Corporate Actions. A Guide to Securities Event Management. Michael Simmons and Elaine Dalgleish

Transcription

1 Corporate Actions A Guide to Securities Event Management Michael Simmons and Elaine Dalgleish

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3 Corporate Actions

4 For other titles in the Wiley Finance Series please see

5 Corporate Actions A Guide to Securities Event Management Michael Simmons and Elaine Dalgleish

6 Copyright C 2006 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England Telephone (+44) (for orders and customer service enquiries): cs-books@wiley.co.uk Visit our Home Page on All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London W1T 4LP, UK, without the permission in writing of the Publisher. Requests to the Publisher should be addressed to the Permissions Department, John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex PO19 8SQ, England, or ed to permreq@wiley.co.uk, or faxed to (+44) Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The Publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the Publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Michael Simmons and Elaine Dalgleish have asserted their rights under the Copyright, Designs and Patents Act, 1988, to be identified as the authors of this work Other Wiley Editorial Offices John Wiley & Sons Inc., 111 River Street, Hoboken, NJ 07030, USA Jossey-Bass, 989 Market Street, San Francisco, CA , USA Wiley-VCH Verlag GmbH, Boschstr. 12, D Weinheim, Germany John Wiley & Sons Australia Ltd, 42 McDougall Street, Milton, Queensland 4064, Australia John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore John Wiley & Sons Canada Ltd, 22 Worcester Road, Etobicoke, Ontario, Canada M9W 1L1 Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Library of Congress Cataloging-in-Publication Data Simmons, Michael, 1951 Corporate actions : a guide to securities event management / Michael Simmons & Elaine Dalgleish. p. cm. ISBN ISBN Securities industry. 2. Corporations Finance Management. I. Dalgleish, Elaine. II. Title. HG4521.S dc British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN (HB) ISBN (HB) Typeset in 10/12pt Times by TechBooks, New Delhi, India Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire This book is printed on acid-free paper responsibly manufactured from sustainable forestry in which at least two trees are planted for each one used for paper production.

7 Contents Introduction Acknowledgements About the Authors xvii xxi xxiii PART I INTRODUCTORY ELEMENTS 1 1 Basic Corporate Action Concepts Introduction Definition of Corporate Actions Purpose of Corporate Actions Impact of Corporate Actions Impact from the Position Holder s Perspective Impact on the Price of the Underlying Security The Lifecycle of a Corporate Action Mandatory (Generic) Lifecycle Mandatory with Options Lifecycle Voluntary Lifecycle Multi-Stage Lifecycle Issuer Notices Lifecycle Summary 8 2 Event Description and Classification Introduction Event Descriptions Payment of Interest Due Payment of Income Earned Distribution of Capital Reserves Equity Restructure Debt Restructure against Equity (Issued Capital) Debt Redemption Raising of Capital 15

8 vi Contents Re-organization of Company Structure Issuer Notices Event Classification Impact Lifecycle Event Combinations Event Variations and Terminology Summary 22 3 The Securities (and Corporate Actions) Market Place Introduction The Securities Market Place Overview The Trading Environment Issuers Securities Investors Agents for Investors Securities Trading Organizations (STOs) CSDs, ICSDs and Custodians Participants The Corporate Actions Perspective Issuers CSDs and ICSDs Custodians Position Holders Individuals Institutional Investors Securities Trading Organizations (STOs) Summary 36 4 Static Data Introduction Securities Static Data Common Attributes of Securities Static Data Detailed Attributes of Securities Static Data Changeable Detailed Attributes of Securities Static Data Additional Corporate Actions Securities Static Data Participant Static Data Common Attributes of Participant Static Data Detailed Attributes of Participant Static Data Changeable Detailed Attributes of Participant Static Data Additional Corporate Actions Participant Static Data Sources and Maintenance of Static Data Securities Participants Summary 47 5 Securities Position Management Introduction 49

