Types of corporate actions

Forward split

A forward split is used by a company to increase the number of shares in issue. Shareholders will be given more shares but there will be no change to the total value of their shares.

Example:

You own 1 share of company XYZ , trading at $2,000. If XYZ announces a 5:1 stock split, after the split you will have 5 shares of XYZ and the value per share will be $400. The total market value ($2,000) stays the same.

Consolidation or Reverse split

A consolidation (or reverse split) is used by a company to reduce the number of shares in issue. Shareholders will be given a reduced number of shares but each share will now be worth more. This will typically result in the new shares having a higher nominal value.

Example:

You own 6 shares of company ABC and their shares are trading at $1 each. If ABC announces a 1:2 reverse stock split, you will own as a result 3 shares trading at $2 each.

Exchange/Conversion

This is an automatic conversion of securities into another class of securities (e.g., from preferred to common shares).

Delisting

A delisting occurs when a company:

• No longer wishes to maintain their listing on an exchange
• Is going through a separate corporate action (e.g., they are being acquired by another company)

Or

• No longer meets the listing requirements of the exchange and is removed from that exchange

Name change

A name change itself does not affect the number of shares you hold or the value of the shares. However, a name change may sometimes occur at the same time as another corporate action which could affect your holding.

Also, a name change involves the delisting of the old name and symbol and the listing of the new name and symbol on the securities exchange.  Shareholders may experience a delay before the new symbol is traded.

Merger     

A merger is an agreement that joins two existing companies into one new company. Where one company has acquired another company (also known as a takeover), this can be agreed upon or recommended by the target (acquired) company.

A merger can also be forced upon a company, this is known as a hostile takeover.

Plan of arrangement

A plan of arrangement is when one company attempts to buy another company.

This usually occurs when an agreed bid between a buyer and seller is reached. This has to be agreed in court and is put to shareholders to vote. If the plan becomes effective and all resolutions are passed, the buying company will obtain 100% of the shares in issue, regardless of whether a shareholder voted in favour, against, or not at all.

Shareholders usually receive the proceeds in the form of cash, shares in the new company, or a combination of both.

Spin-Off

The creation of a new company from the parent company, in which customers are allocated shares of the newly created company based on how many shares they held of the parent company.

Liquidation

A liquidation occurs when a company is unable to continue trading. This is usually because it can no longer raise the necessary funds to cover its debts and liabilities and is unable to obtain any external financial backing.

A receiver is appointed to take over the running of the company.  The receiver will sell the company's assets and then distribute the proceeds to those who are owed money, in this order of priority:

• The receiver (receives their fee)
• Government and banks who are owed money
• Shareholders. Unfortunately, shareholders come near the bottom of the list and there is often little or no money left for ordinary shareholders

This process can take several years; however, shareholders may eventually recover some of their investment. If a company's shares are declared as being of zero value, shareholders can usually use this as a capital loss to offset other capital gains they may have accrued.

Cash dividend

A cash dividend is the distribution of funds or money paid to shareholders as part of the corporation's current earnings or accumulated profits.

Stock dividend

This is a declared event in which customers will receive shares instead of cash.

Conversion/Exchange privilege

A conversion privilege is the opportunity to convert one class of shares into another class. A common example would be the opportunity to convert a holding of Convertible Loan Stock into Ordinary Shares.

For example:

The company will issue a conversion ratio. You may be offered one ordinary share for every five exchangeable shares, or they may be exchangeable on a one-for-one basis.  If you decide to proceed, then your existing holding will be replaced by the new shares on the conversion date.

There is no cost to convert shares from one class to another.

Dutch auction

A Dutch auction is an event where the company is buying back their own shares and shareholders are given the option to choose a price within a range set by the company.

The company will look at the offers received and set a strike price. (i.e., a specified price for the sale of the stock.)

All shareholders who have offered their shares at or below this price will have tendered their shares. All shareholders will receive the strike price even if their original offer was lower than this.

Shareholders who have chosen a price above the strike price will not have their shares taken up by the company.

Rights offer

A rights offer is when a company offers its current shareholders the right to buy additional shares in the company, usually at a discount to the market price. Companies use rights offers as a way to raise funds.

Shareholders, as of a set date (the record date), will receive the right to purchase additional shares at a specific price for a specific time period. Holders of the rights have the option to exercise their rights (i.e., buy the additional shares), or allow them to lapse.  Rights are often tradable and can usually be bought/sold on the market.

Warrant exercise

Warrants give the holder the right to buy shares in a company at a predetermined price - the exercise price, until a future date - the expiration date.

Companies may give warrants to current shareholders as part of a corporate action, with an exercise price which is higher than the current market price.

For example: ordinary shares may be trading at $1.00,  whereas the warrants have an exercise price of $2.00. In this case, there is no point in exercising warrants unless the share price rises above $2.00; it is cheaper to buy the shares on the market. Warrants are often traded in the market, meaning they can be sold as an alternative to exercising them.

Warrants that are not exercised before the expiry date will be deemed worthless and are automatically removed from your account.

When will I see a payment from a corporate action in my account?

Payment will be made to your account once Questrade receives the payment from the depository handling the corporate action.

What happens if I have fractional shares after a corporate event?

Fractional shares on corporate action events—where the portion of the stock is less than one full share—are treated differently in every situation.

The shares may be rounded up, rounded down, or paid as cash in lieu. The company's information circular or prospectus will indicate how fractional shares will be treated.

How are dividends paid by U.S. companies to non-U.S. shareholders taxed?

Dividends paid by U.S. corporations to non-U.S. shareholders are generally subject to IRS (Internal Revenue Service) withholding tax, at a rate of 30%.

Withholding tax is charged at the source of income, so the amount withheld does not appear in your account.

A lower rate (generally 15%) may be applied under an income tax treaty.

Note the following:

• IRS 302 is tax on a merger or tender payment that is treated as a dividend.
• IRS 304 is a similar tax, but is only applied to shareholders who own shares in both the target and the acquiring company before the merger has been completed. This type of event is much less common than those for which 302 tax is applied.

Note:  RRSP, RRIF and LIF accounts are exempt from this tax and are not charged.

Class actions

Due to the nature of Questrade Inc.’s business model and our efforts to keep customer costs low, Questrade cannot monitor, on behalf of our customers, the status of class actions or other lawsuits against the thousands of corporations whose securities are traded by our customers or provide information to customers. Also, Questrade Inc. does not participate in the claim recovery process for class action lawsuits for securities held by Questrade customers. Generally, if a class action lawsuit is successful or if there is a settlement, shareholders should receive a claim notice from the class action administrator. Any questions about class action lawsuits should be directed to the law firms representing the plaintiff(s).

Notification to customers about corporate actions

Please note that we notify our customers about upcoming and effective corporate actions as a courtesy in an effort to provide information which we believe may benefit our customers. All information is supplied on a best-efforts basis and as such, Questrade cannot guarantee the timeliness nor accuracy of the information. At times, terms of an offer may change without new information being provided to customers. It is the customer's responsibility to ensure they have reviewed all corporate action terms with an external party, such as company websites or news releases, before making any trading decision.

Submitting corporate action requests to Questrade