Acquisition

Home > Corporate Actions Toolbox > Events > Acquisition In general, companies will aim to grow. Growth can be achieved organically (the company simply growths their existing company) or inorganically (by acquiring other already existing businesses and integrate them with their own). In order to execute an acquisition strategy, the acquiring company may use several means: a merger, a takeover bid (usually by announcing a Tender Offer or an Exchange Offer) which are all Corporate Actions Events. Click on the links to read more about these events.

Bonus Issue
Shareholders are awarded additional securities (shares, rights or warrants) free of payment. The nominal value of shares does not change. A Bonus Issue, which is sometimes referred to as "Scrip Issue" or "Capitalisation Issue", is effectively a free issue of shares - paid for by the company issuing the shares out of capital reserves. Please note that a Bonus Issue should NOT be seen as a Dividend, like for example aSTOCK DIVIDEND event. A company calls a Bonus Issue to increase the liquidity of the company's shares in the market. Increasing the number of shares in circulation reduces the share price. The term 'Bonus Issue' is generally used to describe what is technically a capitalisation of reserves. The company, in effect, issues free shares paid for out of its accumulated profits (reserves). Theoretical example, company ABC calls a 1 for 4 Bonus issue:


For every four shares you own in ABC you will receive one additional free share i.e. you will own 5 shares of ABC plc after the issue The number of shares issued increases by 25% The share price adjusts proportionately; if the market price was 100 cents before the issue, it will adjust to 80 cents as the number of shares have increased

 

The Earnings Per Share (EPS) and Dividend Per Share adjust proportionately, but the ratios remain the same The issued share capital increases by 25%, although this is offset by the reduction in the capital reserves.

Let us say you purchased 1000 shares in ABC plc at 100p per share. For Capital Gains tax purposes, the Bonus shares are treated as the same asset and acquired at the same time as your existing ABC plc shares. There is no immediate liability to CGT when you receive the bonus shares, but there could be a capital gains tax liability when you come to dispose of the shares. In order to determine your capital gains when you come to make a full or part disposal of your ABC plc holding, you need to adjust the base cost of your shares, reducing the cost per share as follows: Before Bonus Issue you own: 1000 x shares ABC plc @ total cost = 1,000 Base cost per share = 100p In this example, you receive 1 new Bonus Issue share for every 4 shares held. If you own 1000 shares, (1000/4 = 250) then you will receive 250 new bonus shares. After Bonus Issue: You previously owned 1000 shares in ABC plc which you bought for 1,000. You then received 250 bonus issue ABC plc shares, at no additional cost. And so, pooling the new shares together with your original holding, you now own a total 1,250 shares in ABC plc with total combined cost of 1,000. As you can see the base cost per share is therefore reduced: 1250 x shares ABC plc @ total cost = 1,000 New base cost per share = 80p When you make a full or part disposal of your ABC plc shares, it is the new reduced base cost that you use in your Capital Gain calculations.

Example (that happened in reality): RBS 2007 Bonus Issue (source www.rbs.com)
The Bonus Issue was approved by shareholders at the Annual General Meeting on 25 April 2007 and took effect on 8 May 2007. It had the effect of lowering the price per share, aligning them closer with the average share prices for FTSE 100 companies and other banking stocks at the time. Why were the Bonus Shares issued? The Group's share price had been trading for some time at a price which was high relative to the average share price of companies trading on the London Stock Exchange. The directors believed that many shareholders prefer to deal in shares with a lower price per share, which is more in line with the stock market as a whole. Therefore, in March 2007 the directors proposed to adjust the level of the price per share by issuing, by way of a bonus issue, two new ordinary shares for every one ordinary share held by shareholders. The Bonus Issue was approved by shareholders at the Annual General Meeting on 25 April 2007 and took effect on 8 May 2007. It has had the effect of lowering the price per share, aligning them closer with the average share prices for FTSE 100 companies and other banking stocks. How has this affected the value of my shareholding? The Bonus Issue should not have affected the overall value of any Group shares you held at close of business on 4 May 2007. Although the value of each share at the start of trading on Tuesday 8 May 2007 will be about one third of its closing value on 4 May 2007, you will now have three times the number of shares than you previously held (See Note for example). Remember, Group shares will continue to fluctuate in accordance with market factors prevailing at any given time. Did I have to do anything to get the Bonus Issue Shares? No. All shareholders on the Register at close of business on 4 May 2007 (the Bonus Issue Record Date) qualified for the Bonus Issue Shares. Do I need to keep my old share certificate? Yes. The existing share certificates are still valid and need to be kept in addition to the new Bonus Issue share certificate due to be sent to you as soon as possible after Monday 14 May 2007. Will I need my old share certificate - I think I've lost it? Yes. The existing share certificates are still valid and need to be kept in addition to the new Bonus Issue share certificate due to be sent to you as soon as possible after Monday 14 May 2007. If you have lost your existing share certificate(s), please write to Computershare, quoting your full name and Shareholder Reference Number, company name (RBS) and the number of shares making up the missing certificate. When will CREST accounts be credited?

CREST accounts were credited with the Bonus Issue shares on Tuesday 8 May 2007. When will dealings in the Bonus Issue Shares start? Dealings in the Bonus Issue Shares commenced on Tuesday 8 May 2007. Note:- Example of how your shareholding has been affected by the Bonus Issue: For example purposes, let us assume that prior to the Bonus Issue you held 100 RBS Shares. The terms of the Bonus Issue are that for every 1 share you held at close of business on 4 May 2007 (the Record Date), you will have received 2 Bonus Issue Shares. As such, you will now hold three times the number of RBS shares you previously held. In this example, you would now have 300 RBS shares (100 existing shares + 200 Bonus Issue Shares). However, the price of each share will have been lowered by the market to reflect the allocation of the Bonus Issue Shares.

Cash Dividends
What is a Dividend? The simple answer is that Dividends are payments by a company to its shareholders. For more detailed answers, about cash dividends please find several definitions below. Please also refer to our stock dividend, dividend reinvestment plan and cash stock option pages. Definitions Definition 1 The part of the profits made by a company that it pays to its shareholders. Definition 2 A distribution wealth to the shareholders of a company, made out of the earnings during a period (year, half year, quarter or month). Definition 3 The reward an investor receives for investing in the company. The higher the dividend, the higher the reward. Definition 4 A taxable payment from a company to its shareholders. Why do companies pay dividends? Companies are not required to pay dividends. Companies that chose to do so, often have grown sufficiently and see no opportunities to invest in

themselves to obtain growth. So rather than retaining the money, they give it to the shareholders. Start up companies however, might chose to retain their income and use it to grow their business, meaning that shareholders will not receive payments in cash. A third option to increase value for the shareholders is to pay off the debt of the company (especially debt with unattractive terms an conditions). A company could also chose to use its profits to buy back its own stock (and by doing so increasing the value of the remaining outstanding shares). Why are investors interested in receiving dividends? Investors seek to maximise the value of their money. They might chose to put the money in a bank account and receive interest on it. But if they think certain shares will pay them a higher rate than the interest on a bank account, they might want to invest their money in those shares. The difference between putting your money in a bank account and investing it in shares is the risk you're taking. When putting money in a bank account an investor knows beforehand how much interest they are going to get. When investing in securities, an investor has to take a gamble and wait and see how well the company is going to perform in the coming period and how much of the profit the company is transferring back to its owners (the company could decide to not pay a dividend at all). Dividends Glossary Declaring a Dividend A Dividend is being Declared by the board of directors. There are legal guidelines as to what information needs to be made available (different per country). Declaration Date This is the date at which the board of directors announces how much the dividend is going to be, as well as what the record date and the payment date are going to be. Record Date This is the date used to determine to which shareholders to pay the dividend to. Because shares are being traded between shareholders continuously, a cut off date is needed which is called the record date. The dividend is being paid to the shareholder who holds the shares at the record date (which does not mean that he is actually entitled to it). Ex (Dividend) Date The Ex Date is the date at which the shares start trading WITHOUT the entitlement to the dividend. This means that an investor who purchases the