9 Contents 5.2 The STO S Risk Fundamentals of Securities Position Management Generic Securities Accounting Principles Extended Securities Position Management Disparate Trade and Position Records Reconciliation Summary 55 PART II MANDATORY EVENTS 57 6 Overview of the Generic Corporate Action Lifecycle Introduction Issuer Communicates Event Data Event Terms Capture and Cleansing Determining Entitlement Communication of Event Information Calculation of Resultant Entitlements Passing of Internal Entries Collection and Disbursement of Resultant Entitlements Updating of Internal Entries 61 7 Straight Through Processing Introduction STP and Corporate Actions 64 8 Event Terms Capture and Cleansing Introduction Event Terms Underlying Security Event Dates Entitlement Security and/or Currency Ratios and Rates Treatment of Fractions Exchange Rates Options Available Additional Event Conditions and Information Sources of Event Terms Availability of Event Terms Upon Issue of the Security During the Life of the Security Cleansing of Event Terms The Importance of Clean Event Terms Approaches to Clean Event Terms Timing of Event Terms Cleansing When to Apply Event Terms Managing Changes to Event Terms Throughout the Lifecycle Summary 77 vii

10 viii Contents 9 Determining Entitlement Introduction The STO s Risk Types of Entitled Positions (Including Unsettled Trades) Ownership Positions Location Links Between Ownership Positions and Location Positions Equity Event Entitlement Business Principles Entitlement Date Record Date Normal Cum and Normal Ex Trading Special-Cum and Special-Ex Trading Special Value Date Depot Adjustment Date/Compensation Date Equity Event Itemized Trading and Settlement Scenarios Bonds Event Entitlement Business Principles Determining Entitlement Record Date Applying the Business Principles in Practice When to Determine Entitlement Identification of Ownership Positions Identification of Settled Custodian Positions Identification of Potential Claims Balancing of Positions and Unsettled Trades Reconciliation of Positions and Unsettled Trades Reconciliation of Ownership Positions Reconciliation of Settled Custodian Positions Reconciliation of Unsettled Trades Summary Communication of Event Information Introduction The STO s Risk Communicating with Position Holders Characteristics of Communication Types Generic Communication Types Communication Features Preferences of the Position Holder Communicating with Interested Parties Summary Calculation of Resultant Entitlements Introduction The STO s Risk Calculation of Resultant Cash Entitlements Cash Rates Per Share Percentage Relevant to Face Value 125

11 Contents 11.4 Calculation of Resultant Securities Entitlements The Securities Ratio The Treatment of Fractions Securities Ratio Calculation Sequence Calculation of Removal of Underlying Securities Holdings Calculation of Cash Payable to the Issuer Calculation of Resultant Entitlements Against Ownership Positions Benefit Events Re-organization Events Balancing Resultant Entitlements Reconciliation of Resultant Entitlements Reconciliation of Location Resultant Entitlements Reconciliation of Ownership Resultant Entitlements Reconciliation of Claims Determination of Collectible and Disbursable Accounts Summary 136 ix 12 Passing of Internal Entries Introduction The STO s Risk Mechanisms for Passing Internal Entries Types of Internal Entries Entitlement Date Entries Record Date Entries Review of Required Internal Entries Summary Collection/Disbursement of Resultant Entitlements Introduction The STO s Risk Collection of Resultant Entitlements from the Custodian Physical Collection Electronic Collection Disbursement of Resultant Entitlements to Position Holders Contractual Settlement Actual Settlement Settlement of Claims Individual Settlement Compensation Transformation Write-Offs Summary Updating of Internal Entries Introduction The STO s Risk 161

