Corporate actions - Glossary of terms

A company will use a bonus issue to convert cash reserves into share capital. The process is an accounting procedure used to convert profits which the company has retained into share capital.

This is achieved by creating a number of new shares and then giving them to existing shareholders. Shareholders do not have to pay for these shares because the cash which has been converted into share capital already belongs to shareholders.

The effect of a bonus issue is to increase the number of shares in issue and as a result reduce the price per share. Companies often use a bonus issue as a way of reducing the price per share to increase liquidity of the stock.

For example under a bonus issue each shareholder could be issued with two new shares for each share they hold. Although the shareholders' funds have not changed there would now be three times as many shares in issue. This means that the share price would be reduced by a factor of three. As a result a shareholder who held 100 shares worth £15 each would after the bonus issue hold 300 shares worth £5 each. Therefore although the number of shares in issue and price of each share has changed the total value of the company and each individual shareholding has not.

A Demerger is when a company is split to create two or more separately listed companies.

Shareholders receive shares in a new company (or companies) while usually retaining shares in the original company. An example would be the British Telecommunications demerger where shareholders were given new shares in MMO2 plc which represented the mobile phone arm of the company's business.

The price per share of the original company will be reduced to reflect the part of the business which has been demerged. The value which has been removed from the original company will be the value of the shares in the new company.

Sometimes the original company will also be renamed after the demerger. In the above example British Telecommunications PLC was subsequently renamed BT Group PLC. The original company after the split may not necessarily represent the larger part of the company before the split.

An open offer (also known as an entitlement issue) is an offer by a company to its shareholders to buy new shares in the company at a fixed price. Companies use open offers as a way of raising funds.

Shareholders are usually offered an entitlement to buy a set number of shares in proportion to the number they currently hold. For example you may be offered one new share for every four that you currently hold. Shares will often be offered at a discounted price to the market. For example if the shares are trading at £1 per share in the market you may be entitled to buy shares at 90p each.

An open offer is similar to a rights issue however shareholders are not allocated nil paid shares instead shareholders are given an entitlement to buy new shares. This entitlement cannot be traded on the market and so unlike a rights issue you cannot sell your open offer entitlement. In turn, if you do not take up the entitlement then you will not receive a lapsed payment.

Sometimes a company will give the option to make an excess application. This means that you can apply for more new shares than given in your entitlement. Companies do this so that if some shareholders decide not to take up their entitlement other shareholders can have more new shares. This way the company can still raise the same amount of money from the open offer. If the company receives excess applications for more shares than it wishes to sell, they will scale back these excess applications accordingly.

A tender offer is a cash offer to all shareholders for their shares. Often this is used when a company wants to buy back some of their own shares.

The company will usually be looking to buy back a certain number of their shares and will ask shareholders if they would like to offer their shares for tender. This may be at a fixed price or it may be at a price calculated by the companys net asset value on a given date.

Sometimes shareholders are given the option to choose a price within a range. The company will then look at the offers and set a strike price, everybody who has offered their shares on 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.

The number of shares that can be tendered will vary. There may be a set number which are guaranteed to be tendered, known as the basic entitlement. You may be able to offer more shares however your offer may be scaled back depending on how many people have decided to participate. In the case where a strike price is set, a lower original offer is more likely to be completed in full.

A consolidation 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.

For example a company may consolidate its shares on a basis of one new share for every ten existing shares. This means that if you held 2000 ordinary 10p shares then you would now hold 200 ordinary £1 shares.

The market price per share will rise accordingly to reflect that each share is now worth a larger part of the company. In our example, if the share price closed at 35p on the date of the consolidation then you would expect the shares to commence trading at around £3.50. Normal market fluctuations mean that the share price will probably not open at exactly ten times the previous day's closing price.

Warrants give the holder the right to buy ordinary shares in the company at a set price and at a future date.

Warrants will have an exercise price. This is the price which you must pay in order to convert a warrant into an ordinary share. Converting warrants into ordinary shares is known as exercising the warrants. Usually one warrant can be exercised to give one ordinary share however there are some exceptions where you may need to exercise several warrants to receive one ordinary share.