shares on this date (and on that day will becomes the beneficial owner of the shares), will not be entitled to the dividend. CUM Dividend Date The Cum Dividend date is the date at which the shares end trading WITH the entitlement to the dividend. This means that an investor who buys the shares on this date (and on that day will become the beneficial owner of the shares), will be entitled to the dividend. Payment Date This is the day on which the dividend is acutally going to be paid. Dividend Yield The dividend yield is a ratio which shows how much a company pays in in dividends relative to its share price. Put differently: it is the annual dividend per share divided by the price per share. For example; Company A's shares are trading at GBP 50 per share and Company B's shares are trading at GBP 100 per share. Both companies announce an annual divided of GBP 5 per share. Dividend Yield = Annual Dividend per share / price per share. Dividend Yield A = 5 / 50 = 0.10 = 10% Dividend Yield B = 5 / 100 = 0.05 = 5% An investor would prefer to buy shares in Company A. Dividend Income There are two sides of Dividend Income: 1. Dividends are paid out of the income of corporations. Income of corporations is the revenues of the company minus the cost of sales, operating expenses and taxes over a given period of time. What is left is available for reinvestment and dividends. 2. Dividens themselves can be part of an individual's or entity's income. In that case an individual or an entity holds shares of (another) company and receives income in that way. Dividend Payment The actual payment of a dividend. Often the cash settlement takes place electronically via your bank. Price per earnings ratio A ratio that shows the valuation of the shares against the earnings per share (EPS) of the company Put differently: it is the current price per share in the market divided by the Earnings of the Company per share (EPS). For example:

For example; Company A's shares are trading at GBP 50 per share and Company B's shares are trading at GBP 100 per share. Both companies announce Earnings per share of GBP 5 per share. Earnings per share ratio = Price per share / Earnings per share. Earnings per share ratio A = 50 / 5 = 10 Earnings per share ratio B = 100 / 5 = 20 An investor is willing to pay a multiple of 10 times the earnings per share for Company A's shares and a multiple of 20 times the earnings per share for Company B's shares. Investors buying shares in Company B have higher growth expectations of Company B than of Company A. Effects of a Dividend on the share price Let's for example assume the following: 1) the investor holds 100,000 shares in company "ABC" before the event takes effect 2) the market price (written in Green) of the shares before the event = EUR 5.00 3) the nominal value of the shares before the event = EUR 1.00 4) the company announces a Cash Dividend of EUR 0.50 per share. In the example the shareholder will keep all his 100,000 shares and receive a cash payment of EUR 35,000 while the nominal value of the shares remains the same and the market value of the shares drops from EUR 5.00 to EUR 4.65. Total value before the exdate of the event: 100,000 x EUR 5.00 = EUR 500,000 Total value after the exdate of the event: 100,000 x EUR 4.65 = EUR 465,000 (+ EUR 35,000 in cash). The Share Value decreases roughly with exactly the same amount as the cash dividend. (this makes sense because one day before the cash dividend went ex, the shares were traded with the entitlement to the dividend whereas on the exdate the are no longer carrying the entitlements. In total no value is lost or made. The nominal value of the shares is not affected. For more effects of other corporate actions events on the value of the share price please refer to this site: Effects on the shareprice Process of a Cash Dividend In terms of corporate actions, dividends are mandatory events. This means that the shareholder does not have to make a choice or to take any action. The money will be paid to them automatically. There are a few steps that will usually be followed:

1. Acoountants and Controllers of a firm propose a Divididend amount to be paid 2. Board of Directors declares a cash dividend, the amount and the important dates 3. In many cases a Paying Agent (a financial institution specialised in the administrative operations of handling and paying cash dividends) is appointed. 4. The information is being made public in announcements in for example newspapers or in electronic media. 5. On the Ex date the shares trade without the entitlements to the dividend 6. On the Record date the company or the paying agent appointed by the company looks at the records of the company to see who the owners of the company are. 7. On the Pay Date the cash proceeds are being settled on the accounts of the eligible holders of the stock 8. Claims between eligible and non-eligible shareholders need to be settled. For more information about claims, please visit our CLAIMS page. Claims processing is usually being done automatically by custodians and broker dealers. 9. Tax vouchers will be issued and these need to be collected by the investors 10. Often, the cash dividend will be forexed back into the base currency of the (global) investor. 11. The (global) investor has to pay the taxes in his own country (and see if there are any double taxation treaties in place between the country of his domicile and the country he was investing in. 12. All the books and accounts from all parties down the chain from company to investor need to be adjusted and reconciled. Tax Consequences There are many tax considerations to make depending on the country an investor is domiciled and the country they are investing in. Besides that, tax legislation has the habit of being changed constantly, so investors are advised to consult their own tax advisors at all times. Below is an example of how the Tax Department in the United Kingdom treats taxation on Dividends for the year 2010-11. SOURCE: www.direct.gov.uk Quote You pay tax at different rates on UK dividends (income from UK company shares, unit trusts and open ended investment companies) than you do on

other income including wages, profits from self-employment, pensions and interest from savings, such as bank and building society interest. Dividend tax rates 2010-11 There are three different Income Tax rates on UK dividends. The rate you pay depends on whether your overall taxable income (after allowances) falls within or above the basic or higher rate Income Tax limits. The basic rate Income Tax limit is 37,400, and the higher rate Income Tax limit is 150,000, for the 2010-11 tax year.
Dividend tax rates 2010-11 Dividend income in relation to the basic rate Tax rate applied after deduction of Personal Allowance or higher rate tax bands and any Blind Person's Allowance Dividend income at or below the 37,400 basic rate tax limit 10%

Dividend income at or below the 150,000 32.5% higher rate tax limit Dividend income above the higher rate tax 42.5% limit

It doesn't matter whether you get dividends from a company, unit trusts or open-ended investment companies, as all dividends are taxed the same way. But bear in mind that interest distributions from unit trusts and open-ended investment companies are taxed at the rates for savings income - see below.
Tax on savings income

There are four different Income Tax rates on savings income: 10 per cent, 20 per cent, 40 per cent or 50 per cent. The rate you pay depends on your overall taxable income. How dividends are paid When you get your dividend you also get a voucher that shows:
y y

the dividend paid - the amount you received the amount of associated 'tax credit' - see next section

If you have agreed to get your dividends paid electronically you may get your dividend voucher in paper or electronic form. Understanding the dividend tax credit Companies pay you dividends out of profits on which they have already paid - or are due to pay - tax. The tax credit takes account of this and is available to the shareholder to offset against any Income Tax that may be due on their 'dividend income'.

When adding up your overall taxable income you need to include the sum of the dividend(s) received and the tax credit(s). This income is called your 'dividend income'.
How tax credits are worked out

The dividend you are paid represents 90 per cent of your 'dividend income'. The remaining 10 per cent of the dividend income is made up of the tax credit. Put another way, the tax credit represents 10 per cent of the 'dividend income'. Dividend income at or below the 37,400 basic rate tax limit
Dividend paid to you (represents 90% of the dividend income) 63 54 90 Tax credit (10% of the dividend income) 7 6 10 Dividend income (dividend paid plus tax credit) 70 60 100

Paying tax on dividend income

If you pay tax at or below the basic rate

You have no tax to pay on your dividend income because the tax liability is 10 per cent - the same amount as the tax credit - as shown in the earlier tables.
If you pay tax at the higher rate

You pay a total of 32.5 per cent tax on dividend income that falls above the basic rate Income Tax limit (37,400 for the tax year 2010-11). In practice, however, you only owe 25 per cent of the dividend paid to you. This is because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit.
If you pay tax at the additional rate

From the 2010-11 tax year you pay a total of 42.5 per cent tax on dividend income that exceeds the higher rate Income Tax limit (currently 150,000). In practice, however, you only owe 36.1 per cent of the dividend paid to you. This is because the first 10 per cent of the tax due on your dividend income is already covered by the tax credit. Note that dividend income, like savings income, is taxed after your nonsavings income - for example, wages and self-employment profit - at your highest tax rate. For example, if it falls both sides of the 37,400 basic rate tax limit, it will be taxed partly at 10 per cent (and covered by the tax credit) and partly at 32.5 per cent (less the 10 per cent tax credit).

