What is a corporate action? A practical guide for investors
You may be asked to invest more, sell shares, or choose what you receive. We break down how they work and what to consider before you respond.
Corporate action sounds like something that should happen in a boardroom, ideally while you are somewhere else.
Then an email arrives asking whether you want to invest more money, sell your shares or choose between cash and more shares. Suddenly, the action is yours.
A corporate action is an event initiated by a company or investment issuer that affects its investors or securities. Some happen automatically. Others give you a choice that can materially change your investment, cash position or tax outcome.
This guide focuses on the second group: corporate actions where you may need to make a decision.
The useful questions are not whether the event has been technically classified as voluntary or mandatory. They are:
- What are your options?
- What happens if you do nothing?
- How could each option affect you?
The terms of each offer are different, so the relevant offer document should always be read before acting.
In this guide
Decisions that can materially affect your outcome
Renouceable rights
Other corporate actions
Share purchase plans
What is a share purchase plan?
A share purchase plan, usually shortened to SPP, allows eligible existing investors to apply for additional shares directly from the company. Applications are commonly made in set dollar amounts and generally do not attract brokerage.
Unlike an entitlement offer, the amount you may apply for is not necessarily based on the size of your existing holding. Eligibility, application limits and pricing are set out in the offer terms.
Why might a company undertake an SPP?
An SPP allows a company to raise equity from existing retail investors. The money might be used to fund an acquisition, invest in growth, repay debt, strengthen the balance sheet or provide working capital.
An SPP also commonly follows a placement to institutional or sophisticated investors. In that situation, the SPP gives eligible retail investors an opportunity to participate in the broader capital raising.
The fact that a company is raising money is neither automatically good nor bad. The important questions are why it needs the money, what management plans to do with it and whether the expected benefit justifies issuing more shares.
What are your options?
You can generally:
- apply for some or all of the amount available under the offer; or
- do nothing.
Some SPPs let you select from prescribed application amounts rather than nominating any amount you like.
What happens if you do nothing?
You keep the same number of shares. However, because the company is issuing new shares, your percentage ownership may fall.
This is called dilution. Dilution does not automatically mean you should participate. Investing more money solely to preserve a percentage can be a rather expensive way to avoid feeling left out.
What should you consider?
Relevant considerations can include:
- the offer price compared with the current market price;
- whether the price is fixed or determined using a future formula;
- why the company is raising capital;
- the company’s prospects and risks;
- how much you already have invested in the company;
- whether increasing that exposure still suits your portfolio;
- the cash you would need to commit and what else it could be used for;
- possible tax consequences; and
- whether applications can be scaled back.
An offer described as being at a discount can sound compelling, but the market price continues moving while the offer is open. If the market price falls below the offer price, the same shares may become available on the market for less.
A discount is a comparison, not a guarantee of value. Free brokerage is a fee saving, not an investment thesis.
What happens if an SPP is oversubscribed?
An SPP is oversubscribed when investors apply for more shares than the company intends to issue.
The company may accept some additional applications, scale applications back, or use a combination of both. Depending on the offer terms, a scale-back might take account of existing holdings, the amount applied for, a fixed minimum allocation or another method determined by the board.
You may therefore receive fewer shares than you applied for. Any unapplied money should be returned in accordance with the offer terms.
ASIC has specifically said that SPP documents should clearly explain the scale-back terms if the offer is oversubscribed.[1]
Held through a platform, wrap or super fund?
A custodian may submit applications for multiple underlying investors. The final amount you receive can be affected by the company’s scale-back and the way the platform allocates the resulting shares among participating investors. Applying for an amount does not guarantee that amount will be allocated.
Rights and entitlement offers
What is an entitlement offer?
An entitlement offer gives eligible existing investors an opportunity to buy additional shares in proportion to their current holding. It might, for example, offer a specified number of new shares for every group of shares already owned.
The terms “rights issue” and “entitlement offer” are often used for closely related structures.
An offer may be:
- renounceable, meaning the right to participate may be sold or transferred; or
- non-renounceable, meaning the right cannot be sold or transferred.
The precise options depend on the offer. Some also include a shortfall facility that lets investors apply for shares not taken up by others.
Why might a company undertake one?
Like an SPP, an entitlement offer raises new equity. A company might use the proceeds for an acquisition, growth, debt reduction, regulatory capital or balance-sheet support.
