Unit 21: Corporate Actions

A reverse split can be

even or uneven split 1 for 2, 1 for 3 uneven: 2 for 3, 4 for 5

Forward split can be characterized as either

even split or an uneven split.

In a proxy contest,

everyone who participates must register with the SEC. Also anyone who is not a direct participant but who provides stockholders

Forward split

increases the number of shares and reduces the price without affecting the total market value of shares outstanding an investor will receive more shares, but the value of each share is reduced. The total market value of the ownership interest is the same before/after the split

The Securities and Exchange Commission (SEC) requires that notice of corporate actions be given for all of the following except

interest payments on the issuer's debt instruments Payment of bond interest is an obligation and therefore not considered a special corporate action notice. Reverse splits and warrants are not regular happenings, and even though some companies have paid dividends regularly, those dividends are not guaranteed and can be halted. Hence, these events would be considered special corporate actions and therefore require notification to the marketplace.

With a reverse split

investors own fewer shares at more per share. The cost basis per share will also increase. The total value of the position is unchanged by the split.

Proxy solicitation

offers to let a third party vote the shares for controversial company proposals.

With stock dividends, the net result is that shareholders now

own more shares after the distribution, but the cost per share is adjusted downwards.

Mergers, acquisitions, and spin offs are generally not taxable events because:

shareholders receive stock. However, these offers may be a mix of stocks and cash payments. The cash portion is taxable as a capital gain/loss.

A corporation divests itself of all of the shares of another company it owns. This is known as

spin off

Which of the following would not require delivery of notice?

An interest payment on a corporate bond Stockholders must receive notice from the issuer in the event of actions to shareholders, chiefly those that are unscheduled or unpredictable. Some examples are stock splits, dividend payments, and rights or warrant offerings. A scheduled interest payment on a corporate bond thus does not require delivery of notice.

stock dividends

If a company wishes to reinvest its profits for business purposes rather than to pay cash dividends, its board may declare a stock dividend.

All of the following would be included in a notice of corporate action regarding a stock dividend except 1. The stock's issue date 2. declaration date 3. record date 4. rate of dividend

1

In a proxy contest, which of the following must register with the Securities and Exchange Commission (SEC)?

1. All persons participating in proxy solicitation 2. All persons providing shareholders with unsolicited advice

Under what circumstances could a member firm holding stock in street name vote the shares as it sees fit?

1. If the customer does not return the signed proxy statement by the 10th day before the shareholders' meeting 2. If the matters to be voted on are of minor importance

The following should be included in the notice:

1. Title of security 2. Date of declaration 3. Date of record for determining holders entitled to receive the distribution or to participate in the split 4. Date of payment/distribution 5. Cash dividend - amount paid 6. for stock dividend - rate of the dividend 7. For split - rate of the distribution

An investor owning 500 shares of stock worth $40 per share receives notice that the stock will undergo a split. When the split is completed, the investor owns 400 shares of stock worth $50 per share. The split must have been

1. a reverse split. 2.an uneven split.

Issuers are required by the SEC to give notice of corporate actions to shareholders for such actions like:

1. cash dividends 2. stock dividends 3. forward/reverse split 4. rights/warrants offering

Notice should be given no later than

10 days before the record involved, or in case of a rights subscription or other offering if giving 10 days advance notice is not practical, on or before the record date and in no later than the effective date.

All of the following are considered unique or nonstandard corporate actions except 1. 3:1 stock split. 2. tender offer 3. merger. 4. takeover.

3:1 stock split

Tender offer

An offer to buy a security directly from the owners of the security. They make a tender offer on their own debt as a way to retire the debt early.

Which of the following would lead to a standardized cost-base adjustment for stockholders?

Dividends. Scheduled, common events such as dividend declarations, issuance of rights and warrants, and forward and reverse stock splits are accompanied by standardized adjustment of the stock's cost base. Unique events such as corporate mergers, takeovers and spin-offs are dealt with in a nonstandardized case-by-case manner that depends on the individual circumstances. Ideally, the outcome is what is best for the stockholder and the company.

Which of the following describes the results of a 1 for 2 reverse stock split?

Half as many shares at twice the original price If a stock price has become too low, for example for listing to continue on an exchange, a corporation may carry out a reverse stock split. In a 1:2 reverse split, the price of the stock is doubled, but the number of shares outstanding is halved. Any stock split, forward or reverse, must leave the total value of the outstanding stock unchanged before and after the adjustment.

Is stock dividend taxable?

No. But the adjusted cost per share will impact the tax consequences when the shares are sold.

Acquisition

One company buying another. Shareholders of the company that was acquired will receive shares of the company that did the acquiring. their old shares are canceled.

An investor has some stock held in street name and has just received proxy statements forwarded by the broker-dealer for an upcoming shareholders' meeting. If the investor wishes the shares to be voted as recommended by the issuer's management, which of the following must the investor do?

Sign and the proxy statements by the 10th day before the meeting

If a broker-dealer holds the stock of an investor in street name, which of the following must be forwarded to the investor promptly upon receipt?

Stock a broker-dealer holds in street name will be the subject of financial reports, proxy statements, and other material generated by the issuer that is important for the investor, the beneficial owner of the stock, to have. Accordingly, the broker-dealer must forward the material to the investor promptly.

Mr. McCann owned 100 LMN at $10 per share when the board of directors (BOD) declared a 1:4 split. What will happen to the share price and the number of shares?

The share price will go to $40 and will own 25 shares. For reverse splits the price goes up and the number of shares goes down.

Spin off

a corporation forms a subsidiary company out of some of the corps assets and operations.

Proxy voting

a grant of authority by a shareholder allowing another individual to vote his or her shares

Buybacks and tender offers are normally

cash offers

Buybacks and tender offers are almost always:

cash offers and are treated as a sale of the security resulting in a capital gain/loss.

If proxies are solicited,

the SEC requires a company to give stockholders information about the items to be voted on and allow the SEC to review this information before it sends the proxies to stockholders.

In an even split,

the investor will always be given a certain # of shares for each share owned: 2 for 1, 3 for 1.

QUIZ: A shareholder had arranged to vote by proxy at the corporation's annual shareholders' meeting, but later decided to vote the shares personally. All of the following statements regarding this situation are true except

the shareholders must accept the proxy's decision. If a shareholder decides not to abide by the decision to assign a proxy to a particular person, the decision can easily be abrogated. The shareholder may still abstain, may vote the shares personally or by mail or online, or may reassign the proxy to another.

In an uneven split,

the split can be 3 for 2, 5 for 4.

A proxy is automatically revoked if

the stockholder attends the shareholder meeting or if the proxy is replaced by another proxy that the stockholder executes at a later date.

Why would a company do a buyback?

to reduce # of shares available and increase the value of shares available. This approach to increasing shareholder value is becoming more popular as corporations prefer share buybacks to paying dividends.

Buyback

when a company buys its own outstanding shares in the open market from existing shareholders.

Reverse Split

when a stock becomes too low, it looks undesirable. Might not meet the listing criteria of a stock exchange that it is listed on and delisting can occur.

Merger

when two companies or more combine operations and assets. both receive new shares of combined company and their shares of the old company are canceled.