General Announcement An event used by the company to notify its shareholders of any events that take place. This event type is used to communicate several types of information to the shareholders. Merger
Merger of 2 or more companies into one new company. The shares of the old companies are consequently exchanged into shares in the new company according to a set ratio.

Stock Dividend
What is a Stock Dividend? Dividends are payments by a company to its shareholders. However, rather than paying in cash, the company distributes additional shares to its shareholders. Critically by doing so it increases the amount of issued shares. Definitions Definition 1 The event in which the directors of the corporation distribute a payment to shareholders in the form of shares of stock, as opposed to money, while increasing the number of shares. Definition 2 A stock dividend is a payout of part of a company's profits in proportion to the number of shares each shareholder owns, paid in the company's own shares rather than in cash. When a company pays a stock dividend the value of each share of stock is not altered, as it is in a stock split. Definition 3 The reward an investor receives for investing in the company. The higher the dividend, the higher the reward. Definition 4 A non-taxable payment from a company to its shareholders (as opposed to a cash dividend) Why do companies pay stock dividends? * For the company the main advantage is that when the company's cash position is inadequate for paying out cash dividends, they can pay their shareholders in shares. * For both the investor as well as the company, another main advantage is that there are usually no tax consequences until the shareholder sells the shares. A cash dividend would be considered as income in the year it is received.

* The company might aim to increase liquidity of its shares by issuing more of shares and by doing so reducing the value of the shares (this is not always the case) Stock Dividends Glossary Declaring a Dividend A Dividend is being Declared by the board of directors. There are legal guidelines as to what information needs to be made available (different per country). Declaration Date This is the date at which the board of directors announces how much the dividend is going to be, as well as what the record date and the payment date are going to be. Record Date This is the date used to determine to which shareholders to pay the dividend to. Because shares are being traded between shareholders continuously, a cut off date is needed which is called the record date. The dividend is being paid to the shareholder who holds the shares at the record date (which does not mean that he is actually entitled to it). Ex (Dividend) Date The Ex Date is the date at which the shares start trading WITHOUT the entitlement to the dividend. This means that an investor who purchases the shares on this date (and on that day will becomes the beneficial owner of the shares), will not be entitled to the dividend. CUM Dividend Date The Cum Dividend date is the date at which the shares end trading WITH the entitlement to the dividend. This means that an investor who buys the shares on this date (and on that day will become the beneficial owner of the shares), will be entitled to the dividend. Payment Date This is the day on which the additional shares are acutally going to be delivered. Dividend Yield (both for cash dividends as well as stock dividends) The dividend yield is a ratio which shows how much a company pays in in dividends relative to its share price. Put differently: it is the annual dividend per share divided by the price per share.

For example; Company A's shares are trading at GBP 50 per share and Company B's shares are trading at GBP 100 per share. Both companies announce an annual divided of GBP 5 per share. Dividend Yield = Annual Dividend per share / price per share. Dividend Yield A = 5 / 50 = 0.10 = 10% Dividend Yield B = 5 / 100 = 0.05 = 5% An investor would prefer to buy shares in Company A. Dividend Income (both for cash dividends as well as stock dividends) There are two sides of Dividend Income: 1. Dividends are paid out of the income of corporations. Income of corporations is the revenues of the company minus the cost of sales, operating expenses and taxes over a given period of time. What is left is available for reinvestment and dividends. 2. Dividens themselves can be part of an individual's or entity's income. In that case an individual or an entity holds shares of (another) company and receives income in that way. Dividend Payment The actual payment of a dividend. Often the settlement of the additional shares takes place electronically via your bank. Price per earnings ratio A ratio that shows the valuation of the shares against the earnings per share (EPS) of the company Put differently: it is the current price per share in the market divided by the Earnings of the Company per share (EPS). For example: For example; Company A's shares are trading at GBP 50 per share and Company B's shares are trading at GBP 100 per share. Both companies announce Earnings per share of GBP 5 per share. Earnings per share ratio = Price per share / Earnings per share. Earnings per share ratio A = 50 / 5 = 10 Earnings per share ratio B = 100 / 5 = 20 An investor is willing to pay a multiple of 10 times the earnings per share for Company A's shares and a multiple of 20 times the earnings per share for Company B's shares. Investors buying shares in Company B have higher growth expectations of Company B than of Company A. Effects of a Stock Dividend on the share price Let's for example assume the following: 1) the investor holds 100,000 shares in company "ABC" before the event takes effect

2) the market price (written in Green) of the shares before the event = EUR 5.00 3) the nominal value of the shares before the event = EUR 1.00 4) the company announces a Stock Dividend of 0.05 new shares for every 1 old share. In the example the shareholder will keep all his 100,000 shares and receive additional shares of the company; 100,000 x 0.05 is 5000 new shares with nomial value EUR 1.00. Please note that the nominal value of the company increases (the profits that would normally have been paid out in cash will now be added to the capital of the company), while the nominal value per share remains the same (since there will be more shares). Depending on the relative size of the stock dividend, it is believed that the share value might increase or decrease. There are many other variables that influence the shareprice, but roughly speaking though it is to be expected that the price in the market stays the same. Assuming that the shareprice does stay the same, our investor would end up with; (100,000 + 5000) x EUR 5.00 = EUR 125,000 The relative stake of his holdings in the company stay exactly the same For more effects of other corporate actions events on the value of the share price please refer to this site: Effects on the shareprice Process of a Stock Dividend In terms of corporate actions, dividends are mandatory events. This means that the shareholder does not have to make a choice or to take any action. The additional shares will be paid to them automatically. There are a few steps that will usually be followed: 1. Acoountants and Controllers of a firm propose a Divididend amount to be paid 2. Board of Directors declares a stock dividend, the amount and the important dates 3. In many cases a Paying Agent (a financial institution specialised in the administrative operations of handling and paying stock dividends) is appointed. 4. The information is being made public in announcements in for example newspapers or in electronic media. 5. On the Ex date the shares trade without the entitlements to the dividend

6. On the Record date the company or the paying agent appointed by the company looks at the records of the company to see who the owners of the company are. 7. On the Pay Date the stock proceeds are being settled on the accounts of the eligible holders of the stock 8. Claims between eligible and non-eligible shareholders need to be settled. For more information about claims, please visit our CLAIMS page. Claims processing is usually being done automatically by custodians and broker dealers. 9. All the books and accounts from all parties down the chain from company to investor need to be adjusted and reconciled. 10. The investors can continue trading the shares as usual Tax Consequences
In most countries there are no tax consequences from a stock dividend.

Spinoff
Definition 1 The process of splitting off certain parts of the company and found them as seperate independent businesses. The shares of the new company are given to the shareholders of the existing company (on a pro rata basis). The transfer of product knowledge and knowledge from the parent to the newly start up company is the most important aspect. Definition 2 The event through which a new company is created and seperated from its parent company. After the event there are 2 seperate companies, each with their own outstanding share capital. Owners of the parent company's shares are being given an amount of shares in the spun off company according to a ratio (for example, each shareholder in parent company A will receive 5 shares in the spun off company B) Both company's shareholders and stakes are identical at the moment of the spin off even taking place. Each shareholder holds shares in company A as well as in B at the moment of the spinoff. Reasons for a Spinoff * The company has adopted a strategy to focus on its core activities. Noncore related activities are spun off

* The company thinks that the spun of activities can be better developed on their own, rather than as part of a bigger concern (usually the new company is a new technology or a new market) * The company thinks that it can make more money by spinning the activities off. For example it could be that the spun off company yet needs to prove it can be profitable. * Sometimes the activities don't fit in the overall branding strategy of the parent company. * The spin off activities could be more profitable than the overall parent company * Newly independent entities are no longer constrained by the overall culture of the parent company that might not fit * The spun-off company can try to seize opportunities it would normally not be able to explore * The management of the new company is often formed out of employees from the old company. For these employees, a spin off represents a good chance to make career progress. * In a takeover, sometimes the acquirer does not want or can not for regulatory reasons, buy one of the target company's businesses. A spin-off of that business to the target company's shareholders prior to the merger can provide a solution. * Tax advantages (see more below) Process of a Spinoff 1 Parent company to adopt a strategy to focus on its core business and to spin off certain parts of the business (often based on advise from management consultants, accountants, its own shareholders and industry experts) 2 Parent company to decide which assets and which debt obligations should be transferred to the newly created company 3 Parent company to appoint a Paying Agent 4 Paying agent to publish a prospectus with the exact details of the event 5 Paying agent to announce the event to shareholders via the usual communication channels 6 Custodians and broker dealers to receive the new shares from the Paying Agent and to pass them on the the beneficial owners that are entitled to receive the new shares 7 Shareholders and parent company to deal with tax consequences and amend their investment portfolios and their share value 8 Shareholders to decide their trading strategies for both companies

Example of a Spinoff A very famous and complex example of a spin off was that of a newly formed company called Reinet Investments SCA from its Parent Company Company Financire Richemont SA. Shareholders in Compagnie Financire Richemont SA voted at the AGM (9 October 2008) to spin off its Richemont luxury goods business as part of a planned restructuring of the firm. It also sold off its stake in British American Tobacco Plc and set up a separate investment unit called Reinet Investments SCA. Richemont owns a portfolio of leading international jewellery, watch, writing instrument and accessories brands including the Chlo fashion label. What made this spin off so complex was that the spin off was actually a cross-border corporate action event whereby the parent company is a Swiss listed company and the spun-off entity a Luxemburg listed entity. Spin-offs and Tax Tax laws differ per country and jurisdiction, but in many a spin-off distribution can be made tax-free to the parent corporation and the receiving shareholder. Rather than selling the division outright, a spinoff can represent significant savings to the parent company, especially if the subsidiary is carried on the books at a large discount to expected market value. A sale would generate a big capital gain tax. If at least 80% of a subsidiarys equity is distributed to existing shareholders, a spin-off lets a company avoid the potentially large capital gains tax liability that a straight sale would incur. Spin-offs are the most tax efficient mechanism to separate a division. There are several rules and conditions to acquire tax free status though (depending on jurisdiction).

Stock Split (Share Split)

Definition of a Share Split A Company can decide to increase the amount of its outstanding shares while at the same time decreasing the nominal share price proportionally. Example 1: a 4 for 1 stock split (from a issuer's point of view) BEFORE THE STOCK SPLIT: Amount of outstanding shares: 1,000,000 Nominal value per share: EUR 0.50. Total nominal value of the company: 1,000,000 x EUR 0.50 = EUR 500,000 AFTER THE STOCK SPLIT

Amount of outstanding shares: 4,000,000 Nominal value per share: EUR 0.125 Total nominal value of the company: 4,000,000 x EUR 0.125= EUR 500,000 Example 2: An investor experiences a 4:1 stock split (from an investor's point of view) BEFORE THE STOCK SPLIT: A shareholder holds 500 shares of company ABC Nominal Value per share: EUR 0.50 Market Value per share: EUR 0.60 (this is an assumption) Total value of his holdings: 500 shares x EUR 0.60 = EUR 300 AFTER THE STOCK SPLIT: The shareholder holds 2000 shares Nominal Value per share: EUR 0.125 Market value per share: EUR 0.15 (the market value of the shares does not have to equal the nominal value of the shares) Total value of his holdings: 200 shares x EUR 0.15 = EUR 300 Example 3: What Would you prefer?

1 share's worth before the stock split OR

10 share's worth after the stock split Stock Split - Why companies split their shares A Company may try to * Increase liquidity (100 shares of USD 2,00 are easier to trade than 1 share of USD 200) * Increase their perceived attractiveness for small investors * People believe that it has a psychological effect In itself a stock split can only be called after a period during which a company has performed very well - leading to a rise in the share value. In that light a share split can be seen as an accolade that the company gives itself. It is believed that it is a signal that the board of directors believe that the company is going to perform well in the future. * Some people believe that share splits will result in higher share prices (although this is never proven) * Make itself better comparable with its peergroup (ie other companies in the same industry who's shares are trading at lower prices) Effects:

A share split will result in all shareholders holding more shares in the company. However, the STAKE in the nominal value of the company per share will remain the same (the share's portion in the share capital). The nominal value per share will decrease. Each new share will carry the same rights as the pre-reverse-split shares (including voting rights and dividend entitlements). Preconditions: A stock split requires Shareholder approval at an Annual General Meeting pursuant to the Board's proposal. The proposal includes a resolution on a change in the articles of association with regards to the highest and lowest number of shares that may be issued.

Stock Split - Transformations of Open Trades DATES FOR TRADING When trading securities in general, an investor needs to consider 3 dates:
Trade date

the date at which the securities change legal ownership

y

Contractual settlement date

the dates at which the securities need to be physically settled out of and into the safekeeping accounts of the trading partners and on which the money needs to be debited from the buyer and credited to the seller.
y

Actual settlement date

the date at which the trades actually get settled (should in theory be the same as contractual settlement date) This means that there is a difference between purchasing the shares (and gaining ownership of them) and the date at which the shares acually fysically settle in their safekeeping account and the money is debited from their cash accounts. This phenomenon is also called a settlement cycle. The most common forms of settlement cycles are: T+2: The contractual settlement date is 2 days after the trade date T+3: The contractual settlement date is 3 days after the trade date

DATES FOR STOCK SPLITS When dealing with transformations on stock splits, an investor needs to consider 2 dates: EXDATE and RECORD DATE. The EXDATE is the date at which the shares are trading at post split prices. The RECORD DATE is used by the custodian to establish whom to debit and credit the shares from and to. Depending on the market (country) the dates will be set in different ways. There are two main principles:
y y

Exdate driven markets Record date driven markets

In Exdate driven markets, the exdate will be after the record date. In Record date driven markets, the record date will be after the exdate. When combining the settlement cycles with the different market principles there are several possible scenarios. Please see below the main ones. Change of ISIN On some occassions the ISIN will change along with the ratio being applied it can also remain the same. SCENARIO 1 Settlement cycle is T+3 and Market is RECORD DATE driven:

In this Scenario the Trader A buys the shares before the exdate of the stock split event and will therefore purchase at pre split quantities, ISIN and prices. The shares will settle into his account on the RECORD DATE. The

custodian will look at who has the shares at close of business on the RECORD DATE and will affect the payments one day later accordingly (in this case to trader A). There is no trasforming of trades involved. Example worked out: Split on ISIN NL00B10RZP78 NEW ISIN: NL0000488639 RATIO: 10:1 Nominal value per share pre-split: EUR 0.50 Nominal value per share post split: EUR 0.05 Market price per share Pre-split: EUR 3.00 Market price per share Post-split: EUR 0.30 Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the stock split. The trades settle on the record date. On record date +1 the custodian will debit the 100 shares NL00B10RZP78 from Trader A's account and credit him with 1000 new shares NL0000488639. No transformations of the trades is required. SCENARIO 2 Settlement cycle is T+3 and Market is EXDATE driven:

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split prices, quantities and ISIN (let's assume that there is a change of ISIN). Trader B, however, will hold the shares in his account at close of business of the RECORD DATE and the custodian will debit the pre-split ISIN, quantities and credit the post-split

ISIN and quantities from and to Trader B. As a consequence, the pending trades that both traders have alledged against eachother on the old ISIN, quantities and prices must be cancelled and re-instructed on the post-split ISIN, quantities and prices. The process of cancelling old trades and reinstructing is called transforming trades. Example worked out: Stock split on ISIN NL00B10RZP78 NEW ISIN: NL0000488639 RATIO: 10:1 Nominal value per share pre-split: EUR 0.50 Nominal value per share post split: EUR 0.05 Market price per share Pre-split: EUR 3.00 Market price per share Post-split: EUR 0.30 Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-2 of the stock split. Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00). Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00). The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares NL00B10RZP78 from Trader B's account and credit him with 1000 new shares NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied. Trader A has to re-instruct a Receive versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30). Trader B has to re-instruct a Delivery versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30). (Please note the total value of the shares does not change) SCENARIO 3 Settlement cycle is T+3 and Market is RECORD DATE driven parent trade settles late

