Corporate Actions – A Concise Guide An introduction to securities events by Francis Groves HARRIMAN HOUSE LTD 3A Penns Road Petersfield Hampshire GU32 2EW GREAT BRITAIN Tel: +44 (0)1730 233870 Fax: +44 (0)1730 233880 Email: enquiries@harriman-house.com Website: www.harriman-house.com First published in Great Britain in 2008 Copyright © Harriman House Ltd The right of Francis Groves to be identified as the author has been asserted in accordance with the Copyright, Design and Patents Act 1988 978-1-905641-67-3 British Library Cataloguing in Publication Data A CIP catalogue record for this book can be obtained from the British Library 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, or otherwise without the prior written permission of the Publisher This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without the prior written consent of the Publisher Printed and bound in Great Britain by Athenaeum Press Limited, Tyne & Wear No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading material in this book can be accepted by the Publisher, by the Author, or by the employer of the Author Contents About the Author vii Preface ix Introduction xi Quick Guide to Locating Information on Specific Corporate Actions Defining Corporate Actions xv The characteristics of a share and its issuer – definitions of corporate actions – how the action is decided upon: articles of association, AGMs & EGMs – the board of directors – chief financial officers and treasury departments – legislation underpinning the system The Main Corporate Actions How many types of corporate action are there? – definitions/descriptions of main types of corporate actions (dividends, scrip dividends, scrip issues, return of capital, consolidation, rights issues, takeover bids, agreed takeovers, de-mergers) – benefits or otherwise for shareholders and share prices The Corporate Actions Process 31 From the investor’s point of view – announcement dates – record dates – ex-dates – effective dates – steps along the way to a takeover – corporate actions information from the share prices pages – typical timetables for returns of capital and rights issues iii Corporate Actions – A Concise Guide The Corporate Actions Industry 43 What goes on behind the scenes – chart of the corporate action flow of information – the connections between the main players – the legislative framework How Well is the Corporate Actions System Working? 59 The volume of actions and cost of corporate actions administration; staff, data and investment – risk and the cost of mistakes in processing – where the problems arise? – who loses out when mistakes are made? Corporate Actions; Technology and the Future 73 The importance of automation in corporate actions – ISO 15022 and SWIFT – Straight Through Processing (STP) – ISO 20022 – solution providers in corporate actions automation – how likely is it that full standardisation will ever be achieved? Corporate Actions Wreaking Change on Shares Corporate actions, a winding path – a concrete example – how much does the investor need to know? – how important is corporate action information (or the lack of it) as a factor in selecting a sharedealing/investment service? – different routes for information to reach the investor iv 87 Contents Shareholder Voting 97 How important is it to vote? – voting by investment funds – differences between the UK & the USA – the Myners Report – the state of affairs for the retail/small investor – voting terminology Corporate Actions and Taxation 109 Stamp taxes and withholding taxes – illustrations of how different corporate actions can affect income tax and CGT liabilities with some specific shares as examples – treatment of corporate actions for ISA holders – investment funds and corporate actions 10 Corporate Actions in Different Jurisdictions 121 National differences in corporate actions – Japanese dividends – depository receipts – restrictions on foreign share ownership – different rules for shareholder general meetings – bearer certificates – the removal of corporate actions barriers in the EU? 11 