Corporate Actions

Five types of corporate actions

• merger

• acquisition

• spin-off

• buyback

• tender offer.

Merger

• Two (or more) companies combine operations and assets.

• The shareholders of both companies receive new shares of the combined company, and their shares of the old company are canceled.

• no taxable

Acquisition

• one company takes over the operations and assets of another firm.

• The shareholders of the company that was acquired will receive shares of the company that did the acquiring, and their old shares are canceled.

• not taxable

What does M&A stands for

merger and acquisition.

Spin-Off

• a corporation forms a subsidiary company out of some of the corporation's assets and operations. It then issues shares of the newly formed corporation to the shareholders of the original company.

• no taxable

Buyback

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

Tender Offer

• An offer to buy a security directly from the owners of the security (not through secondary markets).

• taxable actions

Buybacks and tender offers are normally cash offers?

Yes

When is the corporate action taxable?

• in Mergers, acquisitions, and spin-offs in which the shareholders receive cash, The cash portion is taxable as a capital gain or loss.

• Buybacks and tender offers are almost always all-cash offers and are treated as a sale of the security resulting in a taxable capital gain or loss.

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

• cash dividends

• stock dividends

• a forward or reverse split

• rights or warrants offering.

what should be included in the notice?

• title of the security

• date of declaration

• date of record

• date of payment distribution

• for a cash dividend = the amount to be paid

• for a stock dividend = the rate of the dividend (e.g 10%)

• for a split (forward or reverse) the rate of the distribution (e.g 2:1, 3:2)

Notice should be given no later than

10 days before the record involved or

notice should be given on or before the record date and in no event later than the effective date (payment date).