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split ISIN, quantities and price. Since the shares on the parent line are settling late, the trades that the two traders had alledged against eachother need to be cancelled and reinstructed on the post-split ISIN quantities and price (since after the record date no trades on the pre-split ISIN will settle anymore). Example worked out: Stock split on ISIN NL00B10RZP78 NEW ISIN: NL0000488639 RATIO: 10:1 Nominal value per share pre-split: EUR 0.50 Nominal value per share post split: EUR 0.05 Market price per share Pre-split: EUR 3.00 Market price per share Post-split: EUR 0.30 Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the stock split. Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00). Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 300 (100 x EUR 3.00). The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares

NL00B10RZP78 from Trader B's account and credit him with 1000 new shares NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied: Trader A has to re-instruct a Receive versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30). Trader B has to re-instruct a Delivery versus Payment --> 1000 shares NL0000488639 versus EUR 300 (1000 x EUR 0.30). Conclusion Whenever shares are bought before exdate the buyer will buy the shares at pre-split quantities, ISIN and prices. If the settlement date of the trades between the traders is after the record date of the event, the old trades have to be cancelled and re-instructed on the new ISIN with the ratio applied.

Return of Capital
What is a Return of Capital? A Return of Capital is a Corporate Actions Event whereby the initial capital paid by the shareholders is paid back to those shareholders. A Captial Return differs from a Cash Dividend in the sense that a Return of Capital is paid by decreasing a company's equity, whereas a Cash Dividend is paid from the Company's profits. Definition 1 When a company pays back part of all of the invested money to the investor hereby decreasing the total value of the investment. Definition 2 A transfer of wealth back to the investor by the company. When the company pays a Capital Return, it will decrease its outstanding capital accordingly. Why do shareholders like Return of Capital Events? As opposed to a cash dividend, neighter the compony nor the investor needs to pay tax on a return of capital. Process of a Capital Return 1 Company to decide for a Return of Capital (often advised by managent consultants, accountants and industry experts) 2 Company to appoint a Paying Agent

3 Company to officially announce and publish the details of the event 4 Paying agent to distribute the information among all industry participants 5 Paying agent to pay the money on the payment date Key Dates, Ratios and numbers in a Return of Capital Event Exdate, Record date, Payment Date, Cash amount per share Tax Consequences of a Capital Return There are no tax consequences Example of a Return of Capital On May 28, 2009, the shareholders of Nobelcorp approved a return of capital to shareholders through a reduction in par value in an aggregate amount equal to 0.25 CHF per share, which was paid in four installments as follows:
August 2009: November 2009: February 2010: CHF 0.10 CHF 0.05 CHF 0.05 CHF 0.05

May 2010:

Under current Swiss tax law, distributions to shareholders in the form of a reduction in par value are exempt from Swiss withholding tax. However, the company urged shareholders to consult Nobles Proxy Statements relating to its Change of Incorporation, its 2009 General Meeting of Shareholders and its 2010 General Meeting of Shareholderseach as filed with the U.S. Securities and Exchange Commission. Investors were also urged to consult their tax advisor for more information.

Reverse Split
A Company can decide to decrease the amount of its outstanding shares while at the same time increasing the nominal share price proportionally. Example 1: a 1 for 4 reverse stock split BEFORE THE REVERSE SPLIT: Amount of outstanding shares: 1,000,000 Nominal value per share: EUR 0.50. Total nominal value: 1,000,000 x EUR 0.50 = EUR 500,000

AFTER THE REVERSE SPLIT Amount of outstanding shares: 250,000 Nominal value per share: EUR 2.00 Total nominal value: 250,000 x EUR 2.00 = EUR 500,000

Example 2: What Would you prefer?

1 share's worth after reverse split OR

10 share's worth before reverse split Reverse Split - Why companies reverse split their shares A Company may try to * Avoid becoming a so called "penny stock" * Avoid being delisted due to stock exchange's minimum share price rules * Make their stock look more valuable * Avoid huge volatility in terms of percentage point share price change * Make itself better comparable with its peergroup Effects: A reverse split will result in all shareholders holding fewer shares in the company. However, the STAKE in the nominal value of the company per share will remain the same (the share's portion in the share capital). The nominal value per share will increase. Each new consolidated share will carry the same rights as the pre-reverse-split shares (including voting rights and dividend entitlements). Preconditions:

A reverse split requires Shareholder approval at an Annual General Meeting pursuant to the Board's proposal. The proposal includes a resolution on a change in the articles of association with regards to the highest and lowest number of shares that may be issued.

Reverse Split - Transformations of Open Trades DATES FOR TRADING When trading securities in general, an investor needs to consider 3 dates:
Trade date

the date at which the securities change legal ownership

y

Contractual settlement date

the dates at which the securities need to be physically settled out of and into the safekeeping accounts of the trading partners and on which the money needs to be debited from the buyer and credited to the seller.
y

Actual settlement date

the date at which the trades actually get settled (should in theory be the same as contractual settlement date) This means that there is a difference between purchasing the shares (and gaining ownership of them) and the date at which the shares acually fysically settle in their safekeeping account and the money is debited from their cash accounts. This phenomenon is also called a settlement cycle. The most common forms of settlement cycles are: T+2: The contractual settlement date is 2 days after the trade date T+3: The contractual settlement date is 3 days after the trade date DATES FOR REVERSE SLITS When dealing with transformations on reverse splits, an investor needs to consider 2 dates: EXDATE and RECORD DATE. The EXDATE is the date at which the shares are trading at post split prices. The RECORD DATE is used by the custodian to establish whom to debit and credit the shares from and to.

Depending on the market (country) the dates will be set in different ways. There are two main principles:
y y

Exdate driven markets Record date driven markets

In Exdate driven markets, the exdate will be after the record date. In Record date driven markets, the record date will be after the exdate. When combining the settlement cycles with the different market principles there are several possible scenarios. Please see below the main ones. Change of ISIN On some occassions the ISIN will change along with the ratio being applied it can also remain the same. SCENARIO 1 Settlement cycle is T+3 and Market is RECORD DATE driven:

In this Scenario the Trader A buys the shares before the exdate of the reverse split event and will therefore purchase at pre reverse split quantities, ISIN and prices. The shares will settle into his account on the RECORD DATE. The custodian will look at who has the shares at close of business on the RECORD DATE and will affect the payments one day later accordingly (in this case to trader A). There is no trasforming of trades involved. Example worked out: Reverse split on ISIN NL00B10RZP78 NEW ISIN: NL0000488639 RATIO: 10:1

Nominal value per share pre-split: EUR 0.05 Nominal value per share post split: EUR 0.50 Market price per share Pre-split: EUR 0.30 Market price per share Post-split: EUR 3.00 Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the reverse split. The trades settle on the record date. On record date +1 the custodian will debit the 100 shares NL00B10RZP78 from Trader A's account and credit him with 1 new share NL0000488639. No transformations of the trades is required. SCENARIO 2 Settlement cycle is T+3 and Market is EXDATE driven:

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split prices, quantities and ISIN (let's assume that there is a change of ISIN). Trader B, however, will hold the shares in his account at close of business of the RECORD DATE and the custodian will debit the pre-split ISIN, quantities and credit the post-split ISIN and quantities from and to Trader B. As a consequence, the pending trades that both traders have alledged against eachother on the old ISIN, quantities and prices must be cancelled and re-instructed on the post-split

ISIN, quantities and prices. The process of cancelling old trades and reinstructing is called transforming trades. Example worked out: Reverse split on ISIN NL00B10RZP78 NEW ISIN: NL0000488639 RATIO: 10:1 Nominal value per share pre-split: EUR 0.05 Nominal value per share post split: EUR 0.50 Market price per share Pre-split: EUR 0.30 Market price per share Post-split: EUR 3.00 Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-2 of the reverse split. Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30). Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30). The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares NL00B10RZP78 from Trader B's account and credit him with 1 new share NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied. Trader A has to re-instruct a Receive versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00). Trader B has to re-instruct a Delivery versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00). SCENARIO 3 Settlement cycle is T+3 and Market is RECORD DATE driven parent trade settles late

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split ISIN, quantities and price. Since the shares on the parent line are settling late, the trades that the two traders had alledged against eachother need to be cancelled and reinstructed on the post-split ISIN quantities and price (since after the record date no trades on the pre-split ISIN will settle anymore). Example worked out: Reverse split on ISIN NL00B10RZP78 NEW ISIN: NL0000488639 RATIO: 10:1 Nominal value per share pre-split: EUR 0.05 Nominal value per share post split: EUR 0.50 Market price per share Pre-split: EUR 0.30 Market price per share Post-split: EUR 3.00 Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the reverse split. Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30). Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30). The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares

NL00B10RZP78 from Trader B's account and credit him with 1 new share NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied: Trader A has to re-instruct a Receive versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00). Trader B has to re-instruct a Delivery versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00).

