Corporate actions

A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company.
Splits, dividends, mergers and acquisitions,rights issue and spinoffs are all examples of corporate actions.

Type of Impact
Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities (bonds))  or call (early redemption) of a debt security may have a direct financial impact on the shareholders or bondholders; Other corporate actions such as stock split may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise. Some corporate actions such as name change have no direct financial impact on the shareholders.


How are corporate actions processed?
The details of all possible corporate actions need to be recorded. Corporate actions processing is a complicated, non-standardized, and, to a large extent, manual process. In cases where benefits are predictable at the outset from the static data repository, it’s important that the data is accurate, whether it is sourced from the issuer’s prospectus, the custodian, or data providers. Some institutions utilize third parties to provide them with independent notification at the time a benefit is due from an unpredictable announced event, while others rely on their custodians to provide the detail. Despite this, processing failures can arise in the corporate action chain due to problems with the flow of downstream information (from issuers to investors) or upstream information (from investors to issuers).

Types

Corporate actions are classified as Voluntary, Mandatory and Mandatory with Choice corporate actions.

Mandatory Corporate Action : A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, pari-passu and spinoffs. Strictly speaking the word mandatory is not appropriate because the share holder per se doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory Corporate Action.

Voluntary Corporate Action : A voluntary corporate action is an action where the shareholders elect to participate in the action. A response is required by the corporation to process the action. An example of a voluntary corporate action is a tender offer. A corporation may request share holders to tender their shares at a pre-determined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the corporation's agents, and the corporation will send the proceeds of the action to the shareholders who elect to participate.

Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For example in case of a cash/stock dividend option, the shareholder can elect to take the proceeds of the dividend either as cash or additional shares of the corporation. Other types of Voluntary actions include rights issue, making buyback offers to the share holders while delisting the company from the stock exchange etc.

Mandatory with Choice Corporate Action : This corporate action is a mandatory corporate action where share holders are given a chance to choose among several options. An example is cash/stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied.