FINRA’s Office of Investor Education receives a steady stream of inquiries from investors about public company corporate actions. What are they? How are they processed? And how do they impact your investments? If you are an investor curious about the corporate actions of publicly traded companies, here’s what you need to know.
For starters, a corporate action is an event by a public company that may affect the company’s securities and, therefore, its shareholders and bondholders. Corporate actions can range from making a change to a company’s name to issuing a dividend or other distribution to a major restructuring of the company through a merger or bankruptcy.
Some of these actions, such as a merger or bankruptcy, might make headlines if they involve large well-known companies. Recently, the spotlight has been on companies changing their business names to link themselves to the "hot" cryptocurrency and blockchain technology sectors. Other changes, such as a stock symbol change or a dividend payout, might not make headlines, but are important for investors to be aware of.
Here are six common types of corporate actions and how they might impact your investments.
1. Name or Trading Symbol Changes. These changes will appear on customer account statements and in account holdings. A company might make these changes to reflect its business focus or ownership more closely, or to distinguish itself from other companies. These changes may require the company to get a new CUSIP, the unique nine-symbol identifier assigned to most financial instruments.
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2. Stock Splits. A stock split changes the number of shares owned by each shareholder, but it does not affect the shareholder’s proportionate equity in the company. For example, in a 3-for-1 stock split, a holder of 100 shares would have 300 shares of the post-split security, but his equity in the company remains the same.
A company may decide to do a stock split to lower the per-share price of its stock; a very high stock price can intimidate investors who fear there is little room for price appreciation. Conversely, a reverse stock split reduces the number of shares outstanding and increases the price per share. A company might do a reverse split to meet minimum listing price requirements for continued trading on an exchange. For more information, check out A Piece By Piece Guide To Stock Splits.
3. Dividends. When a company distributes—in the form of cash or stock—a portion of its earnings to shareholders, it’s called a dividend. A cash dividend gives you a sum of money for each share owned, and a stock dividend gives you additional shares in the company. For example, a stock dividend of 10 percent means that for every 10 shares you own, you will get one additional share. Companies with substantial retained earnings might pay a dividend to pass the benefit on to its shareholders.
4. Mergers and Acquisitions. A merger occurs when two companies agree to become one entity. An acquisition, on the other hand, occurs when one company purchases a majority of another company’s stock, which can be either a friendly or a hostile move. Mergers and acquisitions often involve a strategic decision to limit competition, influence a certain industry or grow a business. Check out How Companies Use Their Cash: Mergers and Acquisitions for more on this topic.
5. Rights Offering. A rights offering occurs when a company issues "rights" to existing shareholders that entitle them to buy additional shares directly from the company in proportion to their existing holdings within a prescribed time period. Companies will announce an expiration date by which shareholders must buy in to the rights offering, generally one to three months from the date the company announces a rights offering. The price at which each share may be purchased is generally at a discount to the current market price. Rights are often transferable, allowing shareholders to sell them on the open market. Companies generally offer rights when they need to raise money.
6. Liquidation and Dissolution. Liquidation is the process by which a company sells off its assets and closes down its business for good. In liquidation, the company’s assets are sold and the proceeds are used to pay off as many creditors as possible. Dissolution is the last stage of liquidation, in which the assets and property of the company are redistributed.
Secured bondholders get paid first, and common stockholders are last in line for any distribution of proceeds. Even when a company seeks protection under one of the relevant chapters of the United States Bankruptcy Code, its securities may continue to trade in the OTC market place after a bankruptcy filing. A stock with a "Q" as the last letter in its trading symbol indicates that the company has filed for bankruptcy.
FINRA’s Role in OTC Corporate Actions
Federal securities regulations task FINRA with processing corporate action announcement requests by companies that trade in the over-the-counter (OTC) marketplace rather than on a national securities exchange. Corporate actions reportable to FINRA generally include mergers, a dividend or other distribution of cash or securities, stock splits and name and domicile changes.
FINRA’s processing function helps to keep investors and the market informed of company corporate actions. However, FINRA is not responsible for approving or disapproving the action the company is taking. And FINRA does not review such requests for a company’s compliance with any federal, state or other regulatory requirements. The public company is responsible for making sure their business decisions comply with all applicable laws and regulations.
Corporate actions for exchange-listed companies are handled by the exchange upon which a company is listed; and information on these corporate actions is available on the websites of the relevant exchanges.
Be Wary of Announcements Regarding FINRA "Approval" of a Corporate Action
Companies undergoing a corporate action often issue a press release or other communication, such as a tweet or other social media post, to provide details of the change. For instance, a company might announce a new corporate name that reflects a change in product lines or business focus. However, in the past, some companies have used these publications to suggest that FINRA has somehow "approved" a corporate action or that a corporate action will be effective once FINRA approves it. To clarify, this is not the case: FINRA does not approve corporate actions.
How Can You Find Out About OTC Corporate Actions?
FINRA announces corporate actions related to OTC securities on its website in an area known as the Daily List. This information also is available on the OTC Markets website. The Daily List provides valuable information regarding corporate actions announcements for OTC securities, including ex-dates (the date that determines whether shareholders will receive a dividend), new issues, deleted issues, deletions, trading symbol and name changes. The Daily List also indicates if previously announced changes have been updated or cancelled. If you own stock in an OTC company that is the subject of a corporate action, you will want to check the Daily List.
For questions about the Daily List or corporate actions, call FINRA at 1-866-776-0800, and choose option 1. FINRA staff cannot disclose whether a company has submitted a corporate action or whether a corporate action announcement request is in process unless and until it is already announced on the Daily List.
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