Mandatory Events with Options

Cash Stock Option Shareholders are offered the choice to receive the dividend in cash or in additional new shares of the company (at a discount to market). Reinvesting often carries a tax shield. Merger with Elections
Merger of 2 or more companies into one new company. The shares of the old companies are consequently exchanged into shares in the new company according to a set ratio. Shareholders of both companies are offered choices regarding the securities they receive Spin-off with elections A distribution of subsidiary stock to the shareholders of the parent corporation without having cost to the shareholder of the parent issue whereby the shareholders are offered choices regarding the resultant stock.

Voluntary Events

Rights Issue
Rights Issues are Corporate Actions Events whereby a company seeks to increase its capital by issuing new securities. Existing shareholders need to be given a chance to maintain their stake in the company to prevent dilution. So, rights are credited to existing shareholders of a company. Cross-ex trades result in claims and compensations. The rights are securities just like shares and can be listed on a stock exchange. Rights themselves are often tradable during a predetermined trading period. Rights can be exercised to subscribe to new securities during the exercise period.

On the paydate of the event, the shareholder who exercised the rights will receive the resulting securities and will pay the company the exercise price per share. Rights that were not exercised will lapse Glossary for RightsIssues: Announcement date The date at which the company announces the event officially Exdate The date at which the parent line shares trade without the entitlement to the rights. For example if the rights issue has an exdate of 24.03.2009 this will mean that all shares traded up until 23.03.2009 will entitle the buyer or the holder of the shares to the rights. Record date Date at which holdings are being taken in order to calculate entitlements. Deposit date Date at which the rights have to be settled in the account of a direct market participant or agent bank. Exercise period The period during the event in which instructions can be sent to the broker/custodians/agents to exercise the rights in order to subscribe to new shares. Trading period Rights are securities that can be listed (for short periods of time) at a stock exchange themselves just like other securities. This period of time can Nil paid rights Rights can be nil paid or fully paid. When credited to the shareholders rights are nil paid, meaning that no payment has been made to exercise the right. Fully paid rights Rights can be nil paid fully paid. If the holder of the rights who exercised them pays the exercise price, the rights become fully paid. Ratios There are 2 ratios in the event of a rights issue: the amount of rights one is entitled to per original parent line share one held and the amount of rights one needs to exercise in order to be able to subscribe to one new resultant

security. For example: One share entitles to receive one right (1 old : 1 old) and 5 rights entitle to subscribe to 2 new shares (5 old : 2 new). Parent line shares The actual shares of the company that cary the entitlement to the rights. Resultant line security The resultant line shares are the security that holders of the rights can subscribe to by exercising the rights in the rights issue. These can generally be equity, bonds or convertible bonds. Young shares When the event of a rights issue takes place during course of the dividend year, the company can decide to credit holders who exercised their rights Young Shares rather than the final resultant line shares. Young shares are credited under a different (temporary) ISIN and will assimilate back into the parent line after the next due dividend has been paid on the parent line shares. Oversubscription Shareholders can be entitled to subscribe to more shares than they'd normally be entitled to if they'd exercised their full amount of rights. This option is not always offered. Options The options that shareholders have during the event of a rights issue are to 1) Exercise the rights, 2) Oversubscribe to new securities, 3) buy additional rights, 4) sell their rights, 5) Lapse their rights or 6) Take No Action. In theory, every beneficiary owner of the rights will have to send an official instruction to their broker or custodian on what they decide to do with their rights. In the money If the exercise price is lower than the market price of the shares the rights issue is called "in the money". It is attractive to subscribe to the new securities, because they can be sold in the market for a higher price Out of the money The compay can set the exercise price too high. In that case it would be unattractive for the investor to subscribe to the new securities in the event. The same shares could be bought in the market for a lower price At the money When the exercise price is exactly the same as the price of the securities in the market, the event is called "at the money".

Exercise The hoder of the rights decideds to send an instruction to their broker or custodian to exercise the rights in order to buy the new securities. Oversubscribe The holder of the rights has the right to subscribe to more shares than they would be entitled to by just exercising the rights. Oversubscription is often subject to scaleback (in case too many shares are being subscribed to). Oversubscription is not always possible in every rights issue. Buy Basically anybody can buy rigths if the rights are tradeable (even if they didn't hold the shares on the exdate and the record date of the rights issue event. Sell The holder of the rights decides to send an instruction to their broker or custodian to sell their rights. Lapse The holder of the rights decides to send an instruction to their broker to let the rights lapse at the end of the exercise period. This is very similar to taking no action. Noac The holder of the rights decides to send an instruction to their broker to leave the rights in the account and do nothing with them. Often investors hold accounts with other brokers or custodians and it could be that they decide to transfer or sell the rights via another broker or custodian. Market deadline This is the official daedline set by the agent of the event by which all instruction need to be received. Custodian deadline This is the deadline that the custodians set for their clients. Broker deadline This is the deadlien that the brokers set for their clients Claims Due to the difference in trade date and settlement date of the shares into accounts when trading. Shares that are traded and settled over the exdate of a rights issue need to be compensated. For example: If a settlement cycle is t+3, meaing all trades are settled in accounts 3 days after trade date (T) and if trader A sells 100 shares to trader B on 23.03.2009 and the exdate of

a rights issue is 24.03.2009 this will mean that the trades will be still in the account of the custodian of trader A on the 24.03.2009 (since the will only settle into the custodian's account of trader B on 26.03.2009. When the paying agent credits the rights to shareholders on exdate (without a T+x settlement cycle), the rights in this case will be credited to trader A. But since trader B bought the shares before the exdate, he is entitled to the rights. Trader B has to claim the rights from trader A. This process is also being referred to as compensation. Click here to find out more about CLAIMS CUM / EX Shares are traded WITH entitlement to the rights until the EX date, which is the day the shares are traded WITHOUT entitlement to the rights. Exercise price This is the price that needs to be paid for the new securities that result from the rights issue event. This price usually is offered at a discount to the current market price. Bookbuilding A method by which the exercise price is being determined by calculating the volume weighted average price of the shares during a predetermined period of time. Paydate There are two paydates in a rights issue; cash pay date and stock pay date. Both can be on the same day but they can also differ (usually depending on market). The cash pay date is the date at which the subscription price needs to be paid to the agent. The stock paydate is the date at which the resultant shares will be dispatched. Paying agent The party in the market working on behalf of the company that takes care of the technical process of the whole rights issue event (including notifications, instructions managment, collecting the money and issuing the new shares. Underwriters Underwriters and the company that wants to increase its capital can sign official legal contracts called purchase agreements. In the purchase agreements, the underwriters commit themselves to buy all the shares at the exercise price that other shareholders did not subscribe to. In that way a succesfull capital increase is guaranteed for the company. The company will have to pay the underwriters a fee for taking over the risk.

