Training Material - Corporate Actions

1 What Are Corporate Actions?

• Any event initiated by a corporation that impacts its shareholders and
creditors.

• Some Corporate Actions may affect only one security issued by the issuer;
others may affect many or all of the securities issued.

• Corporate Actions can pertain to either equity or debt securities, although

there are some differences in the action types that apply to each.

• Some corporate actions are mandatory, others are voluntary. A mandatory

action is one in which the holder of the security has no choice regarding the
change in status of his or her shares. Most mandatory actions happen
automatically, with no action required on the part of the holder. A stock split
is an example of a mandatory action. A voluntary action is one in which the
holder has a choice to make about how the action will affect the status of his
or her shares. Usually, there is some action required on the part of the holder
in order to participate in the action.

• Check corporate actions in Bloomberg

For example
If you want to look at all historical corporate actions for IBM Equity in
Bloomberg
You type IBM Equity <GO>
CACS <GO>
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If you want to see all corporate actions

You type CACT <GO>

2 Types of Corporate Actions

2.1 Cash Dividend
• Dividends are distribution of company’s earnings to shareholders

• Dividends are declared by board of directors

• Dividends take two forms: Cash dividend and stock dividend

• Three important dates for dividends

o Announcement Date (Declaration Date)

- The specific day a company announces that its stocks will be
paying dividends
- The amount of the dividends will also be announced on this
date
o Ex-Dividend Date
- The first date on which a security is traded without entitling the
buyer to receive distributions previously declared
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-
In terms of fund accounting, if we hold the equity in our book
as of Ex-Date (even if we sold on Ex-Date, but not settled and
transferred title), we are entitled to the dividend announced.
- Book accrued dividend at Ex-Date
o Payment Date
- The date on which the announced dividend is paid out to
shareholders
- In terms of fund accounting, when we receive cash payment on
Payment Date, we book cash dividend and reverse the entry for
previously accrued dividend

2.2 Stock Dividend

• A dividend paid as additional shares of stock rather than as cash

• Also known as a "scrip dividend"

• If dividends paid are in the form of cash, those dividends are taxable. When a
company issues a stock dividend, rather than cash, there usually are not tax
consequences until the shares are sold

• Companies may decide to distribute stock to shareholders of record if the

company's availability of liquid cash is in short supply. These distributions are
generally acknowledged in the form of fractions paid per existing share. An
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example would be a company issuing a stock dividend of 0.05 shares for each
single share held

• In terms of fund accounting, e.g. 5% stock dividend, at Ex-Date, we adjust the

number of existing shares by 1.05 times, and adjust the cost by 1/1.05.

2.3 Stock Split and Reverse Stock Split

• A stock split is a decision by the company's board of directors to increase the
number of shares that are outstanding by issuing more shares to current
shareholders. For example, in a 2-for-1 stock split, every shareholder with one
stock is given an additional share. So, if a company had 10 million shares
outstanding before the split, it will have 20 million shares outstanding after a
2-for-1 split

• A stock's price is also affected by a stock split. After a split, the stock price
will be reduced since the number of shares outstanding has increased. In the
example of a 2-for-1 split, the share price will be halved. Thus, although the
number of outstanding shares and the stock price change, the market
capitalization remains constant

• A stock split is usually done by companies that have seen their share price
increase to levels that are either too high or are beyond the price levels of
similar companies in their sector. The primary motive is to make shares seem
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more affordable to small investors even though the underlying value of the
company has not changed

• Another version of a stock split is the reverse split. This procedure is typically
used by companies with low share prices that would like to increase these
prices to either gain more respectability in the market or to prevent the
company from being delisted (many stock exchanges will delist stocks if they
fall below a certain price per share). For example, in a reverse 5-for-1 split, 10
million outstanding shares at 50 cents each would now become two million
shares outstanding at $2.50 per share. In both cases, the company is worth $50
million

• In terms of fund accounting, at Ex-Date, for example, if it is a 2-for-1 split, we

should adjust the cost base to 50% of the initial purchase price and double the
number of shares in our accounting system

2.4 Spin-offs
• A spinoff occurs when a company separates a portion of its business into a
newly created subsidiary and distributes shares of that subsidiary to its
shareholders pro rata
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• From accounting point of view spinoff looks like as separation of assets and
liabilities of subsidiary and removing them from the balance sheet of the
parent company at their historical amounts (without adjustment)

• The spinoff’s balance sheet “inherits” the historical cost of the assets and
liabilities transferred

