How Corporate Actions Affect Shareholders?

By David Gass

Corporate actions affect the rights and privileges of the shareholders to a great extent. Shareholders are of two kinds, the common shareholders and the preferred shareholders. Companies do offer their shareholders with voting rights if agreed by the board of directors.

The following corporate actions can have a great impact on the fortune of shareholders.

Liquidation: In case of liquidation of a company, the common shareholders are at a maximum risk. The funds raised by the liquidation of a company would be distributed to the preferred shareholders first. However, preferred shareholders do not enjoy voting rights in the company, hence would not be able to influence corporate actions.

Capital Redemption: In this process the registered owners avail the facility of redemption of capital either by cash payment or by new securities. Capital Reduction is one step ahead of capital redemption where the excess capital is distributed to the shareholders.

Conversion of Securities: Shareholders are also affected by dealing in convertible securities. For instance, if a particular shareholder is holding convertible preference shares, the company may declare that he or she can get them converted into debentures or ordinary shares. Conversion can be full or partial. In a partial conversion the shareholders are required to convert only a percentage of their shares. In full conversion no such option is available.

Minority Offer: At times, a small group of shareholders is required to sell their shares to a large group that is already holding a majority stock. This is termed a minority offer. This may not always be done with the consent of the minority shareholders. It is therefore said that the board of directors determines the fate of minority shareholders.

Stock Split: The board of directors sometimes decides to split the company’s shares in order to boost the liquidity of the stock. Although more shares would be available to in the market either to buy or sell, this action does not add much value to the company’s stock. Stock split also leads to dilution in a company’s earnings per shares, commonly known as EPS.

Interest Payment: At times, the profit earned by the company can be further distributed amongst the shareholders in the form of interest. Different companies have different policies in this regard and some prefer not giving any interest at all, but utilizing the profits for further expansion. It is in the long-term interest of shareholders if the company able to grow its business significantly. But most of the investors prefer to gain immediate rewards rather than waiting for the share prices to appreciate.

To better understand the above mentioned and other related corporate actions there are lot of information available in the Internet. Also many companies provide softwares to help companies to make documents related to the above corporate actions in an easy and cost effective way. Shareholders and investors, who are indirectly the owners of the company in which they hold stakes, need to have complete understanding of the impact of corporate actions on the value of share prices.

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