Corporate Actions for Debt Securities 135 The volume of corporate actions relating to bonds – fundamental difference from equity corporate actions – interest and redemption, the basic corporate actions – optional redemption, callable and puttable bonds – variable coupon bonds and floating rate notes – conversions and warrants v 12 Corporate Action Effects Across the Investing Spectrum 147 How corporate actions affect the calculation of stock exchange indices – how charts handle corporate actions – the effects of corporate actions on futures, options, CFDs and ETFs – corporate actions for CDOs – corporate actions and securities lending – hedge funds and corporate actions – corporate actions and the pension fund trustee – corporate actions and crime 13 Conclusion 161 Glossary 165 Appendices 191 List of Central Securities Depositories 193 Capital Gains Tax Example – Biffa/Severn Trent 197 Non-rights Issues of Shares 199 Suggested Reading 201 Index 205 About the Author Francis Groves studied modern history at the London School of Economics and has many years of experience working for legal and financial publishers including, Reuters, the Financial Times and Butterworths He has written on overseas property investment and created financial literacy training materials The interaction of politics and finance is a particular interest for him vii Preface What the book covers Corporate actions are normally considered as incidental to the business of investing and marketing investments, but the aim of this concise guide is to look at the subject of corporate actions in the round, defining what corporate actions are, listing and describing the main corporate actions and showing how individual corporate actions are applied to investors’ holdings of securities This will give an overview of the way in which the corporate actions processing function works both in the UK and other important global markets Detailing all the differences between jurisdictions is beyond the scope of this guide, though the UK is taken as a starting point to help describe and explain significant national distinctions, particularly for the United States and the rest of the European Union Who the book is for The guide is designed to be an introduction to corporate actions for investment industry practitioners in general Those starting out in corporate actions processing will find it a helpful outline, but it is also designed to be useful for all who encounter corporate actions tangentially in disciplines such as fund management or financial advice provision Different industry participants have differing interests in corporate actions, and for the sake of consistency the guide is (mainly) written from the point of view of the beneficial owners of securities ix Corporate Actions – A Concise Guide The Biffa shares had a value equal to 21.3% of the combined Biffa and Severn Trent shareholdings on 9th October 2006:140 The cost base of the 250 new shares received in Severn Trent PLC is £3,080: £3,914.25 x 78.7% = £3,080 The cost base date for the Biffa shares is £834: £3,914.25 x 21.3% = £834141 The price the Biffa shares were sold for on 30th November 2007 was 333p a share, grossing £1,249.142 The total taxable gain is £415 (for the sake of simplicity assume that the investor has already used up their capital gains tax allowance) The Severn Trent shares were worth 1,567p a share on the same day, grossing £3,918 This would have produced a taxable gain of £838 Help from HM Revenue & Customs HM Revenue and Customs publish helpsheets to assist with CGT calculations on shares which can be accessed online at www.hmrc.gov.uk/helpsheets These are particularly useful for the “bed & breakfast”, pooling and matching rules Issuers will normally provide notes on the tax positions arising from corporate actions such as returns of capital or de-mergers, to help maintain good investor relations 140 The special dividend that was also paid as part of the consolidation/de-merger exercise appears to have been treated entirely as an income distribution subject to income tax Consequently, it