12 x Contents 14.3 Mechanisms for Passing Internal Entries Settlement Date Entries Contractual Settlement of Custody Client On Payment Date Settlement of Custodian Position on Payment Date Actual Settlement of Custody Client as a Result of Custodian Settlement (incl. late claim settlement) Settlement of Claims and Transformations Summary Examples of Mandatory Events Introduction Bonus Issue Purpose of Example Event Terms Determining Entitlement Communication of Event Information (Event Terms Announcement) Calculation of Resultant Entitlements Entitlement Date Entries Record Date Entries Communication of Event Information (Final Claim Notice) Settlement Details Settlement Date Entries Share Split Purpose of Example Event Terms Determining Entitlement Communication of Event Information (Event Terms Announcement) Calculation of Resultant Entitlements Entitlement Date Entries Record Date Entries Settlement Details Settlement Date Entries Bond Maturity Purpose of Example Event Terms Determining Entitlement Communication of Event Information (Event Terms Announcement) Calculation of Resultant Entitlements Entitlement Date Entries Record Date Entries Settlement Details Settlement Date Entries 182

13 Contents PART III EVENTS WITH ELECTIONS Concepts of Events with Elections Introduction The STO s Risk Impact of Events with Elections Impact from the Issuer s Perspective Impact from the Position Holder s Perspective Impact on the Price of the Underlying Security Events with Elections Lifecycle Summary Management of Mandatory with Options Events Introduction Mandatory with Options Event Terms Options Available Election Decision Deadlines Determining Entitlement to Mandatory with Options Events Communication of Mandatory with Options Event Information Receipt of Election Decisions Position Holder Election Decisions Claiming Counterparty Election Decisions Recording and Validating Received Election Decisions Recording Election Decision Quantities Validating Received Election Decisions Managing Overdue Election Decisions Issue of Election Decisions Calculating Election Decisions to be Issued Identifying the Location Component Balancing Election Decisions Communication of Election Decisions Over-Elections Calculation of Resultant Entitlements Calculations Based upon a Re-investment Price Passing of Internal Entries Mandatory with Options Benefit Events Mandatory with Options Re-organization Events Collection and Disbursement of Resultant Entitlements Updating of Internal Entries Summary Management of Voluntary Events Introduction Voluntary Event Terms Options Available Election Decision Deadlines Shareholder Eligibility 221 xi

14 xii Contents 18.3 Determining Entitlement to Voluntary Events Communication of Voluntary Event Information Receipt of Election Decisions Recording and Validating Received Election Decisions Managing Overdue Election Decisions Issue of Election Decisions Over-elections Calculation of Resultant Entitlements Passing of Internal Entries Election Decision Date Entries Record Date Entries Over-Election Adjustment Entries Collection and Disbursement of Resultant Entitlements Updating of Internal Entries Summary 231 PART IV MULTI-STAGE EVENTS Concepts of Multi-Stage Events Introduction The Life of a Multi-stage Event The Life of a Rights Issue Comparison of Multi-stage Events The STO s Risk Impact of Multi-stage Events Impact from the Issuer s Perspective Impact from the Position Holder s Perspective Impact on the Price of the Underlying Security Lifecycle Elements of the Multi-stage Event Multi-Stage Event Terms Determining Entitlement at Each Stage Communication of Event Information Receipt and Issue of Election Decisions Calculation of Resultant Entitlements Passing of Internal Entries Collection/Disbursement of Resultant Entitlements Updating of Internal Entries Summary Management of a Rights Issue Introduction The Operational Life of a Rights Issue Rights Issue Event Terms Nil Paid Rights Distribution Determination of Entitled Holdings Communication of Event Information 251

15 Contents Calculation of Resultant Entitlements Passing of Internal Entries Collection and Disbursement of Resultant Entitlements Updating of Internal Entries Nil Paid Rights Subscription Determine Entitled Holdings Communication of Event Information Receive and Issue Election Decisions Calculate Resultant Entitlements Passing of Internal Entries Collection and Disbursement of Resultant Entitlements Updating of Internal Entries Un-subscribed Nil Paid Rights Expiry Determine Entitled Holdings Calculate Resultant Entitlements Passing of Internal Entries Distribution of Sale Proceeds from Un-Subscribed Nil Paid Rights Summary Example of a Rights Issue Introduction Event Terms Nil Paid Rights Distribution Determining Entitlement in the Event Underlying Security Communication of Event Information Calculation of Resultant Entitlement in Nil Paid Rights Communication of Resultant Entitlement in Nil Paid Rights Passing of Internal Entries re Nil Paid Rights Collection and Disbursement of Resultant Entitlements in Nil Paid Rights Nil Paid Rights Trading Nil Paid Rights Subscription Determining Entitlement in Nil Paid Rights Receiving and Issuing Subscription Decisions Passing of Subscription Decision Date Entries Calculation of Resultant Entitlement in the New Security(s) and Subscription Cash Communication of Resultant Entitlement in the New Security Passing of Internal Entries to Reflect Subscriptions Collection and Disbursement of New Securities Unsubscribed Nil Paid Rights Expiry Determining Remaining (Unsubscribed) Positions in Nil Paid Rights 273 xiii