Lapsing rights When the rights issue event is over, the agent will lapse the rights. Depending on the market and the situation, the rights can be lapsed worthless or agains money. In case they are being lapsed worthless, they will just be booked out of the accounts worthless. Sometimes, the leadagent tries to find buyers for the additional rights and in that case the rights will lapse versus money. OPTIONS FOR INVESTORS IN A RIGHTS ISSUE: EXERCISE Rights can be exercised to subscribe to new shares OVERSUBSCRIBE In theory every shareholder can subscribe to an amount of shares that is equivalent to their present stake in the company. In some rights issues it is possible to subscribe to more newly issued shares. In case there are more shares being oversubscribed to then there are available, a pro rata allotment will follow. This is also known as a scale back. For example:
A shareholder holds a 2% stake in a company The company issues 100,000 new shares The shareholder will receive an amount of rights that would entitle to subscribe to 2,000 new shares (2% of 100,000). In our example the shareholder exercises all his rights and subscribes to 2,000 new shares and gives instruction to oversubscribe to 1,000 new shares. Let's say that after the event is finished, the agent establishes that 95% of the shares was subscribed to by normal means of exercising rights (this would leave 5,000 new shares available for oversubscription). Let's say that the agent has received instructions to oversubscribe to an additional 10,000 shares. The scaleback ratio on oversubscription in this case is 50% (5,000 / 10,000) The shareholder in this example will receive and pay for 2,000 + 500 (oversubscription after scaleback) = 2,500 new shares.

y y y y y

y y y

In order to oversubscribe, the shareholder would not have to buy additional rights. BUY Rights themselves are securities that can be listed on a stock exchange (usually for a short period of time). Shareholders can go in the market and try to buy rights from shareholders who want to sell them.

SELL Just like buying rights, a shareholder can also decide to sell his rights. He might want to do this because he might not have funds available to pay for any new shares from the event. LAPSE The investor might conclude that the rights offering is unattractive (out-ofthe money for example) and instruct his broker or custodian to let the rights lapse. Rights can lapse worthless (they will be booked out as wortless after the event) or they can result in a (small) cash payment. NOAC Take No Action - this means that the investor is instructing their broker or custodian to leave the rights in their account and do nothing with them. An investor might hold accounts with several financial institutions and he could for example decide to transfer his rights to another custodian or broker.

CLAIMS FOR RIGHTS ISSUES (COMPENSATIONS):

DATES FOR TRADING When trading securities in general, an investor needs to consider 3 dates:
y y

Trade date Contractual settlement date

the date at which the securities change ownership the dates at which the securities need to be physically settled out of and into the safekeeping accounts of the trading partners and on which the money needs to be debited from the buyer and credited to the seller.
y

Actual settlement date

the date at which the trades actually get settled (should in theory be the same as contractual settlement date) This means that there is a difference between purchasing the shares (and gaining ownership of them) and the date at which the shares acually fysically settle in their safekeeping account and the money is debited from their cash accounts. This phenomenon is also called a settlement cycle. The most common forms of settlement cycles are: T+2: The contractual settlement date is 2 days after the trade date T+3: The contractual settlement date is 3 days after the trade date DATES FOR RIGHTS ISSUES When dealing with claims on rights issues, an investor needs to consider 2 dates: EXDATE and RECORD DATE.

The EXDATE is the date at which the shares are trading without the rights entitlements. The RECORD DATE is used by the custodian to establish whom to pay the rights to. Depending on the market (country) the dates will be set in different ways. There are two main principles:
y y

Exdate driven markets Record date driven markets

In Exdate driven markets, the exdate will be after the record date. In Record date driven markets, the record date will be after the exdate. When combining the settlement cycles with the different market principles there are several possible scenarios. Please see below the main ones. In every example Trader A buys 100 shares from Trader B. SCENARIO 1 Settlement cycle is T+3 and Market is RECORD DATE driven:

In this Scenario the Trader A buys the shares before the exdate of the rights issue event and will therefore be entitled to the rights. The shares will settle into his account on the RECORD DATE. The custodian will look at who has the shares at close of business on the RECORD DATE and will pay the rights one day later accordingly (in this case to trader A). There is no claiming involved.

SCENARIO 2 Settlement cycle is T+3 and Market is EXDATE driven:

In this Scenario trader A buys the shares before the EXDATE and will therefore be entitled to the rights. Trader B, however, will have the shares in his account at close of business of the RECORD DATE and the custodian will pay the rights to trader B on exdate. Once the trade on the parent line settles (in this scenario on EX+1), Trader A needs to claim the rights from Trader B. Trader B needs to deliver the rights to Trader A in the market. SCENARIO 3 Settlement cycle is T+3 and Market is RECORD DATE driven parent trade settles late

In this Scenario trader A buys the shares before the EXDATE and will therefore be entitled to the rights. Since the shares on the parent line are settling late, the shares will still be on trader B's account on record date and therefor the custodian will credit the rights to Trader B on record date+1. Trader A needs to claim the rights from Trader B. Conclusion Whenever shares are bought before exdate the buyer is entitled to receive the rights. Because of the time difference between buying and actual settlement, the rights are credited to the counterparty of the trade and hence the rights need to be transfered. DEVELOPMENT OF THE SHAREPRICE Please find below a description of the effects Rights Issue events can have on the share price in the market. For the calculations the following assumptions are used: 1) the investor holds 100,000 shares in company "ABC" before the rights issue event takes effect 2) the market price of the shares before the event = EUR 5.00 3) the nominal value of the shares before the event = EUR 1.00

Rights Issue (ratios: 1 right for every 1 share, 10 rights entitle to buy 1 new share for EUR 4.00) In the example the sharehoder will receive 100,000 rights based on his holdings of 100,000 shares. With those 100,000 rights he is entitled to buy an additional 10,000 new shares at a subscription price of EUR 4 per share. Value of his holdings before the rights issue: 100,000 x EUR 5.00 = EUR 500,000. Value of his holdings after the rights issue: 100,000 x EUR 5.00 = EUR 500,000. 10,000 x EUR 4.00 = EUR 40,000 value of 110,000 shares: EUR 540,000 Theoretical market price after the exdate of the rights issue: EUR 540,000 / 110,000 = EUR 4.91 per share. The theoretical value of every right equals therefore: EUR 5.00 - EUR 4.91 = EUR 0.09. In reality however, the right issue takes place over a period of time in which the value of the shares will change and hence the value of the rights will change accordingly. Please note that every shareholder has got 4 basic option in a rights issue event: 1) Take No Action and let the rights lapse worhtless. please note that under this option the value of his holdings decreases from EUR 500,000 to EUR 491,000. Put differently: he loses 100,000 x (EUR 5.00 - EUR 4.91) = EUR 9,000. 2) Sell the rights. Under this option he will not lose any value if he manages to sell his rights for at least EUR 0.09 each. 3) Exercise the rights in order to subscribe to 10,000 new share for a total amount of EUR 40,000 In this case the value of his original holdings stays the same, however, he needs to invest an additional EUR 40,000 to achieve this. 4) buy (and subsequently exercise) additional rights from other shareholders. In this case the shareholder could make a profit if he manages to buy the rights for less than EUR 0.09 per right. Combinations of the options mentioned above are possible as well. The above are THEORETICAL calculations only. In reality, a rights issue will take place during the course of a couple of weeks and the share price is subject to several factors, like developments in underlying operations, macro-economic data and market sentiment. Also a shareholder needs to be

confident that the management of the company will find good use for the extra money. (Please note that any investment decicions made based on the content of this site are entirely at the reader's risk only. Please also note the disclaimer) SETTING THE EXERCISE PRICE The company is interested in raising as much money as possible and therefor in theory would like to set the exercise price as high as possible. Shareholders and underwriters on the other hand will be interested in an exercie price that gives a substantial discount to the market. If the exercise price is too close to the market price of the securities, than investors have no real incentive to subscribe to new shares in the event (they can buy the same shares in the market for the same price).

