we’ve seen in the last few months.
Dividends—money in your pocket
One of the more common corporate actions is when a company gives some of its profits back to its shareholders, in the form of dividends.
It’s usually given as an amount per share, so the more shares you own in a company or ETF paying dividends, the higher your dividend is. We’ve written more about dividends here.
Dividends are a mandatory action—the company is going to give dividends whether you want it or not! What you do with that money, of course, is up to you. You can choose to reinvest by buying more shares if you want.
Rights issues and share purchase plans
Companies tend to issue new shares in order to raise money. Rights issues and share purchase plans are when companies do this by giving their existing shareholders the opportunity to buy more shares. One important thing to remember about these is that companies generally create new shares in these corporate actions.
The new shares may be offered at a lower rate than the current market share price, although this isn’t always the case.
The main difference between a rights issue and a share purchase plan is in how many shares you can buy. In a rights issue, you can buy shares in proportion to the shares you already own. For example, a company might say that you can buy 1 new share for every 4 shares you already hold.
Share purchase plans (SPP), on the other hand, are sometimes capped at a fixed amount. Rather than a proportion of your existing shares, SPPs will have a total amount you can invest in new shares.
Functionally, the outcome is similar: you get the opportunity to buy new shares directly from the company.
Acquisitions—buying another company
An acquisition is when a company buys another company. The second company might cease to exist entirely, or it might operate on its own, but give all its profits to the first company.
All of the acquired company’s customers are now the bigger company’s customers, and all of its profits (if there are any) are now the bigger company’s profits (but keep in mind this can also mean all of its risks, including any losses and debts, are now the bigger company’s too).
And if the company you’re invested in gets acquired, this can be good news! Companies acquire other companies using cash, shares or both. So you might get cash for your shares, or you might get some shares in the larger company (which now includes the company you initially invested in).
Acquisitions are sometimes mandatory, but not always. Companies generally have their shareholders vote on a decision to acquire another company, or get acquired by another company.
Mergers—when two become one
Mergers are closely related to acquisitions, but with one big difference: rather than have one company swallow up another one, a merger is two companies combining. When this happens, the two companies effectively stop existing, and they get replaced with a third, bigger company.
The goal of a merger is often to create a bigger, more valuable company through things like economies of scale and the ability to collaborate. But these aren’t guaranteed to make the new company more successful—they can run into problems like poor cultural fits, or inability to reduce costs.
If the merger is successful, your shares may become more valuable over time—but there are also more shares being traded, so each individual share may be worth less, especially in the short term.
Splits and consolidations
Sometimes, a company may want to increase or decrease the price of each share, without changing the overall value of the company. Splits are one way to do this.
When a company has a share split, it increases the number of shares being traded, but reduces the price of each share. So for example, if you had one share worth $100, you would now have 2 shares worth $50 each. Your overall investment is the same but there’s more liquidity (liquidity is how easy it is to turn your investment back into cash!).
Another version of this is called a consolidation. A consolidation is essentially a split, but in reverse. Instead of more shares with lower value per share, you get fewer shares, with a higher value per share.
Just the beginning
These corporate actions are just some of the more common corporate actions. There are lots of other actions that companies can take, that they have to announce to the market. Keep an eye on the shares you own for any new corporate actions! For more information on what corporate actions we offer on Sharesies, check out our help centre.