16 xiv Contents Calculation of Nil Paid Rights to be Reduced Passing of Internal Entries to Zeroize Remaining Nil Paid Rights Positions Final Securities Positions Concepts of Takeover Events Introduction The STO s Risk Features of Takeovers Market and Off-Market Offers Partial and Full Offers Competing Offers Offer Consideration Conditional and Unconditional Status Impact of Takeover Events Impact from the Offeror s Perspective Impact from the Offeree s Perspective Impact from the Position Holder s Perspective Impact on the Price of the Underlying Security Impact on the Price of the Offeror s Security Takeover Event Lifecycle Summary Management of Takeover Events Takeover Event Terms Percentage to be Acquired Offer Period Offer Consideration Conditional/Unconditional Status of the Offer Compulsory Acquisition Determining Entitlement to Takeover Events Communication of Event Information Management of Election Decisions Managing Unsuccessful Takeovers Over-Acceptances Over-Acceptance of a Specific Option Over-Acceptance of a Partial Offer Calculation of Resultant Entitlements Voluntary Stage Mandatory Compulsory Acquisition Stage Passing of Internal Entries Voluntary Stage Compulsory Acquisition Stage Collection and Disbursement of Resultant Entitlements Updating of Internal Entries Summary 298

17 Contents PART V TAXATION Concepts and Management of Taxation Introduction Taxable and Non-Taxable Events Taxable Events Non-Taxable Events Introduction to Capital Gains Tax and Income Tax Capital Gains Tax Income Tax The STO s Risk Summary Management of Income Tax Introduction Gross Income Foreign Witholding Tax Net Income After Deduction of Foreign Withholding Tax Position Holder s Domestic Income Tax Applicability of Position Holder s Domestic Income Tax Calculation of Position Holder s Domestic Income Tax Offsetting Foreign Withholding Tax Net Income After Deduction of Foreign Withholding Tax and Position Holder s Domestic Income Tax Position Holders Resident Within the STO s Country of Residence Position Holders Resident Outside the STO s Country of Residence Calculation of Position Holder s Net Income Determining Tax Rates for Position Holders Position Holder and Security Tax Attributes Maintaining Tax Rate Information Ensuring Correct Withholding Tax is Deducted by the Location The STO as Collector of Taxes Tax Reclaims and Tax Rebates Tax Reclaims Rebateable Tax Communicating Income and Tax Details Summary 329 PART VI ISSUER NOTICES Concepts and Management of Issuer Notices Introduction The STO s Risk 333 xv

18 xvi Contents 26.3 Information Only Events Event Terms Capture and Cleansing Determining Relevant Position Holders Communication of Event Information Issuer Meetings with Proxy Voting Events Event Terms Capture and Cleansing Determination of Relevant Position Holders Communication of Event Information Management of Proxy Voting Summary 339 PART VII OBJECTIVES AND INITIATIVES Objectives and Initiatives Introduction Objectives Initiatives to Achieve the Stated Objectives Internal Initiatives External Initiatives Challenges in Achieving the Stated Objectives 351 Glossary of Terms 353 Index 383