plays no part in the cost base calculations 141 Note that online dealing services’ portfolio valuation screens should show the cost base of the shares in the spun off company, not their share price on the first day of trading 142 Biffa shares had been down on price on the first day of trading for most of 2007 but Montagu Private Equity and HGCapital made a second (higher) bid approach for the company at the end of November 2007 198 Non-rights Issues of Shares In the UK companies wishing to issue equity other than by means of a rights issue have the following methods to choose from: Cash Placing Under the pre-emption rules these are limited to 5% of issued share capital in any year, or 7.5% in a rolling three-year period The rules only allow a discount to the price of existing shares of 5%.143 Vendor Placing These occur in acquisitions such as the purchase of another company’s subsidiary In the event that the vendor wishes to receive cash for their divestment, the acquiring company has the option, under the pre-emption rules, of selling shares to third parties up to the level of 10% of issued share capital Cashbox Placing Another placing method that is normally only used in the context of acquisitions The cashbox (B) is a subsidiary of the listed company (A) seeking to issue more shares B’s shares will be subscribed to or underwritten by A’s investment bank Company A will then issue shares to B with B’s cash as the consideration This cash can then be used to finance A’s takeover activities 143 The pre-emption rules are the guidelines of the Pre-emption Group and derive their force from the willingness of the Association of British Insurers and the National Association of Pension Funds to uphold them Shareholders’ legally enforceable pre-emption rights are set out in the Companies Act 2006 and provide a lower barrier to non-rights share issues than the pre-emption rules 199 Corporate Actions – A Concise Guide Open Offers Open offers come with subscription rights for shareholders The difference from a true rights issue is that open offers not include a tradable entitlement to buy the rights Directors’ Authority to Allot Shares Many companies, especially large ones, may propose resolutions at annual general meetings that renew the directors’ authority to allot securities for cash to the shareholders and to sell Treasury shares This enables them to move quickly to acquire new backing and fresh capital (as has been necessary for a number of banks that have turned to private equity and sovereign wealth funds in recent months) This could be seen as pre-empting pre-emption.144 Pre-emption rights not exist for shareholders in US corporations They are present in the corporate law of all the larger European Union economies though, and are enshrined in the European Union’s Second Company Law Directive (77/91/EEC).145 However, current opinion seems to be in favour of loosening EU legislation in this area.146 Australia and Canada have pre-emption rights but allow larger non pre-emptive share issues than European countries permit (up to 25% of issued shares in a six month period in the case of Canada) Japan has no pre-emption rights but issues of discounted shares require the approval of 66% of shareholders represented at a general meeting 144 In the UK the authority for steps like this is section 80 of the Companies Act 1985 145 Hence the speed and frequency with which US banks such as Citigroup were able to tap sovereign wealth funds for fresh capital in the wake of the sub-prime crisis in 2007 Directors of US companies have a general duty to look after the interests of their shareholders, who can go to court to argue that they are being disadvantaged by new share issues 146 In the UK the 2004 Myners report “The Impact of Shareholders’ Pre-emption rights on a Public Company’s’ Ability to Raise New Capital” looked at the subject in detail, particularly in relation to the capital needs in the biotech sector 200 Suggested Reading Chapter - Defining Corporate Actions ‘Corporate Actions Processing, What Are The Risks?’ (Oxera, 2004) Although this report, commissioned by the DTCC of the US, is now a few years old it includes some good statistics for the corporate actions industry and highlights some of the industry’s challenges and areas of vulnerability Chapter – The Main Corporate Actions ‘Share Prices And Trading Activity Over The Corporate Action Processing Cycle’ (Oxera, 2006) Another study commissioned by DTCC, which looks at the impact of takeovers, spin-offs, stock splits, exchange offers and rights issues on share prices and trading volumes The research was based mainly on a large sample of US corporate actions from 2003 to 2005 Chapter – The Corporate Actions Industry ‘Transforming Corporate Actions Processing’ (DTCC, 2003) This white paper gives a good overview of DTCC’s thinking on its role in the corporate actions processing industry at the time DTCC’s Global Corporate Action validation service Newsletter, published monthly, which keeps readers abreast of the organisation’s work in the corporate action arena (Available from www.dtcc.com) ‘Statement On The Need For Universal, Standardised Messaging In Corporate Actions’ (Association of Global Custodians, June 2007) 201 Corporate Actions – A Concise Guide This white paper provides a useful snapshot of the workings of the corporate actions industry (together with a helpful diagram) AGC is an interest group of just 10 global custodians and, apart from its annual survey of securities depositories, this paper is the high point of its output Chapter – How Well is The Corporate Actions System Working? ‘Managing Risk in Corporate Actions: How Far Has The Industry Come?’ (Financial Services Research, April 2006) A helpful article drawing together the thinking of some of the leading practitioners in the corporate actions field ‘CloseUp – Corporate Actions; Risks? – A quantitative study’ (SegaInterSettle) This is the only honest analysis of the problems facing a Central Securities Depository currently in the public domain For an idea of the kinds of problems that corporate actions processing can run into, a look at some of Euroclear UK & Ireland’s Corporate Action Bulletins is illuminating and recommended Chapter – Shareholder Voting ‘Review of The Impediments to Voting UK Shares’ (Report by Paul Myners to the Shareholder Voting Working Group, June 2004) Chapter 10 – Corporate Actions in Different Jurisdictions ‘Harmonisation of Corporate Actions Processing in Europe: Giovannini 3’ (April 2007) 202 Suggested Reading This report provides a useful list of the areas in which harmonisation was deemed to be necessary and a brief outline of progress in the individual EU-member states ‘China’s Capital Markets at The Birth of A New Era’ (Araceli Almazan & Kris Huishan Lin, UC Davis School of Law, May 2006) A useful summary of China’s state share reform that takes the form of an interview with Winston W Ma, vice-president at JPMorgan Chapter 12 – Corporate Action Effects Across the Investing Spectrum The DTCC has published the following white papers on the subject of structured securities processing: ‘A Central Counterparty for Mortgage-Backed Securities: Paving The Way’ (April, 2006) ‘Structured Securities Processing Challenges’ (June, 2006) ‘Transforming Structured Securities Processing’ (September, 2007) 203 Index Index Subjects covered in the Glossary are highlighted in bold type A Abu Dhabi Investment Authority 143-144 acceleration covenant 140, 167 accrued interest 141, 167 ADR (American depository receipts) 124 advance warning plan 167 agent banks 52 agreed takeover 29 announcement date 33-34, 37 articles of association 5, 7, 126, 181 asset backed securities 68, 145, Biffa PLC, de-merger from Severn Trent 30, 116, 197-198 BISS (Benchmarking International Systems & Services) 85 Bloomberg 64, 182 bond indenture 138-140, 168, 169, 176, 179-180 bonus issues 151, 173, 182 Bradford & Bingley Building Society 52 Brewin Dolphin Ltd 105 Brewster, Pamela, Celent spokesperson 84 152, 154, 167, 179 Asset Management Forum (of the US) 81 Association of British Insurers (ABI) 102, 199 C call or pre-payment