5 Types of Corporate Actions & Companies That Have Implemented Them

The word corporate gets defined by most dictionaries as a large company, nothing more. In the modern sense, the first corporations in the US got up and running in the 1790s. Although in the first years after the American Revolution, small banking groups worthy of this label did exist. Many historians like to point to the Boston Manufacturing Company, one of the first factories in America, run by a wealthy Boston merchant, Francis Cabot Lowell, as the initial industrial corporation on US soil. It implemented a business model imported from Britain, used in that country’s textile sector. In Europe, corporations managed to gain a foothold on the Old Continent in the early 19th century, and many of the organizational principles got copied in the US.

Without question, corporations played a massive part in the creation of the American cultural, political, and economic identity. Their structure, with easy access to capital and business development, laid the foundation for the US Industrial Revolution and spurred the US’ growth into becoming a leading economic power. Post WWII, the United States was the only industrial juggernaut not devastated by the war. And the increased popularity of its stock exchange dramatically influenced how companies got managed, with corporate action taking center stage as moves that could significantly affect the entire economic landscape.

In short, a corporate action is a decision that initiates an event that gets agreed upon by a business entity’s board of directors. It is one that can get authorized by the company’s shareholders. Depending on the event and the entity in question, in some situations, shareholders/bondholders can vote on it, called a voluntary action. While a corporate action can be something as simple as a change to the ticker symbol, in other instances, it can be more complex, leaving an opening for investors to take advantage of a change to the underlying stock or security. Below, we look at five types of corporate actions with examples of big businesses that have utilized them in real-life.

Dividends

Likely the most famous corporate action of all is the dividend. It is an event where a company distributes its earnings to its shareholders at a rate determined by its board of directors. Such distribution can happen every financial quarter, annually, or get paid as a form of reinvestment in additional stock. The popularity of the dividend largely stems from it getting viewed as money-for-nothing, passive income. All one must do is purchase shares in a fledgling company, and he gets a piece of its earnings periodically, continuously getting rewarded for his excellent decision, as long as the business the investor has chosen is doing well.

As a rule of thumb, usually, established and stable corporations are the ones that regularly pay dividends. Fast growers tend to reinvest what they rake into facilitating the expansion of their brand.

It should be noted that dividends have multiple pricing and tax implications for companies and individuals. If they come in the form of cash payments, then they get taxed at the standard rate or a reduced one of 20%/15%/ 0% for American investors. That is only valid for dividends remunerated outside tax-advantaged accounts, like an IRA. Note that potential investors can look up past dividend payouts on a corporation’s website to see what they can expect to get if they opt to invest.

The Dutch East India Company (VOC) went down in history as the world’s initial business to pay dividends at a predefined schedule. Per its records, for close to two centuries, this company gave its investors yearly dividends worth 18% of their shares. Today, virtually every massive corporation doing well is paying its shareholders a slice of its earnings. A few that are among those most touted for their annual dividend yields are Pioneer Natural Resources Co, Kinder Morgan Inc-DE, ONEOK Inc, Pinnacle West Capital Corp, and AbbVie Inc.

Spin-offs

Everyone knows that a spin-off is a by-product, a creation of something that is a deliberate or incidental result of a larger project. The term is most widely famous in the film and TV spheres when a new show or movie gets produced featuring characters from an already existing one. In the corporate world, a spin-off is a type of divestiture, the birth of a new, independent company, brought upon the distribution or sale of new shares of an existing division or business of a parent entity.

There is nothing overly complicated regarding how a corporate spin-off works. A parent usually spins off parts of its enterprise that it expects to be super lucrative. When it does so, these receive a new name and management structure yet retain many of the same human resources, intellectual property, and assets. Moreover, in most cases, the parent entity will still provide tech, logistical, and financial support to its spun-off creation. Investors that owned shares in the parent company at the time that the spin-off occurred will own shares in both companies following the spin-off, and the value of their investment in the parent before the action should be the same as the value of their investment in both the spin-off and the parent after this move.

A notable example of a spin-off is the separation of eBay and PayPal that happened in 2015, when these two brands became different publicly-traded companies, with eBay’s shareholders getting a distribution of PayPal shares on a pro-rata basis. Before this move happened, PayPal had been a subsidiary of eBay, acquired in 2002 in a deal worth $1.5 billion.

