Corporate Actions by Public Companies – What You Need to Know

When you invest in shares of publicly traded companies, something comes with the package – corporate actions, which can affect a company’s stock and, therefore, its shareholders. Corporate actions can range from changing a company’s name to issuing a dividend or major corporate restructuring through a merger or bankruptcy.

Some of these actions, such as a merger or bankruptcy, could make headlines if they involve large, well-known companies. Other changes, such as a change in stock symbol or payment of dividends, might not make the headlines, but it is important for investors to be aware of them.

Here are six common types of corporate actions and their potential impact on your investments.

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1. Name or trade symbol changes

These changes will appear on clients’ account statements and in account holdings. A company may make these changes to better reflect its business orientation or ownership, or to distinguish itself from other companies. These changes may require the firm to obtain a new CUSIP, the unique nine-symbol identifier assigned to most financial instruments. Check: No, FINRA has not approved this security for trading.

2. Stock split

A stock split changes the number of shares held by each shareholder, but it does not affect the shareholder’s proportional equity in the corporation. 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 stake in the company remains the same.

A company may decide to do a stock split to lower the price per share of its stock; a very high stock price can intimidate investors who fear there is little room for price appreciation. Conversely, a stock split reduces the number of shares outstanding and increases the price per share. A company may reverse-allocate to meet minimum listing price requirements to continue trading on an exchange. For more information, see A Piece-by-Piece Guide to Stock Splits.

3. Dividends

When a company distributes, in the form of cash or stock, part of its profits to shareholders, it is called a dividend. A cash dividend gives you a sum of money for each share held, and a stock dividend gives you additional shares in the company. For example, a 10% stock dividend means that for every 10 shares you own, you will get one additional share. Companies with substantial retained earnings could pay a dividend to pass the profits on to their shareholders.

4. Mergers and Acquisitions

A merger occurs when two companies agree to become a single entity. An acquisition, on the other hand, occurs when one company buys the majority of another company’s stock, which can be 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. Find out how companies use their money: mergers and acquisitions.

5. Offer of Rights

A rights offering occurs when a company issues “rights” to existing shareholders that allow them to purchase additional shares directly from the company in proportion to their existing holdings within a prescribed time frame. Companies will announce an expiration date by which shareholders must purchase the rights offering, usually one to three months from the date the company announces a rights offering. The price at which each share can be purchased is generally lower than the current market price. Rights are often transferable, allowing shareholders to sell them on the open market. Companies usually offer rights when they need to raise funds.

6. Liquidation and dissolution

Liquidation is the process by which a company sells its assets and permanently closes its operations. In the event of liquidation, the assets of the company are sold and the proceeds are used to pay off as many creditors as possible. Dissolution is the final stage of liquidation, during which the assets and property of the company are redistributed.

Secured bondholders are 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 over-the-counter market after a bankruptcy filing. A stock with a “Q” as the last letter of its trading symbol indicates that the company has filed for bankruptcy.

FINRA’s Role in OTC Securities Trading

Federal securities regulations direct FINRA to process requests to report securities transactions by companies that trade on the over-the-counter market rather than on a national securities exchange. Corporate actions that must be reported to FINRA generally include mergers, a dividend or other distribution of cash or securities, stock splits, and changes of name and domicile.

FINRA’s processing function helps keep investors and the market informed of company actions. However, FINRA is not responsible for approval or disapproval of the action taken by the firm. And FINRA does not review these claims for a company’s compliance with federal, state, or other regulatory requirements. The public company is responsible for ensuring that its business decisions comply with all applicable laws and regulations.

Trading in securities of listed companies is handled by the stock exchange on which a company is listed; and information on such securities transactions is available on the websites of the relevant stock exchanges.

How can you find out about OTC securities transactions?

If you own stock in an OTC company that is undergoing a corporate action, you will want to check the list daily. The daily list provides valuable information regarding corporate action announcements for OTC securities, including ex-dates (the date that determines whether shareholders will receive a dividend), new issues, deleted issues, deletions, the trade symbol and name changes. The daily list also indicates whether previously announced changes have been updated or rolled back.

Beware of announcements regarding FINRA “approval” of a corporate action

Companies that are subject to a corporate action will often issue a press release or other communication, such as a tweet or other social media post, to provide details of the change. For example, a company may announce a new corporate name that reflects a change in product lines or business focus. However, in the past, some companies have used these postings 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.

Subscribe to FINRA Investor Perspectives newsletter for more information on saving and investing.

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