It’s probably a direct result of the lockdowns but, recently, we’ve received a spate of queries regarding Corporate Actions.
Given that our client data base is a good representation of the broader advice industry, it seems to the topic du jour.
You know that if someone is talking about it, others are thinking about it.
At Assured Support we care and, after extensive re-education, we understand that sharing is caring.
So, today, we’ll share our compliance-focused perspective of Corporate Actions:
What are corporate actions?
“What do you mean? Hey-ey
When you don’t want me to move
But you tell me to go
What do you mean?”
— Justin Beiber, “What do you mean?”
It’s Tarantino-esque to start in the middle, but starting by identifying what “corporate actions” are is important, as the effect of the corporate action on your clients’ share portfolio is different, depending on the type of Corporate Action.
A Corporate Action is any action taken by a company that has a material impact on the company and its shareholders.
Actions can be both mandatory and voluntary and can take the form of a merger; changing a company’s name/brand; acquisitions; stock splits; rights issue; open offers or issuing dividends.
While the type of actions are varied, in this article we will focus on the more popular ones.
Simply, a mandatory action is initiated by the company’s board of directors and can include mergers and stock splits. In this case, shareholders don’t have to act on these but they are affected as beneficiaries. As an adviser, your role would be more educative, as the client has no choice but to participate.
A voluntary event occurs when shareholders elect to participate in the action. Examples include rights issues and open offers. It may require advice and, as a result, you need to determine if you are facilitating further advice via a SoA or RoA or perhaps just providing factual information.
Let’s briefly explain each type of action in turn. Starting with mandatory actions.
Mergers and acquisitions
Think “Brangelina”, synergies and optimisation.
Then focus on the reality than it’s nothing more than management’s unreasonable optimism that by uniting, two companies will maximise shareholder value or secure a competitive advantage beyond what they could achieve alone.
In the end, there can be only one, and a new company is created by combining assets and operations and shareholders receive interests in the new, improved, entity.
An acquisition (or takeover) occurs when one company takes over ownership of another (the prospective Brangelina just becomes a bigger Brad).
In this scenario you could see companies making a takeover bid, where an open invitation is extended to all shareholders to tender their shares for sale, at a specified price during a specified time.
In a technique beloved by media plutocrats, a company increases the number of shares without changing the actual value doesn’t change.
One man’s dilution becomes another man’s gain.
For example, if your client owns 100 shares valued at $10 per share. If the company announces a stock split at 2-1, as a result they would own 200 shares values at $5 per share.
A company may initiate this action, is because they feel their share price is too high; a stock split makes their shares more affordable and therefore attractive to new shareholders.
In contrast, a voluntary event occurs when shareholders elect to participate in the action. Here, the company can’t act without the shareholders’ response.
Examples of voluntary actions include events such as rights issues and open offers.
In the case of a rights issue, companies offer shares at a special price to existing shareholders and, in these cases, your clients often need advice.
Companies turn to rights issues when they are looking to raise money, perhaps for expansion or to pay down debt.
It’s important for the client to understand the nature of the rights issue, particularly if raising cash to manage debt, may be an indication the company has cash flow issues.
Open offers are only available to existing shareholders, and basically gives the client an option to either purchase more ordinary shares at a price normally discounted to the market share price, or not partake in the open offer and let it lapse.
Similar to the rights issue, this could be a money raising exercise for the company.
How do you facilitate a Corporate Action through the advice process?
Your course of action will be different depending on whether you are recommending the action or simply communicating it.
Recommending the action
If recommending the action, depending on the form of the Corporate Action (i.e., rights issue and open offers), you will need to determine the impact of engaging in the Corporate Action on the clients’ portfolio.
You should apply the principle of significance and determine if the result of engaging in the Corporate Action will result in a significant change to the client’s portfolio.
Seizing up the change is important in order to determine if you need to prepare a new Statement of Advice or you can rely on a Record of Advice in order to facilitate the further advice.
Now at this point you might say, why can’t I just use a Record of Advice, I already advised them on the shares, they are part of my initial advice captured in the Statement of Advice previously prepared.
When you look at the elements of s946B (1)(b):
- as a providing entity you have previously given the client a Statement of Advice that set out the client’s relevant personal circumstances in relation to the advice (the previous advice) set out in that statement;
- and you have checked that the client’s relevant circumstances have not significantly changed since the earlier advice; and
- the basis on which the further advice is given is not significantly different form the basis on which the previous advice was given.
However, if engaging in the action results in a significant variation to the balance of the portfolio, you will need to prepare a Statement of Advice.
The million-dollar question of course is, how do I determine significance?
Particularly where it is not defined in the legislation and regulations.
This is where once again, working with such a large client group, we can confirm that most Licensees adopt a pragmatic and sensible approach to interpreting this area of the law.
Generally, they tend apply a percentage, be it 10% when determining significance.
We appreciate that auditors consider 4-8% significant, but, really, who cares what they think?
No doubt you have also enshrined your interpretation and house position in your internal procedures, so please refer to your compliance framework and related policies when determining significance.
Communicating the action
If you are merely communicating the action, you are simply providing factual information, and an email containing simply what the offer is, and how they can take up/not take up (with the transaction cost) will suffice.
We’d also recommend you include an invitation/recommendation to get advice before transacting.
So, remember, it is voluntary actions, where your clients may be seeking your assistance.
If they are merely wanting factual information, then communicate it.
If they need further advice, then depending on the nature of the Corporate action, it’s up to you to determine if participating in the action results in a significant change to the portfolio (guided by your Licensee’s definition of significance.)
Consider, reflect and then prepare the appropriate advice documentation your client needs.
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