The Stock Split

A corporation can select to increase its shares at any time to boost its stock’s liquidity. That gets referred to as a stock split. The standard ratio splits are 2:1 or 3:1 (meaning for every share, now there are three). And despite the fact that, by a specific multiple, the number of available shares on the market grows, their total value remains the same because the initiated split does not change a company’s fundamental worth. Thus, there is no modification to its total market capitalization.

In 90% of instances, a business chooses to conduct a stock split to lower the price of a single share so that it becomes more affordable to investors. To be in a more comfortable range for wider demographics without losing any value.

Other commonly seen stock split ratios include 5:1, 10:1, and 100:1. There is no ratio restriction in play. That is entirely up to each company performing this action to decide. The primary disadvantage of a split is that the procedure is super costly, requires sizable legal oversight, and must get done under stringent regulatory rules. So, the company that wants to split its stock must pay substantial charges to make this go through, and much of those costs get associated with it, ensuring that it has no movement in its market capitalization value.

In mid-July 2022, Google’s parent Alphabet underwent a much-publicized 20:1 split of its Class A, B, and C shares. In 2014, Apple executed a 7:1 split for smaller investors to get more of the brand’s shares. Therefore, this action is commonplace in the financial market.

The Reverse Split

Also known as a stock merger, share rollback, or stock consolidation, this action is the precise opposite of a stock split. That means that it is a corporate move when a board of directors chooses that it is wise to consolidate existing shares of stock in a bundle of fewer, higher-priced ones.

Again, doing this, as in the case of a stock split, does not influence a company’s market value in any way. It only affects its stock price. The most common reason for a reverse stock split is that a share price may be dramatically falling, making it vulnerable to market pressures and adding doubts that it may reach a point where it becomes unable to meet listing requirements. Most see this action as a signal that a company is in distress, so it brings a negative connotation. But an entity may decide on a reverse split to attract big investors with policies that forbid them from investing in stocks whose prices fall below a defined minimum value, or it may choose to perform this action to satisfy regulators or boost the price of a spin-off company.

While most perceive the reserve split as a death knell, the Priceline Group used this action to stage what many believe is the greatest stock comeback of all time. The online travel giant came back from the brink of oblivion, as in the late-2000s, its stocks fell to just over $1 per share after riding above $100. Though the company started its recovery phase before initiating its 1-for-6 reverse split, still, following it, its shares reached $22, and at writing, the stock price of the company, now known as Booking Holdings Inc, is trading for $2,471 a stock. Another recent newsworthy example of a reverse stock split took place in 2021, conducted by General Electric. It was a 1-for-8 one, approved by GE shareholders in May of that year. And other illustrations of this action that have propelled companies to success come from corporations like AIG (AIG) and Motorola (MSI).

Mergers & Acquisitions

Mergers and acquisitions are consolidations of companies. These two terms get used interchangeably in the financial industry, despite having different meanings. A merger happens when two firms combine into a single legal entity operating under a novel corporate name and banner. While an acquisition is a phrase depicting the takeover, or purchase of one entity from another, seemingly more powerful one. Companies can buy out others outright. Or they can merge with them, snagging some of their most valuable assets into a new business.

Mergers customarily occur between firms of roughly the same size, usually operating in the same sphere. It gets looked at as a joining of forces to create something greater than themselves that can dominate their sector. A noteworthy instance of this in the car industry is when Chrysler and Daimler-Benz ceased to exist, and DaimlerChrysler got created as a new company, with both entity’s stocks getting surrendered to this new brand that got a novel ticker and stock price issued.

Hundreds of monumental acquisitions have shaken the world’s economy over the past few decades. Yet, concerning the tech sector, probably the one most regarded as the best is Google’s (Alphabet’s) acquisition of Android in 2005 for $50 million. Many have this opinion because currently, the Android OS is running on more than 70% of the active mobile devices in circulation globally.

To Wrap Up

Corporate actions are distinct deliberate events that affect a company’s stock. They may have a substantial future impact on a business and materially affect its stakeholders. These get divided into two primary categories, mandatory and voluntary. The first, gets started by a corporation’s board of directors and does not include the necessary involvement of shareholders, even though these parties can directly profit or incur damage because of them. The latter, voluntary corporate actions, are events in which shareholders elect or get allowed to vote on these organizational moves.

The five most established corporate actions are the ones explained above. They are dividends, spin-offs, stock splits, reverse splits, mergers, and acquisitions.