What is a Corporate Action?

A corporate action is an initiative by a publicly traded company thathas a material impact on the company and its shareholders. Corporate actions may involve a company’s name change, merger or acquisition with a third-party or issuing of a dividend. Corporate actions can be mandatory or voluntary. A mandatory action can leave the shareholder with no choice in their participation when the company board makes the decision for them. However, the board may stipulate a set of choices within a mandatory action for shareholders to choose from. Voluntary actions involve the shareholder who then decides whether to participate or not.

How does a Corporate Action Begin?

Publicly traded companies have a board of directors, each chosen to serve in specific positions. It is the directors who approve corporate actions and how they will be put to counterparties concerned with the company such as shareholders, bondholders or other stakeholders in the company.

Types

1. Mandatory – Mandatory corporate actions are dealt with by the board of directors and affects all the company’s shareholders. The governing body deals with all aspects of the dividend, while shareholders need do nothing other than collect the cash dividend on their shares. Other mandatory corporate actions include spin-offs, stock splits and mergers. Shareholders effectively give up power to the board to manage such decisions.
2. Mandatory (with options) – For corporate actions with different options for shareholders, the company may determine that a dividend is to be paid, but the shareholder may choose between a stock dividend or a cash dividend.
3. Voluntary – Voluntary corporate actions involve an activity that shareholders opt to be participants. Before moving forward with the intended action, shareholders must respond.

Examples of corporate actions include stock splits, dividend distributions, mergers and acquisitions, rights issues, stock buybacks, spinoffs, name or trading symbol changes and liquidation or bankruptcy.

Corporate actions can be of significant interest to shareholders, potentially signaling management’s strategy, long-term goals and effectiveness. In the next two lessons, we will first explain several different types of corporate action and then focus on one of the most well-known actions, share buybacks.