• The reasons for spin-off:

o An easy way to dispose of a problem subsidiary without recognizing

any gain or loss
o Spinoffs often pay special dividends to their parent companies as part
of the spinoff transaction. In addition, the debt of the spinoff is
removed from the parent company’s balance sheet. The result is lower
parent company debt and, possibly, financial leverage
o If the spinoff was losing money (or had low profitability), the parent
company reports either higher income or, at least higher profit margin

• In terms of fund accounting, usually Bloomberg will give you detailed

information on the spin-off deal, including Term, Factor, Spun-Off Company
Ticker. Term tells you how many parent shares entitle you to get 1 Spun-Off
Company share; for example, 1 per 3 tells you each 3 parent shares are
entitled to 1 spun-off share. Factor tells that you should adjust the total
original cost of the parent company’s shares with this factor and your total
cost for the entitled spun-off shares is the total original cost of the parent
company’s shares times (1-factor). Sometimes if Bloomberg doesn’t provide
factor information, we can calculate the factor based on the historical closing
prices of the parent company and spun-off company prior to Ex-Date.
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2.5 In Default
For fixed income securities, including bonds, notes, commercial papers, and term loans,
when a company is financially distressed, unable to pay periodic interests, it is said to be
In Default. Bloomberg will alert you for default information for public companies. In
terms of fund accounting, we should stop accrue interest for defaulted securities and pay
attention to the development of default solution.

2.6 Rights Offering

Sometimes when a company identifies a special project with promising profits, it needs
additional cash to finance the project. Issuance of "rights" to current shareholders,
allowing them to purchase additional shares usually at a discount to market price, not
only help raise the needed cash and also benefit existing shareholders if the project is
successful. Shareholders who do not exercise these rights are usually diluted by the
offering. Rights are often transferable, allowing the holder to sell them on the open
market to others who may wish to exercise them. Rights offerings are particularly
common to closed-end funds, which cannot otherwise issue additional ordinary shares.

For public companies, you can get detailed rights offering information from Bloomberg.
In terms of fund accounting, existing shareholders can either exercise the right to buy the
new shares at strike price or just forgo the right. If the rights are exercised, we should
book the new shares at the exercise price (the strike price specified in the offering
document). No adjustment is needed for the existing shares.

Following is an example; each 2 existing shares are entitled to buy 1 additinoal share at
0.2.
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2.7 Dissolution/Re-Organization/Merger/Acquisition
• This is the broadest and most challenging area for dealing with corporate
actions. Usually, restructuring occurs when a company is financially
distressed and trying to turn around, or after a merger/acquisition event.

• Federal bankruptcy laws govern how companies go out of business or recover

from debt. It is possible to restructure operations under Chapter 11 or to use
Chapter 7 as an alternative.
o Under Chapter 7, the company stops all operations and goes
completely out of business. Under Chapter 7, the company stops all
operations and goes completely out of business. In this case assets of
the company are sold for cash by a court appointed trustee.
Administrative and legal expenses are paid first, and the remainder
goes to creditors. Secured creditors will have their collateral returned
to them. If the value of the collateral is not sufficient to repay them in
full, they will be grouped with other unsecured creditors for the rest of
their claim. Bondholders, and other unsecured creditors, will be
notified of the Chapter 7, and should file a claim in case there's money
left for them to receive a payment. Stockholders do not have to be
notified of the Chapter 7 case because they generally don't receive
anything in return for their investment. But, in the unlikely event that
creditors are paid in full, stockholders will be notified and given an
opportunity to file claims. Usually, the stock of a Chapter 7 company
is worthless and investors have lost the money invested. In terms of
fund accounting, if it is the case under Chapter 7, usually nothing will
be left to common shareholders and you will see the stock market
value will be marked around 0.
o Chapter 11 is a chapter of the United States Bankruptcy Code, which
permits reorganization under the bankruptcy laws of the United States.
Bankruptcy under Chapter 11 is available to any business. A chapter
11 filing is usually an attempt to stay in business while a bankruptcy
court supervises the "reorganization" of the company's contractual and
debt obligations. Chapter 11 is a form of interim bankruptcy that
allows companies to keep operating as a business while shedding some
liabilities such as debts and financial obligations to a corporate pension
fund. The benefits of Chapter 11 are supposed to be avoiding the
unnecessary liquidation of businesses, and the job destruction and total
loss to creditors this can involve. The court can grant complete or
partial relief from most of the company's debts and its contracts, so
that the company can start from the scratch. It may be more
economically efficient to allow a troubled company to continue
running, cancel some of its debts, and transfer ownership of the newly
reorganized company to the creditors whose debts were canceled.
Alternatively, the business can be sold as a going concern with the net
proceeds of the sale distributed to creditors. If the company's stock is
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publicly traded, a Chapter 11 filing generally causes it to be delisted