Usually, warrants will have one or more exercise dates which are the dates on which you can exercise your warrants, these are usually fixed dates in each year (for example 1 June & 1 December). Usually warrants have a final exercise date which is the last date you can exercise the warrants. After this date the warrants are cancelled however if you fail to exercise them you may still receive a cash payment if the warrants have a value on this date.

Exercising a warrant will sometimes cost more than buying the ordinary shares in the market. Companies may give warrants to current shareholders in a corporate action, with an exercise price which is higher than the current market price. For example ordinary shares may be trading at 30p whereas the warrants have an exercise price of 50p. In this case there is no point in exercising warrants unless the share price rises above 50p as it is cheaper to buy the shares in the market. It is also important to bear in mind the value of the warrants that will be given up when exercising. Companies do this so that current shareholders are rewarded if the company does well in the future and the share prices rises above the exercise price by the exercise date.

Warrants can usually be traded in the market meaning that you can sell your warrants as an alternative to exercising them.

A redemption opportunity gives holders of stocks such as loan notes or 'B' shares the option to have their holding redeemed and receive cash in place of the stock.

Most redeemable shares have a nominal value which is the amount per share which will be paid upon redemption. For some stocks there will be set dates when you can redeem your shares whereas others will be redeemed at the company's discretion.

A scheme of arrangement is similar to a takeover, and is when one company attempts to buy the entire share capital of another company.

A scheme of arrangement 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 court meeting is passed and shareholders holding 75% or more of the issued shares vote in favour of the resolutions then the buying scheme of arrangement will go ahead. If shareholders holding less than 75% of the shares in issue vote in favour of the resolutions at the meeting then the scheme of arrangement will fail and no further action will be taken.

If the scheme becomes effective and all resolutions are passed then 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 (cash, stock, or both) 14 days after the scheme of arrangement becomes effective.

A conversion gives 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.

When a conversion opportunity arises the company will give a conversion ratio, for example you may be offered one ordinary share for every five convertible loan stock. If you decide to proceed then your existing holding will be replaced by the new shares on the conversion date.

Unlike warrants there is not usually any cost to convert your convertible stock into the new line of ordinary shares.

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. It is the receiver's job to find the best way of recovering money owed to creditors. The company may be sold as a going concern or it may be forced to go into liquidation.

Liquidation means that the receiver will sell the company's assets and then distribute the proceeds to those who are owed money. There is a set order of priority for how the money will be distributed. The receiver will take their fee first with money owed to the government and banks being among the next to be paid. 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 there is no money for shareholders then eventually the Inland Revenue will declare the company's shares as being of nil value. If a company's shares are declared as being of nil value, shareholders can usually use this as a capital loss to offset against other capital gains that may have been accrued.

In a return of capital a company makes a cash payment to all shareholders of a proportion of the value of their shares. It may be that the company has excess cash which it is not intending to use and so shareholders are paid this cash.

For example shares in a company may be worth £5 each however the company decides to make a payment of 50p per share to shareholders. Afterwards the value of each share will be 50p lower than previously. This is similar to a dividend payment and will sometimes be called a special dividend.

A return of capital may be made along with a consolidation. This can result in shareholders receiving a cash payment per share but then receiving a reduced number of shares. This is done so that the reduced number of shares can trade at the same price in the market as before. For example you may hold 100 shares worth £5 each. The company makes a payment of £1 per share meaning that your shares are now worth £4 each. The company then makes a four for five consolidation, and so your 100 shares worth £4 each (total value £400) become 80 shares worth £5 each (to keep total value still £400).

Sometimes a return of capital will be made by an issue of new shares, often called 'B' shares, which are worth the amount of money the company is looking to return. The company will then exchange the 'B' shares for cash. This may be immediate or you may have the option to retain the 'B' shares and receive the cash at a later date, normally in the following tax year.

