A Corporate Action is an event undertaken by a company which can make a material
impact to the organisation and, in some cases, the share price and an index.
These actions can range from a company issuing new shares to changing the companies name or paying their shareholders the profits from their operations. These actions are planned and usually take effect on a specific date, known as Ex-Date.
Anyone holding shares or CFDs of the shares on Ex-Date should have the corporate action applied to their position. Note indices can also be impacted by Corporate Actions of constituent companies.
Some of the common Corporate Actions include:
Dividends
As a shareholder you are entitled to a portion of the company’s profits, they pay this to
their shareholders in the form of a dividend. Each company will have a dividend policy
stating how they will use profits and what portion may be issued to shareholders.
The share price reflects the value of the company, which includes many things including
assets. At the point the company pays the dividend to their shareholders their assets
would be reduced by that amount. In practice this means the company share price is
expected to drop by the amount of the dividend. The shareholder then receives that
amount in cash. Below is an example of how this may work in practice:
Prior to Ex-Date:
Shareholder X holds 100 shares in Company A.
Company A share price: $50
Company A plans to pay a dividend of $5 per share.
On Ex-Date:
Company A share price: $45
Shareholder X receives $500 as a dividend.
Dividends are subject to a tax, known as withholding tax.
ThinkMarkets approach:
With respect to CFDs we will make the tax adjustment prior to paying the dividend to our
clients. Clients holding a short CFD will be required to pay this dividend where those
holding a long position will receive it. Long clients will be adjusted net of withholding tax
and short clients will pay the Gross dividend. Clients holding a CFD will have their balance
credited/debited on Ex-Date.
Stock Split
A stock split is where a company alters their existing shares. The action would occur by
changing the number of shares issued, increasing by a fixed multiple. To offset this, the
share price would reduce by that multiple. The net impact to the shareholders value
should be 0. This is often used if the company share price is too high and potentially deters
investors. They will lower the share price allowing more investors access to their
company. Below is an example of how this may work in practice:
Prior to Ex-Date:
Shareholder X holds 100 shares in Company A
Company A share price: $100
Company A plans a stock split of 2:1
On Ex-Date:
Shareholder X holds 200 shares in Company A:
Company A share price: $50
In the above example the client still holds $10,000 in both scenarios, it is simply the
number of shares and share price that are different. This action will occur on a pre-stated Ex-Date.
ThinkMarkets approach:
On Ex-Date the client’s size and opening price will be adjusted by the adjustment factor.
Reverse Split/ Consolidation
A reverse split or consolidation is similar to a Stock split described above, only in this
action the process is inverted. The design is to increase the share price and reduce the
number of shares. This process is often used if the share price is too low, and the company
wishes to make the shares appear more stable and stronger with a higher share price.
Below is an example of how this may work in practice:
Prior to Ex-Date:
Shareholder X holds 2000 shares in Company A
Company A share price: $1
Company A plans a consolidation of 1:20
On Ex-Date:
Shareholder X holds 100 shares in Company A:
Company A share price: $20
In the above example the client still holds $2,000 in both scenarios, it is simply the number
of shares and share price that are different.
ThinkMarkets approach:
On Ex-Date the client’s size and opening price will be adjusted by the adjustment factor.
Mergers and Acquisitions
A merger or acquisition is where two companies either combine to form a new company
or one company takes ownership over another. Shareholders would either be
compensated for their shares or maintain an interest in the new company after the merger
or acquisition. This the case of an acquisition a shareholder in the company being taken
over would have their shares bought off them. They would either be given shares in the
new company or cash at a predetermined price per share. Below is an example of how
this may work in practice:
Prior to Ex-Date:
Shareholder X holds 500 shares in Company A
Company A share price: $5
Company B plans to acquire Company A at $5.50 a share.
On Ex-Date:
Company A ceases to exist
Shareholder X receives $2,750 as compensation for their shares.
ThinkMarkets approach:
Clients holding a CFD position will have their positions reflect the terms of the action. If
the acquisition is cash settled, meaning shareholder are given cash for their position, we
will close the CFD at the acquisition price agreed in the offer. If the terms are stock settled,
meaning a shareholder receives shares in the new company, we will book a new position
on your account in the new company. We will do this by closing your current position in
the old stock at 0 and opening the new position in the new company at 0 also. If the action
is both cash and stock settled, then a combination of both above will take place. This will
all occur on Ex-Date.
Spin Off
A spin off is where a company might split part of their organisation into separate
companies. An example of this might be where a technology company wants to split off
one product they sell to be run by a completely independent operation. The action will
occur by creating a new share in the newly formed company that will trade separately to
the old company. Both the old and new company will continue to trade. As the share price
is representative of the company’s assets, when this spin off occurs it is expected the share
price of the old will drop by the value of the new company. The shareholder will the
receive shares in the new company. Below is an example of how this may work in practice:
Prior to Ex-Date:
Shareholder X holds 1000 shares in Company A
Company A share price: $10
Company A plans spin off company B
On Ex-Date:
Shareholder X holds 1000 shares in Company A and 1000 shares in Company B
Company A share price: $8
Company B share price: £2
The example above is a very simplified version of what can happen. In practice the
adjustment factors will differ slightly, and the number of shares and share prices are not
tied together as simply. The general concept should hold that prior Ex-Date and after Ex-Date the value of the holding should be the same, not considering any legitimate market
moves.
ThinkMarkets approach:
A CFD holder will have their position remain unchanged and a new position booked in the
new company from a price of 0. In cases where ThinkMarkets will not offer the shares in
the newly spun off company, we will cash settle your position as if it were opened at 0 and
closed at the opening price on the first day of trading.
Rights Issue
When a company wishes to raise capital, rather than take a loan or increase debts, they
can undertake a rights issue. This is an action whereby new shares are issued to the
market and are offered to their existing shareholders at a discounted rate. Because issuing
new shares will likely cause the value of each share to drop, the company will first issue
rights to each shareholder entitling them to purchase these new shares at the specified
price. The holder of these rights can either take them up and use them to buy new shares,
they can sell them to other investors, or they can do nothing and let them lapse. The rights
trade on an exchange much in the same way as other shares, with the difference being
they will cease trading at a specified point in time, where they will then be converted to
shares in the company at the subscription price. Below is an example of how this may
work in practice:
Prior to Ex-Date:
Shareholder X holds 3,000 shares in Company A
Company A share price: £2.20
Company A plans a rights issue with a subscription price of £0.32 and a ratio of 10 rights
for every 3 shares.
On Ex-Date:
Shareholder X holds 3,000 shares in Company A and 10,000 rights in Company A
Company A share price: £0.75
Company A rights price: £0.435
For more information, please visit the Company’s website at www.thinkmarkets.com/eu
In the above example the client still holds £6,600 in both scenarios, the loss in the value
of their shares is offset by the new value of the rights.
ThinkMarkets approach:
As we do not offer rights on CFD positions, we will cash settle the rights as if they were
booked onto their account at 0 and closed at the opening price on the first day of trading,
which is usually Ex-Date. Clients holding a short position would be debited the value of the
rights basis the opening price and long clients would receive.