Corporate actions

A rights issues corporate action is when existing shareholders are offered the chance to buy additional newly-issued shares – usually at a discount to the market price. A company might want to raise finance in order to expand, or to repay bank loans or bond finance. Existing shareholders are given the opportunity to buy additional shares to avoid diluting their ownership of the company.

What options do shareholders have when a rights issue takes place:

• Take up rights (i.e. buy shares)
• Sell rights to another investor
• Take up a part of the rights
• Take no action

New shares may be attractive to shareholders because they'll be cheaper than the current market price. However, shareholders aren’t obliged to buy them.

Fidelity will send you an update when a rights issue is announced in a company you hold shares in.

Preemptive rights

A shareholder with preemptive rights can buy additional shares in any forthcoming issue of the company’s common stock before the shares are offered to the general public.

A bonus issue corporate action is when bonus shares (additional shares) are given by a company to its shareholders, at no cost.

A company’s distribution of post-tax profits to its shareholders is known as a dividend. These are not fixed payments; rather, they fluctuate in line with the price of a company’s shares. A company may choose to pay dividends once or twice a year - or can elect not to pay dividends at all. A mid-year dividend is known as an interim dividend, because it’s paid out in conjunction with the company’s interim report, which updates investors on the company’s progress to date.

The dividend payment schedule is decided by the board of directors, who should ideally aim to make each payout higher than the previous year or at least stay the same.

Investor demand is typically high for a business with a solid track record of paying out large dividends. Achieving a capital gain from the share price in addition to dividend income offers long-term investors the best of both worlds.

Mergers are a type of mandatory corporate action. They happen when two or more businesses decide they can succeed in a larger market by joining forces. The assets and business operations of the two businesses are combined to form a new one. The new company will offer shares to its shareholders from both of its companies.

An acquisition or takeover - one business obtaining ownership of another - is a type of voluntary corporate action, until there is a high enough acceptance to make the takeover compulsory. An acquisition has a higher chance of success when it has the support of investors and the workforce.