provisions 169 call protection 140, 169 CAMA (Corporate Action B bankruptcy 57, 151, 154 bearer certificates 128-129 Management Application) 84-85 capital gains distribution 119, 169 205 Corporate Actions – A Concise Guide Capital Gains Tax (CGT) 20, futures & vi, 131, 151 111-112, 197-198 information sources 93, 95 capitalisation issues 149 mistakes 65, 67- 71, 83, capped FRN 169 179 CDI (CHESS depository corporate bonds 47, 137-138, interests) 124 142, 146, 189 central securities depositories cost base 115, 171, 197-198 (see CSD) 49-50, 68, 81, 130, CREST 36, 39-40, 50-51, 107, 158, 193, 195 172 certificated shares 49, 52, 54, CSD 46-47, 49-51, 54-55, 68, 172 80, 176, 193 CheckFree 83, 85 custodian’s nominee 46, 51, 54, China Securities Regulatory 180, 187 Commission 132 custodians 52, 54, 62-63, 68, 69- Citigroup 132, 143-144, 200 78, 84, 104, 131, 153, 163, 176, class test provisions 101, 169 188, 201-202 Clearstream 51, 194-195 Combined Code on Corporate Governance D common stock 3, 145, 170, 181 data scrubbing 54-55, 62, 172 Companies Act 2006 105-106, debt securities 3, 131, 135, 137- 199 146, 152-153, 163, 167, 176, convertible bonds 143, 173 181, 186, 188 corporate actions Delaware, General Corporation 206 contracts for difference & Law of 151-152 Delaware, Supreme Court of (& Event Interpretation Grid poison pills) 28 81, 174 Dematerialisation 50-51 exchange traded funds & de-mergers 29, 116, 150-151, 151-152 188, 198 Index & Capital Gain Tax 116, 172, 202 198 European Central Securities depository receipts 124-125 Depositories Assoc.(ECSDA) 81, Depository Trust & Clearing 130 Corporation 4, 61, 203 European Union 79, 101, 124, Depository Trust Company 50, 126, 128, 130, 138, 200 153, 172, 196 events of default (EODs) 154, discounts (discounted rights 164, 174 issues) 22 ex-date 33-34, 37, 39, 77, 124 dividend cover 13, 15 Exchange Data International 64 dividend history 14, 93 exempt distribution 116, 175 dividend re-investment plans (see extendable bond 140, 175 DRIPs) 15, 173 dividend yield 12-14, 18, 182 dividends 11-17, 20, 26, 38, 67, F 111-112, 117-118, 124, 133, Femia, James,DTCC 61 141, 151-152, 158, 163, 172- Fidelity Investments, Actions 174, 186 Xchange 82 DRIPs 16, 47, 173 Financial Services & Markets drop-lock FRN 142, 174 Act 2000 57, 138 Dubai International Financial Financial Services Authority Exchange 131 (FSA) 6, 57 Dubai Ports World 125 Financial Technologies International 84 E floating rate notes 137-138, 142 FT Interactive Data 64 effective date 33-34, 37 fully paid shares 40, 175 Encore Oil PLC 90 fund managers 52-54, 67, 69-71, entitlement offer 24, 174 85, 99, 103 Esprit Telecom 129 Euroclear UK & Ireland 40, 49, 207 Corporate Actions – A Concise Guide G G30 65 Garnier, Jean-Paul 102 GDR (global depository receipt) 124 gearing ratio covenant 140 Giovannini Protocol 79 GlaxoSmithKline PLC 102 Global Corporate Actions validation service 64, 82 global custodians 52, 62, 69, 78, 84, 131, 188, 201-202 GoldenSource 84 Government of Singapore Investment Corporation 144 Industry Standardization for Institutional Trade Communication (see ISITC) 81 Information Mosaic 84 Institutional Shareholder Services 103 international central securities depository 51 ISA (Individual Savings Account) 117-118 ISITC 82 ISO 15022 40, 75- 82, 85, 130, 174, 177, 186 ISO 20022 82, 177 issuers 16, 19, 52, 68, 78, 85, 93-94, 101, 111, 117, 130-132, 163-164, 176, 198 H Hoodless Brennan PLC 105 HSBC Global Investor Services, global custodian 52, 62 J JPMorgan 80, 203 Hub Data, eActions 64 K I Iberdrola SA 114 Icahn, Carl 102 immobilisation 50 Income & Corporation Taxes Act 1988 175 208 Kempe, Michael, Chairman of the European Central Depositories Assoc 71 Knight, Eric 102 Korean Investment Corporation 144 Index L N lead managers 68, 78 National Association of Pension Lenelle, Bernard, co-Chair of the Funds 102-103, 199 SMPG Corporate Actions National Securities Clearing Working Group 81 Corporation 50 Listing Authority, UK 21, 68, 78 negative pledge 140, 179 Listing Rules 21, 78 nil-paid shares 40 loan notes 