An entitlement offer can be more suitable than an SPP when the company wants to raise a larger amount. Each investor’s entitlement is linked to the size of their existing holding, rather than everyone being subject to the same individual application limit. This gives eligible investors an opportunity to maintain their percentage ownership and allows larger shareholders to contribute proportionally more. The offer can also be underwritten, giving the company more certainty about how much it will raise.
An SPP may be simpler and can work well for a smaller retail raising or as a follow-up to an institutional placement. An entitlement offer is a more structured way to approach all eligible shareholders proportionally. Neither is automatically better. The choice depends on how much money is needed, how quickly it is needed and how the company wants to treat existing shareholders. Entitlement offers can also use accelerated and other structures, so their timetables can differ substantially.2
Why make the rights renounceable?
A company may make an offer renounceable so investors who cannot, or do not want to, contribute more money still have an opportunity to receive value. Instead of simply watching their entitlement expire, they may be able to sell it to someone who does want to participate.
This can be particularly helpful when the new shares are offered at a meaningful discount and non-participating investors face substantial dilution. The trade-off is additional complexity and cost, and there is no guarantee that the rights will have a meaningful sale value.
What are your options?
Depending on the terms, you may be able to:
- take up all of your entitlement;
- take up only part of it;
- apply for additional shares through a shortfall facility;
- sell or transfer the rights if the offer is renounceable; or
- do nothing.
What happens if you do nothing?
You will not receive the new shares and your percentage ownership may be diluted.
With a non-renounceable offer, you cannot sell or transfer the entitlement yourself. It may lapse, although some offers include a separate shortfall or bookbuild process.
With a renounceable offer, you can often sell the entitlement during a limited trading window. If you do not plan to exercise it, you should generally sell it rather than allow it to expire, provided the sale proceeds exceed any transaction costs. A renounceable right is an asset with an expiry date, and letting it lapse can mean giving up value for nothing.3
Some offers include a process for selling unused entitlements and returning any net proceeds to investors. The offer document determines what applies, so check the terms before acting.
What should you consider?
Many of the SPP considerations also apply, including the offer price, use of funds, company outlook, available cash and portfolio concentration.
You should also consider:
- the value of a renounceable right and the date it stops trading;
- how much dilution could occur if you do not participate;
- whether any shortfall application can be scaled back; and
- what happens to an entitlement that is not exercised.
Held through a platform, wrap or super fund?
Check which choices are actually available through the service. In particular, a platform may facilitate taking up an entitlement without supporting the separate trading or transfer of renounceable rights. The custodian’s eligibility and the offer’s treatment of underlying investors can also affect the process.
Buyback offers
What is a buyback offer?
A buyback offer is an invitation from a company to sell some or all of your shares back to it. Shares purchased by the company are then cancelled, reducing the total number on issue.
The offer may use a fixed price or ask investors to nominate a sale price within a tender range. ASIC provides an overview of buybacks and the less common structures investors may encounter.4
Why might a company undertake one?
A profitable company has several possible uses for its money. It can reinvest in the business, make an acquisition, repay debt, keep the cash available for later, pay a dividend or buy back some of its own shares.
If the company has accumulated more cash than it needs and cannot find sufficiently attractive opportunities to expand the business, leaving that money sitting idle may not be the best outcome for shareholders. A buyback provides a way to return some of it by purchasing shares from investors who choose to sell.
Once those shares are cancelled, each remaining share represents a slightly larger proportion of the company. A buyback can be a sensible use of money if the company buys its shares for less than they are reasonably worth. It can be a poor use of money if the company overpays or later discovers that it needed the cash. The announcement of a buyback is therefore not automatically good news.
What are your options?
You may be able to:
- offer some or all of your shares for sale;
- nominate a price within a tender range; or
- do nothing and retain your shares.
The available choices depend on the buyback structure.
What happens if you do nothing?
You ordinarily retain your shares. If the buyback proceeds, the total number of shares on issue will fall and your proportional ownership may increase slightly, although that alone does not determine whether you are better off.
What should you consider?
Relevant issues can include:
- the buyback price compared with the market price;
- whether the price is fixed or determined through a tender;
- the company’s reason for returning capital;
- the effect on your portfolio and future exposure;
- transaction costs if you instead sell on market;
- the tax treatment of the payment; and
- the possibility of a scale-back if too many shares are offered.