19 Introduction Historically, within the securities industry the topic of corporate actions has been regarded as a specialist subject, yet one involving relatively few specialist people. In addition, Corporate Actions Departments have traditionally been manually intensive, with a low-level of Straight Through Processing (STP). However, organizations within the industry have increasingly recognized the risks (and indeed some organizations have suffered losses directly) and as a result a much greater level of attention is now being given to this topic. This includes the automation of many aspects of corporate actions processing. Such an important and diverse topic requires a very good level of understanding, if those who hold securities positions are to ensure they receive the assets due to them, whilst controlling the numerous risks that inevitably exist in the processing of corporate actions. This book aims to demystify the topic of corporate actions and to make the subject more easily understood by a broad audience. The authors intention is to explain the topic from first principles, and to take the readers to a point where they have a very good (but not expert) understanding of the subject. Readers will gain an understanding of the topic from a practical operational use perspective, enabling the application of such principles to specific market and workplace situations; in addition, the book is intended to be used as a reference of corporate action terms. It is important to note that prior to reading the book, readers will need to possess a good fundamental understanding of securities settlement practices and associated operational procedures. It is intended that this book will build upon the basic settlement and operational principles described within Securities Operations: a Guide to Trade and Position Management (ISBN ), published in spring 2002 by Michael Simmons, one of the authors of this book. This book is aimed at the following audiences: those who are new to the securities industry and who wish to gain a thorough understanding of a major aspect of securities operations (such readers are recommended first to read Securities Operations: a Guide to Trade and Position Management in order to gain a sufficient background understanding of the topic of corporate actions); those who work within securities industry firms (including investment banks, broker/dealers, institutional investors, retail and agency brokers, etc.) who have had no direct involvement with the subject of corporate actions, and who wish to (or are required to) broaden their

20 xviii Introduction knowledge. This category includes traders, salespeople, risk controllers, auditors, compliance officers, static data personnel, settlement staff, reconciliations staff, accountants, etc.; those who work within a corporate actions department and wish to broaden their knowledge. Additionally, the target audience also includes those who provide services to the securities industry, such as: software vendors facilitating meaningful discussion with clients, increased understanding of business requirements by software designers and engineers when developing software and appropriate testing of software corporate action data providers (vendors) allowing a greater appreciation of managing corporate action events, after the event data have been supplied to their clients management consultants enabling peer-level discussion with clients and a greater understanding of clients aims in this business area, particularly in light of the increased focus on financial reporting via the Sarbanes Oxley act custodians providing assistance in understanding the processes their clients undergo in the successful management of corporate action events. In order to provide a viewpoint enabling the reader to appreciate more easily the connectivity between the various sub-topics, the book is written primarily from the perspective of a Securities Trading Organization (STO). We define an STO as operating in the following manner: It buys and sells securities for its own account. It typically maintains proprietary trading positions (whether positive or negative). It borrows and lends securities. It borrows funds to cover its positive trading positions. It undertakes repo transactions to minimize the cost of borrowing cash. Furthermore, an STO may provide safe custody services to its clients, requiring the STO to hold securities (and possibly cash) in safekeeping on behalf of the client. The STO will need to ensure that it protects the interests of its clients (as well as itself), in relation to the management of corporate actions. The majority of the concepts contained within the book, and the perspective from which the book is written, are applicable to any individual or organization (such as investment banks and fund managers) that owns securities or manages securities on behalf of others. The book contains the following attributes and features: Structured development of reader understanding through logical and sequential explanation. Chapter topics restricted to easily digestible portions of information. Focus on corporate action event lifecycles and their components, in order to build a practical operational understanding of the management and impact of corporate actions. Explanation of industry terminology. Description of generic market practices and common conventions. Illustration of subject matter by use of diagrams, examples and analogies.

