Types of Corporate Action

Investors may hear from a company from many angles. Here are several reasons.

1.             Stock Split

A stock split increases the number of shares outstanding by dividing existing shares, reducing the share price while maintaining the total market value. Companies do this to make shares more affordable and improve liquidity. For example, a company whose share price is trading at $200 each announces a 4-for-1 stock split. An investor holding 10 shares before the split will own 40 shares after the action, each trading at $50 per share. 

2.             Reverse Stock Split

A reverse stock split reduces the number of shares outstanding by merging existing shares, increasing the share price while maintaining the total market value. Companies use this to meet exchange listing requirements or enhance the perception of stock value. An investor holding 20 shares trading at $5 each ahead of a 1-for-2 reverse stock split will own 10 shares trading at $10.

3.             Dividend Payment

A company distributes a portion of its earnings to shareholders as dividends, either in cash or additional shares. This rewards investors and can signal financial stability. Dividends may be held stable over time or may increase at a steady and predictable amount. But they can also increase because of company growth and success, which is appealing to investors.

4.             Share Buyback (Repurchase)

A company buys back its own shares from the market, reducing the number of shares outstanding. This can increase earnings per share (EPS) and signal confidence in the company’s future. We will dig down into the motivations behind buybacks in the next lesson.

5.             Merger & Acquisition (M&A)

A merger combines two companies into one, while an acquisition occurs when one company takes over another. These actions aim to create synergies, expand market share, or enhance competitiveness. They can also occur when a company seeks to quickly acquire technology, supply chains or some other expertise held by the target company.

6.             Rights Issue

A company offers existing shareholders the right to buy additional shares at a discounted price to raise capital. This can fund expansion but may dilute ownership if new shares are not purchased.

7.             Spin-Off

A company creates a new independent entity by separating a division or subsidiary. This allows the parent company to focus on its core business while unlocking value for shareholders.

8.             Tender Offer

A company or investor offers to purchase shares from existing shareholders at a premium price, often to gain control or increase ownership. Shareholders can choose to accept or decline the offer.

9.             Initial Public Offering (IPO)

A private company issues shares to the public for the first time, becoming publicly traded on a stock exchange. This raises capital and increases market exposure but comes with regulatory and reporting requirements.

10.          Follow-On Public Offering (FPO)

A publicly traded company issues additional shares to raise more capital after its IPO. This can dilute existing shareholders but helps fund expansion or reduce debt.

11.          Delisting

A company removes its shares from a stock exchange, either voluntarily or due to failure to meet listing requirements. This reduces liquidity and transparency but may reduce compliance costs.

12.          Liquidation

A company sells its assets to pay off liabilities before closing permanently. Shareholders receive any remaining funds after creditors are paid.

13.          Corporate Restructuring

A company reorganizes its business structure, operations, or financial setup to improve efficiency and profitability. This may involve layoffs, divestitures, or changes in debt structure.

14.          Bonus Issue (Stock Dividend)

A company issues additional shares to existing shareholders for free, based on their holdings. This increases the number of shares outstanding but does not change the company’s market value.

15.          Warrant Issue

A company issues warrants, giving investors the right (but not the obligation) to buy shares at a predetermined price within a specified period. This can raise capital and attract investors without immediate dilution.

16.          Debt-to-Equity Conversion

A company converts outstanding debt into equity shares, reducing liabilities and strengthening the balance sheet. This is often used during financial distress or restructuring.

17.          Special Dividend

A one-time, non-recurring dividend issued by a company, usually when it has excess cash or after a significant event like an asset sale. It provides an additional reward to shareholders.

Conclusion: There are many reasons as you can see that a company may need to communicate through corporate actions with its shareholders. Some are more important than others, while several will require a response from owners of the stock.