A buyback offer can have tax treatment that differs from an ordinary market sale. This can materially change the after-tax comparison, so the headline price should not be assessed on its own.
Takeover offers
What is a takeover offer?
A takeover offer is made when a bidder seeks to acquire shares in another company, usually to gain control. The bidder may offer cash, its own shares, or a combination of both.
The target company will usually provide its response, including the directors’ recommendation and, where required or considered appropriate, an independent expert’s report.
Why does a takeover happen?
A bidder may want the target’s business, assets, customers, technology, market position or future earnings. It may expect cost savings or strategic benefits from combining the businesses.
The target board may support the offer, oppose it or seek a better proposal. A recommendation is useful evidence, but it does not replace considering what the offer means for you.
What are your options?
Depending on the transaction, you may be able to:
- accept the takeover offer;
- reject it by taking no action;
- sell your shares on the market; or
- wait for further information, a higher offer or a competing proposal, while remaining mindful of the deadline.
Accepting an offer can restrict your ability to sell the shares or change your mind. Withdrawal rights and offer conditions vary, so read the bidder’s statement and subsequent updates carefully.
What happens if you do nothing?
Initially, you continue holding your shares. What happens later depends on the outcome of the takeover.
If the bidder obtains control but does not acquire everyone’s shares, you may remain invested as a minority shareholder in a company with different ownership, strategy and potentially lower trading liquidity.
If the bidder reaches the relevant statutory threshold, compulsory acquisition may follow. The Takeovers Panel describes this as a process through which a shareholder owning 90% or more of a company can acquire the remaining shares.5
What should you consider?
Relevant issues can include:
- the offer value compared with the market price and your assessment of fair value;
- the target company’s prospects if the takeover does not proceed;
- whether the offer is conditional;
- the likelihood of a higher or competing offer;
- the target directors’ recommendation and reasons;
- any independent expert’s conclusion;
- the tax consequences of accepting or selling on market;
- the timing and certainty of payment; and
- the consequences of remaining a minority shareholder.
If shares are offered as consideration, you are also making a decision about whether you want exposure to the bidder. That deserves more thought than simply comparing the headline dollar values.
Choosing between cash and shares
What is a consideration election?
Some takeovers, mergers, schemes of arrangement and restructures let investors choose what they receive. The alternatives may be cash, shares in another company, or a combination of both.
This is not always a standalone corporate action. It is often one decision within a larger transaction.
Why offer a choice?
Offering different forms of consideration can help a buyer manage how much cash it needs, give existing investors flexibility and allow some investors to retain exposure to the combined business.
The offer may cap how much cash or how many shares are available. If investors collectively choose more than the available amount, elections can be scaled back or rebalanced under the transaction terms.
What are your options?
The transaction document will explain the available combinations and any limits. It should also identify the default consideration that applies if you do not make a valid election by the deadline.
Under a scheme of arrangement, there can be two separate decisions:
- shareholders vote on whether the transaction should proceed; and
- investors may be asked to elect what form of consideration they want.
If the scheme is approved and becomes legally effective, it can bind all affected shareholders, including those who voted against it or did not vote. Not voting is therefore different from failing to make a consideration election.
What should you consider?
Cash may provide greater certainty and a clean exit. Shares retain investment exposure, which could produce a better or worse outcome from that point.
Relevant considerations can include:
- the value and volatility of any shares being offered;
- the exchange ratio and how it is calculated;
- your willingness to own the acquiring or combined company;
- portfolio concentration and diversification;
- tax consequences and any available rollover relief;
- trading access and liquidity, particularly for foreign securities;
- caps, scale-backs and the default election; and
- your need for cash.
Held through a platform, super fund or SMA?
Confirm whether every consideration option is supported. If an election is unavailable or no valid instruction is received, the default treatment under the transaction and service rules may apply.
How the way you hold an investment can change the process
Once you understand the decision itself, the next practical issue is who can make the election.
The company undertaking a corporate action usually communicates with, and takes instructions from, the registered holder of the investment. That may or may not be you.
If you hold the investment directly
Your name will generally appear on the company’s share register. You ordinarily receive the offer and make any election yourself.