21 Introduction Depiction of the full event lifecycle by use of detailed and sequential worked examples. Identification of the operational points of risk, control, STP and automation. Rather than cover the practices within specific locations around the globe, we have attempted to convey concepts that will be applicable to the majority of locations. The intention is for the reader to apply these concepts in any location, as each of the major points covered within the book are typically practised within each market, but there is every possibility that each market has its own nuances in dealing with a particular point. In compiling the information contained within this book, the authors have listed those types of events that they consider to be fundamental and the most common of corporate actions; not every conceivable event has been stated, nor will every possible variation of those events that are included, be covered. Nonetheless, we believe that readers will find that the method of explaining concepts will allow such concepts to be applied to variations of, and new types of, corporate action. We have in general attempted to develop the reader s knowledge gradually by describing the various components of a topic conceptually, providing examples and making forward reference to later topics, and backward reference to earlier topics. Our objective has been to enable the reader to gain a complete overview of corporate actions, subsequently enabling communication with other people on any and all of the topics covered. Due to the cumulative effect within the book, the chapters (particularly in the second half of the book) make numerous references to points covered within previous chapters; consequently it is recommended that the book is read sequentially, chapter-by-chapter (although as far as possible we have designed chapters to be read on a standalone basis). Words and terms explained within the Glossary of Terms are highlighted in italics within the main text. We have written this book entirely independently and not for and on behalf of any organization, for whom we have been an employee or for whom we have worked in a consulting capacity. Although every effort has been made to remove errors from the text, any that remain belong to the authors! If the reader has observations on the style and content of the book, we would appreciate being informed of such comments, via the following website: xix Elaine Dalgleish and Michael Simmons

22 Disclaimer The authors of Corporate Actions occasionally refer to well known organisations within the financial community in order to illustrate the context of typical trading and corporate actions scenarios. The scenarios created and the relationships and transections referred to are for illustrative purpose only and have no factual basis. The authors accept no responsibility for any loss that purports to be incurred as a result of the content of this book.

23 Acknowledgements We would like to express our gratitude for the contributions of the following: Jon Foord Harvey Colborne Mark Rigby Colin Baker Sue Woods. We would also like to thank Viv Wickham and Sam Hartley at the publisher John Wiley & Sons, for their help in the production of the book. In particular, we would like to say a special thank you to Ailean Maclean and Graham McCormack, who have dedicated their time to the review of the entire book, ensuring both accuracy and continuity throughout. Without their input and efforts it would not have been possible to complete this book. Finally we would like to say thank you to Allyson Simmons and Paul Andrews for their patience, support and objective comment during the writing of this book.

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25 About the Authors Michael Simmons has spent the majority of his working life within the operational areas of international investment banks, most notably within the S.G. Warburg group in London. Having gained a detailed understanding of various back office tasks through many years of hands-on experience, he assumed managerial responsibility for a number of operational areas. In recent years, Michael has worked as head of business consultancy within a global computing services firm, and is now an independent analyst and trainer. Michael s areas of expertise include all aspects of the trade lifecycle and related activities including operational risks and control. Recent assignments include the offshoring of operational activities to India and operational risk analysis (the Sarbanes Oxley act). In addition, he creates and delivers training courses on the workings of the securities industry and associated operational aspects to audiences around the world. Michael is author of Securities Operations: A Guide to Trade and Position Management published by John Wiley & Sons, which describes the fundamental components of operational activities from a first-principles perspective. Elaine Dalgleish has spent her working life within the operational areas of investment banking and stock broking, working directly for international banking firms and financial software providers. Elaine s hands-on experience spans various middle and back office operational disciplines in multiple markets. Whilst working directly in investment banking and stock broking, this has ultimately included the managerial responsibility for a number of operational areas. The focal point of Elaine s working history is the consistent involvement with Corporate Actions operations, initially with the manual processing of events as a custodian, and subsequently working as a Senior Business Analyst, specializing in Corporate Actions, analysing client requirements, and consulting in process re-engineering for Tier 1 and Tier 2 investment banks. As a consequence, Elaine has both observed and been directly involved in the evolution of global market practices of Corporate Actions operations and the move to automation. Observations on the style and content of this book can be conveyed to the authors by info@mike-simmons.com

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27 Part I Introductory Elements Introductory Elements