from its primary stock exchange if listed on the New York Stock
Exchange, the American Stock Exchange, or the NASDAQ. On the
NASDAQ the identifying fifth letter "Q" at the end of a stock symbol
indicates the company is in bankruptcy. Many stocks that are delisted
quickly resume listing as over the counter (OTC) stocks. In the
overwhelming majority of cases, the Chapter 11 plan, when confirmed,
terminates the shares of the company rendering shares valueless.
There is no federal law that prohibits trading of securities of
companies in bankruptcy

Example: Delta Air Lines

On Wednesday September 14th Delta Air Lines (DAL:
NYSE), America’s fourth-largest airlines, filed for bankruptcy. The
company was delisted from NYSE. It lost 6.2 billion dollars in 2006
amid a 5.4-billion charge for reorganization. The U.S. Bankruptcy
Court for the Southern District of New York approved Delta's exit
from bankruptcy on April 25th 2007. The listing on exchanges was
resumed. During this time company went through extensive
restructuring. According to the statement made by company’s CEO
Delta “successfully repaired our balance sheet, improved the customer
experience, expanded our international route system and built a
platform for future success”.

2.7.1 Delisting and Liquidation

When a company goes bankrupt and liquidates, it is delisted from the exchange. Usually
you will see the delist information from Bloomberg by typing “CACS” under this
security.

In terms of fund accounting, after delisting and during the liquidation process,
• For common equities or preferred stocks of such company, the investment
managers normally mark such common equity at around 0, because in most
cases, no residual value will be available to shareholders for a bankrupt
company after liquidation.
• For secured and unsecured senior debts, investment managers will price them
at a discount below par expecting senior creditors may not get the full
payback of the debt after liquidation. More likely such securities still have a
value, so they will be traded OTC (over the counter).
• For junior/subordinated debts, investment managers usually mark them close
to 0, expecting that there won’t be much left for these creditors.

2.7.2 Delisting and Liquidation

When a company is bankrupt and liquidated, it is first delisted from the exchange.
Usually you will see the delist information from Bloomberg by typing “CACS” under
this security.
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In terms of fund accounting, after delisting and liquidation process,

• For common equities or preferred stocks of such company, the investment
managers normally mark such common equity at around 0, because in most
cases, no residual value will be available to shareholders for a bankrupt
company after liquidation.

• For secured and unsecured senior debts, investment managers will price them
at a discount below par expecting senior creditors may not get the full
payback of the debt after liquidation. More likely such securities still have a
value, so they will be traded OTC (over the counter).

• For junior/subordinated debts, investment managers usually mark them close

to 0, expecting that there won’t be anything left for these creditors.

2.7.3 Delisting and Restructuring

When a company is in under bankruptcy protection with Chapter 11 filing, it is first
delisted from the exchanges. After couple months of restructuring of capital and re-
organization of business strategy, if successful, the company will emerge from
bankruptcy protection and get listed again under new name with new equity and debt
structure.

Typically, after a company emerged from bankruptcy protection:

• The old common shares is worthless, no residual value left for the older
shareholders
• The older creditors will either get some cash back or receive new common
shares of the newly restructured company in exchange for its debt. Different
creditors get different amount of cash or new shares, depending on the
seniority of their debt holding. For public companies, Bloomberg will give
you detailed information about Resolutions for different types of old securities
of the old company. In case of Delta Airlines, after restructuring, different
debt securities got different treatments:
o The first one only got 11.35 with par value of 421.91
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o The second get 100% cash back of par amount

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o The last one was converted to new common shares of the restructured
company, per old security with 1000 par value is paid with 23.46 new
common shares
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• Usually, the new company will get listed again in the exchanges.

2.7.4 Merger and Acquisition

When an acquiring company plans to take over a target company, it must announce the
proposed deal terms to its shareholders. Such information is available in Bloomberg for
public companies.

Following is a completed acquisition cash deal. In this case, if we hold common shares of
the target company, after the completion of the acquisition, we should remove the old
holdings for the target company, and book the cash after received, in this case it is $23.51
per target company’s common stock.
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Sometimes the M&A deal is stock offering or a combination of stock and partial cash.
After completion of the deal, if it is an all-stock offer, we should remove the shares of the
target company and book the shares of the acquiring company with the total cost of the
new shares same as the total cost of the old shares.