Corporate action: Overview, definition, and example
What is a corporate action?
A corporate action is an event initiated by a company that affects its securities, shareholders, or bondholders. Corporate actions can include mergers, stock splits, dividend payments, acquisitions, and rights offerings. These actions are typically approved by the company's board of directors and may require shareholder approval.
For example, if a publicly traded company decides to issue a stock dividend, existing shareholders receive additional shares based on the number of shares they already own.
Why is a corporate action important?
Corporate actions are important because they impact a company’s financial structure, stock value, and shareholder rights. Investors need to be aware of corporate actions because they can affect investment returns, voting rights, and tax obligations.
For businesses, corporate actions help with restructuring, raising capital, rewarding shareholders, or complying with regulatory requirements. Proper communication and execution of corporate actions ensure transparency and maintain investor confidence.
Understanding corporate action through an example
Imagine a technology company announces a 2-for-1 stock split, meaning every shareholder will receive two shares for every one share they currently own. This increases the number of shares in circulation while reducing the price per share, making the stock more affordable to investors without changing the company’s overall value.
In another scenario, a manufacturing company decides to merge with a competitor. The corporate action results in shareholders of the acquired company receiving new shares in the merged entity, while the acquiring company expands its market presence and operations.
An example of a corporate action clause
Here’s how a corporate action clause might appear in a shareholder agreement:
“The Company reserves the right to undertake corporate actions, including but not limited to mergers, stock splits, dividends, and reclassifications. Shareholders shall be notified of any corporate action in accordance with applicable securities laws and regulations.”
Conclusion
Corporate actions play a crucial role in shaping a company’s financial structure, shareholder value, and strategic direction. Whether through dividends, mergers, or stock splits, these actions influence investors and require careful execution to ensure transparency and compliance with regulations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.