A subdivision is the opposite of a consolidation with the number of shares in issue being increased by a set ratio. In turn the nominal value of the shares and the market price per share of the shares will decrease by the same ratio.

A company will split each ordinary share into a set number of new ordinary shares, for example a shareholder may receive five new ordinary shares for one existing ordinary share. The nominal value of the shares will also be adjusted and in a five for one subdivision, if the shares were ordinary 50p shares then they would become ordinary 10p shares.

The market price per share will decrease to reflect that each share is worth a smaller part of the company. For example, before the subdivision each ordinary 50p share might have been worth £1, and after the five for one subdivision they would have a value of 20 pence (subject to normal market movements).

A delisting is when a company no longer wishes to maintain its listing on that certain exchange, usually as a result of the administrative costs being high in relation to the trades being executed.

Once a company has delisted (providing it is not listed on another exchange) it can become very difficult to trade in the stock and in some cases it may not be able to trade at all. On occasions, companies set up a matched bargain facility where they will try to match buyers and sellers, however this process may take several weeks or months to complete due to the lack of liquidity. The price is often unknown and in some cases can be an unrealistic figure.

This is when a company announces that it will be changing its name. The 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.

A rights issue is when a company offers its current shareholders the right to buy new shares in the company at a discount to the market price. Companies use rights issues as a way of raising funds.

Shareholders are usually offered the right to buy a set number of shares in proportion to the number they currently hold. For example you may be offered one new share for every four that you currently hold. Each share will be offered at a discounted price to the market. For example if the shares are trading at £1 per share in the market you may be offered the right to buy shares at 90p each.

The rights themselves can be traded in the market, they are known as nil paid shares (or nil paid rights). Any sale of nil paid shares in the market can be made online or by phone and will be subject to the usual commission charges.

If you decide to take up your right to buy new shares then the nil paid shares can be converted into ordinary shares at the take up price. In our above examples if you held 400 ordinary shares then on a basis of one new share for every four held you would be issued with 100 nil paid shares. If the option to take up these rights was 90p per share then it would cost £90 to convert the 100 nil paid shares into 100 ordinary shares. This would give you a new holding of 500 ordinary shares (your original holding of 400 shares plus your 100 new shares from the rights issue).

Shareholders also have the option to 'tail swallow' their rights. This involves selling a number of rights in the open market to generate enough proceeds to cover the cost of taking up the remaining rights. Using the above example, if you had 100 nil paid shares worth 25p each, you could sell 89 nil paid shares to generate £22.25, after our £11.95 online dealing commission charge you would be left with £10.30 which is enough to take up 11 Rights without investing any further cash.

If you do nothing then the offer will lapse on the deadline for elections. If the nil paid shares had a value when the right lapsed then you should receive a lapsed cash payment approximately equal to this value.

A takeover (also sometimes known as a merger) is when one company attempts to buy the entire share capital of another company. Takeovers can be agreed / recommended by the target company or can be hostile.

A takeover is automatically triggered when a single party owns 30% or more of a company, that party is forced to make an offer for all remaining shares. Shareholders will be contacted with the terms of the offer which may give options to receive cash and / or shares for their existing holding. This offer will have a time limit for acceptances.

If the bidder is able to obtain acceptances to acquire more than 50% of the company's shares, they can declare the bid 'unconditional'. The bidder can now take control of the company with a majority shareholding. Shareholders who have not yet accepted the offer will have a further opportunity to accept.

If the bidder is able to obtain acceptances for 90% of the company's shares then they can force all remaining shareholders to sell their shares. The remaining shareholders must accept the offer once this level of acceptances has been reached.

The bidding party can make the offer conditional, for example on receiving a certain percentage of acceptances, and can back out of the bid if these conditions are not met. The bidder may also decide to increase the offer if they are unable to secure the required number of acceptances. If the bid is increased then shareholders who have already accepted a previous bid will automatically receive the increased offer.

Once the offer is declared 'wholly unconditional' (successful), the relevant proceeds being either cash, new stock, or both will be credited to your account with 14 calendar days.