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29 1 Basic Corporate Action Concepts 1.1 INTRODUCTION For any holder of securities, whether an organization or individual, remaining in control of securities and cash positions is fundamental to the efficient management of its investment portfolio. This is not simply a matter of recording trading and settlement activity, but also the accurate processing and recording of the impact of corporate action events on those securities and cash positions. This chapter serves to introduce the fundamental concepts and terminology associated with the processing and management of corporate actions. 1.2 DEFINITION OF CORPORATE ACTIONS A corporate action is an event in the life of a security (typically) instigated by the issuer, which affects a position in that security. If and when the issuer of an existing security distributes benefits to shareholders or bondholders (referred to throughout this book as position holders), or chooses to change the security s structure, such events are commonly known as corporate actions. Many types of corporate action events exist, often with subtle variations, but it is possible to define and group these events based upon a combination of: the issuer s purpose; the impact of the event from the position holder s and market place s perspectives; and the lifecycle of the event. The term lifecycle is used in the context of this book to refer to the series of logical steps in the processing of a corporate action. Such lifecycles are determined by the nature of the corporate action. Note that detailed descriptions of numerous corporate action types are contained within Chapter 2, Event Description and Classification. 1.3 PURPOSE OF CORPORATE ACTIONS The purpose of a corporate action is (typically) driven by the aims of the issuer, and will vary according to the specific type of corporate action. Purposes include: Distribution of Income This relates to the distribution of profits on equities and the payment of interest on bonds, by the issuer. Profits (or earnings) are distributed to shareholders in the form of dividend payments, whilst interest is distributed to bondholders via interest payments (commonly known as coupon payments). Note that the payment of a dividend is dependent upon a

30 4 Corporate Actions decision by the issuer s board of directors (dividend payments are not guaranteed), whereas coupon payments are made at pre-stated intervals and (for fixed-rate bonds) at the specified coupon rate in accordance with the terms of issue of the bond. Raising of Capital When the issuer wishes to raise further capital it may do so either by the issue of new equity via shares, or alternatively via the issue of bonds (also known as debt). The market place as a whole may be permitted to purchase either the new shares or debt, or the issue may be restricted to existing position holders only. In those instances where the issue of new equity at a price is offered to existing position holders only, then the event is considered to be a corporate action. Restructuring of Issued Capital From time to time the issuer may choose to restructure or re-organize the issued capital of the company. The issued capital is the total value of issued shares in the company; the total value is calculated by multiplying the par value of each share, by the quantity of shares issued. From time to time the issuer may choose to change the quantity of shares issued and/or the par value of those shares, for example by way of share splits or buy-backs. Many reasons exist for restructuring, including: the reduction or increase of the total value of issued capital; the reduction or increase of the current market price of the shares. Redemption of Debt In accordance with the terms of individual debt issues (in the form of bonds), the issuer will redeem the bonds at the maturity date (or prior to the maturity date if the issue terms permit). Upon issuance of bonds, the debt will appear as a liability in the balance sheet of the issuer; at redemption the liability will be reduced accordingly. Restructuring of Debt Liabilities Against Issued Capital From time to time an issuer may choose to restructure its balance sheet, by the conversion of debt liabilities to issued capital (where the bond issue terms permit). Such conversions will simultaneously reduce the debt liabilities of the issuer, whilst increasing the capital in issue. Assuming Control of Another Organization One organization, in this case not the issuer, may wish to gain control of (i.e. takeover) another organization, in order to, for example: control competition in the same market; control either supplier or distribution networks in the same market; extend or diversify product range or market. Dissemination of Information to Shareholders The board of directors of an issuer is obliged to inform shareholders of various activities that affect the operation and profitability of the company, and in some cases will also need to seek the shareholders approval of such activity before it is undertaken. Such information includes notification of company year-end results, capital investment programmes, notification of an A.G.M. Figure 1.1 illustrates the various aims of the issuer (as described above), whilst also showing that in each case the corporate action event information is intended to be communicated to the position holder (the owner of the underlying security).