If you hold it through a platform, wrap or superannuation fund
A custodian, nominee or super fund trustee may be the registered holder. The available choices may be passed through to you, with the legal owner making the election after receiving your instruction. Not every option available to direct shareholders will necessarily be supported.
If you hold it through a separately managed account, or SMA
The investment manager may have authority to make the decision under the investment mandate. You may not be asked to make a personal election, even though the corporate action is voluntary at the security level.
The exact process depends on how the investment is owned and the rules of the relevant service. ASIC’s MoneySmart website recommends checking the terms of an omnibus holding arrangement to understand how corporate actions and voting rights are handled.6 ASIC also notes that investments in a managed discretionary account, a category that can include an SMA, are managed by the provider at its discretion within agreed limits.7
If you have received an election request, work from the instructions and deadline provided to you. Do not assume the issuer’s public closing date is necessarily the date by which your instruction must be received.
Shareholder voting: having a say rather than making a transaction
Companies may ask shareholders to vote on director appointments, remuneration, capital transactions, mergers, schemes and other resolutions. These votes can matter collectively, particularly when approval is required before a major transaction can proceed, although an ordinary investor is unlikely to determine the result single-handedly.
Direct shareholders can ordinarily vote or appoint a proxy. If the shares are held through a custodian, platform, super fund or SMA, voting may be facilitated through a separate process, exercised by another party under its voting policy, or not passed through to you at all.
Corporate actions that happen automatically
Not every corporate action asks you to make a choice. Dividends and distributions, returns of capital, share splits and consolidations, bonus issues, demergers, compulsory acquisitions, and name or ticker changes may all be applied automatically to eligible holdings.
These events can still affect your income, tax records, cost base, portfolio or future liquidity. “Automatic” means you do not make an election. It does not mean nothing important has happened.
A practical checklist before you make an election
Before responding to a corporate action, identify:
- What happens if you do nothing? Never assume that no response means nothing changes.
- Why is the company undertaking it? Look beyond the discount, premium or glossy summary to the commercial purpose.
- What is the offer actually worth? Compare the terms with current market information, not just the price used when the offer was announced.
- How does it affect your portfolio? Consider exposure, diversification and the role the investment is meant to play.
- What cash would you commit or receive? Include the opportunity cost of using that cash elsewhere.
- What are the tax consequences? Two choices with similar headline values can produce different after-tax outcomes.
- Could the offer be scaled back or fail to proceed? Check allocation methods, conditions and refund arrangements.
- Who needs to make the election? Confirm whether you, a custodian, a super fund trustee or an investment manager is responsible.
- When is your instruction due? Use the deadline applying to your holding arrangement and allow time to deal with any questions.
Corporate action booklets tend to combine a firm deadline with enough pages to test even the most enthusiastic reader. Reducing the decision to these questions makes the paperwork much more manageable.
How Lume Wealth can help
A corporate action is not automatically an opportunity or a warning sign. The right response depends on the specific terms, current market conditions, tax consequences, available cash, portfolio concentration and what the investment is meant to achieve for you.
At Lume Wealth, we help people assess material financial decisions in the context of their broader strategy, rather than judging an offer in isolation.
If you are an existing Lume Wealth client and receive a corporate action requiring an election, send it to us as soon as possible. We can confirm what is relevant to your circumstances and, where it falls within the scope of our service, provide a recommendation before you act.
Sources
[1] Australian Securities and Investments Commission, “Share purchase plans: the risks of early closure”, Corporate Finance Update, Issue 6.
[2] Australian Securities and Investments Commission, Regulatory Guide 189: Disclosure relief for rights issues.
[3] Australian Securities and Investments Commission, “Westpac to remediate customers for failure to pass on important corporate action information”, 2 July 2021.
[4] Australian Securities and Investments Commission, “Company share buybacks”.
[5] Takeovers Panel, “Glossary of key takeover terminology”.
[6] MoneySmart, “Holder identification number (HIN)”, Australian Securities and Investments Commission.
[7] Australian Securities and Investments Commission, “Managed discretionary accounts”.
This general advice has been prepared without taking into account your objectives, financial situation or needs. Therefore, you should consider the appropriateness of the advice in light of your own objectives, financial situation or needs, before acting on it. You should also obtain a Product Disclosure Statement (PDS) relating to the product and consider the PDS before making any decision about whether to acquire the product.