Corporate Governance and Proxy Voting

A lot is said and written about Corporate Governance in general. It is a subject that has many facets. In the last couple of years it has become an increasingly relevant topic. Famous cases in which adequate corporate governance failed are "Enron" and "Worldcom". New leglislation is or will be passed on the several continents. For practical reasons on this site, we'll just say that Corporate Governance is "all activities to control a company". In general there will be many stakeholders involved in controlling the company like; employees, suppliers, customers, banks, (local) governments, environmental groups etc. For the purpose of this site we will however focus on the shareholders and the management of the company as stakeholders that control a company. The distance in the relationship between the management of the company and its shareholders has increased in two ways: structurally - because in recent decades shareholders have become more institutionalised and geografically - because the financial system has become more globalised. Because of the greater distance between them, there is an increased need for ways to control the management. An important tool is called "Proxy Voting" at the annual general shareholders meeting (AGM). Corporate Governance and Corporate Actions are closely intertwined. Many Corporate Actions Events are subject to prior shareholder approval at the AGM and the AGM itself can also be seen as a Corporate Actions Event.

"Proxy voting" means that the shareholder who is not able to attend the AGM in person can legally authorise somebody to cast votes on his behalf. This can be done electronically. Process This is roughly how the process of an Annual General Meeting works: 1) announcement of the date, time and venue of the meeting by the company 2) announcement of the meeting's agenda and the voting points by the company 3) shareholder to submit his elections for each of the voting points in combination with a "power of attorney" to the person who will cast the votes on his behalf (often this person will offer the same service to other shareholders) at the meeting. For each voting point the shareholder can vote "yes", "no" and "abstain". 4) the votes will be cast and counted 5) announcement of the results by the company. Many corporate actions events are subject to shareholder approval at the AGM, for example: * rights issues * mergers & acuistions * stock split * reverse stock split * name change * assimilation * bonus issue * cash dividend * return of capital * company buy-back programmes * spin-offs * etc Example of an agenda of an AGM (based on a real world agenda): 1. Opening 2. Overview of the Company's business and financial situation (non-voting item) 3. Discussion of the Annual Report 2007 and adoptation of the financial statements for the financial year 2007 (voting item) 4. Evaluation of the performance of the External Auditor by the Board of Management and the Audit Committee (non-voting item). 5. Discharge of the members of the Board of management from liability for their responsibilities in the financial year 2007. (voting item)

6. Discharge of the members of the Supervisory Board from liability for their responsibilities in the financial year 2007. (voting item) 7. Preparation of Regulated Information in the English language (voting item). 8. Clarification of the Reserves and Dividend Policy (non voting item). 9. Proposal to adopt a cash dividend of EUR 0.40 per ordinary share (voting item). 10. Adoptation of the updated Remuneration Policy for the Board of Management (voting item) 11. Approval of the performance stock arrangement, including the number of shares, for the Board of Management (voting item). 12. Approval of the number of stock options for the Board of Management and the number of stock options, respectively shares, for employees (voting item). 13. Composition of the Board of management (non-voting item). Notification of the intended re-appointment of one of the members. 14. Composition of the Supervisory Board (voting item). Re-appointment of 2 members. 15. Proposal to authorise the board of managment to issue shares or rights to subscribe for shares in the capital of the company, subject to approval by the supervisory board (voting item) 16. Proposal to authorise the Board of Management for a period of 18 months toacquire the company's own shares. (voting item) 17. Proposal to cancel repurchased ordinary shares (voting item). 18. any other business 19. closing Buy-back program (BIDS) / Repurchase Offer Offer by the issuing company to existing shareholders to repurchase the companys own shares or other securities convertible into shares. This results in a reduction in the number of outstanding shares Dividend Reinvestment Plan (DRIP) Similar to cash stock option. In this case however, the company first pays the cash dividend after which shareholders are offered the possibility to reinvest the cash dividend in new shares.

BONDS: Conversion of convertible bonds Convertible bonds are being converted in the underlying shares Coupon Payment - interest payment The issuer of the bond pays interst according to the terms and conditions

of the bond, ie interest rate and intervals of payment. Early Redemption The issuer of the bond repays the nominal prior to the maturity date of the bond, normally with accrued interest. Lottery (also known as a drawing) The issuer redeems selected holdings before the maturity date of the bond (early redemption). Partial Redemption The issuer of the bond repays part of the nominal prior to maturity, normally with accrued interest. Final Redemption The issuer of the bond repays the nominal of the bond, normally with accrued interest. DERIVATIVES: Optional Put An event in which the holder of the put options has the option to exercise the put option in order to sell the underlying security at a given price. Warrant Exercise An event in which the holder of the warrants has the option to exercise the warrant in accordance with the terms and conditions of the warrant. Warrant Expiry An event that notifies the holder of the warrant that the warrant is about to expire and the holder of the warrant is given the option to exercise the warrant. Warrant Issue Per share an amount of warrants is issued according to a specific ratio. The warrant can entitle to sell or buy the underlying security at a given price within a given timeframe.

How Rights Issues Work So, how do rights issues work? The best way to explain is through an example. Let's say you own 1,000 shares in Wobble Telecom, each of which is worth $5.50. The company is in a bit of financial trouble and sorely needs to raise cash to cover its debt obligations. Wobble therefore announces a rights offering, in which it plans to raise $30 million by issuing 10 million shares to existing investors at a price of $3 each. But this issue is a three-for-10 rights issue. In other words, for every 10 shares you hold, Wobble is offering you another three at a deeply discounted price of $3. This price is 45% less than the $5.50 price at which Wobble stock trades. (For further reading, see Understanding Stock Splits.) As a shareholder, you essentially have three options when considering what to do in response to the rights issue. You can (1) subscribe to the rights issue in full, (2) ignore your rights or (3) sell the rights to someone else. Here we look how to pursue each option, and the possible outcomes. 1. Take up the rights to purchase in full To take advantage of the rights issue in full, you would need to spend $3 for every Wobble share that you are entitled to under the issue. As you hold 1,000 shares, you can buy up to 300 new shares (three shares for every 10 you already own) at this discounted price of $3, giving a total price of $900. However, while the discount on the newly issued shares is 45%, it will not stay there. The market price of Wobble shares will not be able to stay at $5.50 after the rights issue is complete. The value of each share will be diluted as a result of the increased number of shares issued. To see if the rights issue does in fact give a material discount, you need to estimate how much Wobble's share price will be diluted. In estimating this dilution, remember that you can never know for certain the future value of your expanded holding of the shares, since it can be affected by any number of business and market factors. But the theoretical share price that will result after the rights issue is complete - which is the ex-rights share price - is possible to calculate. This price is found by dividing the total price you will have paid for all your Wobble shares by the total number of shares you will own. This is calculated as follows:

1,000 existing shares at $5.50 300 news shares for cash at $3 Value of 1,300 shares Ex-rights value per share

$5,500 $900 $6,400 $4.92 ($6,400.00/1,300 shares)

So, in theory, as a result of the introduction of new shares at the deeply discounted price, the value of each of your existing shares will decline from $5.50 to $4.92. But remember, the loss on your existing shareholding is offset exactly by the gain in share value on the new rights: the new shares cost you $3, but they have a market value of $4.92. These new shares are taxed in the same year as you purchased the original shares, and carried forward to count as investment income, but there is no interest or other tax penalties charged on this carriedforward, taxable investment income. 2. Ignore the rights issue You may not have the $900 to purchase the additional 300 shares at $3 each, so you can always let your rights expire. But this is not normally recommended. If you choose to do nothing, your shareholding will be diluted thanks to the extra shares issued. 3 Sell your rights to other investors In some cases, rights are not transferable. These are known as "non-renounceable rights". But in most cases, your rights allow you to decide whether you want to take up the option to buy the shares or sell your rights to other investors or to the underwriter. Rights that can be traded are called "renounceable rights", and after they have been traded, the rights are known as "nil-paid rights".

To determine how much you may gain by selling the rights, you need to estimate a value on the nil-paid rights ahead of time. Again, a precise number is difficult, but you can get a rough value by taking the value of ex-rights price and subtracting the rights issue price. So, at the adjusted ex-rights price of $4.92 less $3, your nil-paid rights are worth $1.92 per share. Selling these rights will create a capital gain for you.