A corporate action is defined as an event instigated by a company that may affect the share capital. Events may be voluntary or mandatory, may impact stock (increasing, decreasing or changing the stock held) or cash (payment or receipt) or may confer a different right such as voting at company meetings or any combination of the above. Underlying shareholders often have to make decisions on voluntary events based on a set of options, such as cash or stock on dividends, or to accept a rights issue or convert warrants.
“When a publicly-traded company issues a corporate action, it is initiating a process that brings material change to the company and affects its stakeholders. Corporate actions are typically determined by a corporation’s Board of Directors and authorised by the shareholders.” Source: SWIFT.com
SWIFT define around 60 different types of corporate action although in practice these can be grouped into about 25 different issues. Examples of corporate actions include rights issues, bonus issues, take-overs, liquidations, class actions and conversions. Corporate Actions administrators working for Asset Management Houses, Registrars, Custodians, Fund Administration Service Companies and various Information Providers all look after all types of equity and bond instruments and are responsible for processing corporate actions across a wide range of accounting systems. Types of fund include investment trusts, unit trusts & OEICs, life funds, pension funds, charities, international accounts, SICAVs, and retail accounts (PEPs, ISAs, savings schemes, investment funds).
The first stage of the corporate action process is to identify that an issue is occurring. The primary data suppliers for corporate actions are custodians and data vendors such as Bloomberg and FTS. Other data vendors including Reuters, and the LSE are used to validate data.
Many corporate actions require the update of fund accounting systems to amend stock and cash positions. Where updates are required, these need to take into account the timing of NAVs for individual accounts. Where corporate actions affect the price of the parent asset, this change in price is used to confirm an issue has occurred.
The decision you make on a corporate action can affect the future value of your shareholding. For example, if you are accept the option to receiving new shares by way of a dividend reinvestment plan, and later the stock market crashes, you potentially lose a greater part of your portfolio. However, the reverse can also be true. But the choice is yours.