116-117, 175, 178 Northern Rock PLC 5, 157 London Stock Exchange Northern Trust 80 Corporate Action Diary service 64 M O Obama, Barack & the Shareholder Vote on Executive Manifest Voting Agency Ltd 103 Compensation Act 101 Marks & Spencer PLC 107, 158 omnibus nominee 55, 104, 180 master servicers 153 OMX Nordic Exchange 94 Megacor 84-85 open offer 24, 174, 180, 185 Mellon Financial 70, 79 over-voting 128 Merrill Lynch 144 mini max FRN 142, 178 mortgage backed securities 138, P 179 paying agents 154 municipal bonds 137-138 Pearson PLC, & de-merger mutual funds, tax treatment of rumours 29, 83 119 Pensions Act 2004 157 Myners Report (“Review of the PIRC (Pensions Investment impediments to voting UK Research Consultants Ltd.) 103 shares”) 103-104 poison pills 28, 99 Portugal Telecom 102 209 Corporate Actions – A Concise Guide pre-emption right 21, 181, 188 Royal Dutch Shell PLC 116 pre-payment provisions (see call Ryanair Ltd 126 or pre-payment provisions) Prospectus Rules 138 provisional allotment 40, 181 S Proxinvest 103 scrip dividends 16-17, 34, 111, proxy voting agencies 103 163, 173 scrip issues 18, 38, 100, 133 Securities & Exchange R Commission 57, 138 record date 15, 17, 33-34, 39, Securities Industry Association 40, 124, 128, 130, 141 (of the US) 82 redemption 39, 117, 131, 139, SegaInterSettle (SIS) 67, 80, 196, 140-145, 167, 169, 173-176, 202 180, 182 separate register 126, 184 Regulatory News Service 94, 182 Severn trent PLC, divestment of relative dividend yield 182 Biffa 197-198 residual assets 3, 182 Shaftesbury PLC restricted voting shares 127 share blocking 101-102, 123, return of capital 19-20, 30, 38- 185 39, 112, 116-117, 156, 183, 188 share buyback 20 & tax treatment 112 share consolidation 21, 173, 197 Reuters 64, 96, 137 share placing 89, 185 reverse takeover 28, 90, 151, share register 4, 33, 45, 48, 185 183 share registrar 47-48, 54, 185, Revised Model Business 189 Corporation Act share split 18, 21, 38, 173, 185 rights issues 3, 21-22, 38, 48, 80, ShareCrazy.com 94 99, 111, 118, 123, 139, 151, shareholder meetings 5-6, 82, 99, 199, 201 105, 107, 108, 125, 129, 170 & CGT 112, 114 210 Sharia-compliant assets 131 Index SIS (see SegaInterSettle) SWIFT 8, 76-82, 85, 177, 188 SmartStream 84 SWIFTReady 84, 85 SMPGs 81 Society for Worldwide Interbank Financial Telecommunication T (see SWIFT) takeover bids 3, 20, 25, 27, 139, Software as a Service (SaaS) 85 155, 158 solicitation of shareholders’ Tata Consultancy Services (TCS) consent 186 83 special dividend 26, 30, 114, Taurus Project 51 146, 186 Telco Communications 129 Stagecoach PLC, return of Telefonica, takeover of O2 28 capital 38 Telekurs Financial 64 Stamp Duty 16, 111 Thomson Financial/Datastream Stamp Duty Reserve Tax 111 64 Standard & Poors 64, 149 Tokyo Market Information State Street Bank, global service 64 custodian 52, 62 total return 13, 149, 188 Step-up bonds 142, 187 treasury departments iii Stockbrokers 105, 107, 128, 163, 173 straight through processing U (STP) 77, 163, 187 uncertificated shares 189 StreetActions 84 unconditional offer 25-26, 36, structured securities 68, 152, 37, 189 153-154, 164, 174, 178, 180, Unilever PLC 102 188, 203 sub-custodian 52, 62, 188 subscription rights 21-24, 113, 114, 188, 200 V variable coupon bonds 142 Vereinigte Oostindische 211 Corporate Actions – A Concise Guide Compagnie (VOC) 12 Vermeg 84 W warrants 133, 144-145, 167, 171, 178-179, 189 withholding tax 111-112, 123, 155 X Xcitek 80, 83 212 ... different corporate actions can affect income tax and CGT liabilities with some specific shares as examples – treatment of corporate actions for ISA holders – investment funds and corporate actions... handle corporate actions – the effects of corporate actions on futures, options, CFDs and ETFs – corporate actions for CDOs – corporate actions and securities lending – hedge funds and corporate actions... following chapter Corporate Actions – A Concise Guide In 2004 the number of corporate actions taking place worldwide was estimated to be close to one million.8 Given that each corporate action affects