What are the different types of corporate actions that may affect me?

There are various types of corporate actions that may affect your holdings. Each corporate action works differently. Below, we describe some of the most common.

Rights issue

In order to raise money, a company may offer its existing shareholders the right to buy new shares at a discount to the market price. The more shares you already hold, the more new shares you’ll have the right to buy.

For example, if you own 400 shares in a company and you're offered the right to buy one share for every five you own, you could buy 80 new shares. As these shares are offered at £1.20 each – rather than the market price of £2 – you can buy them for a total of £96 (a discount of £64).

As a shareholder, you typically have four options when a rights offer is issued:

  1. Take up the rights in full. By paying the discounted price of the shares, you increase your holding in the company. There are no dealing charges or stamp duty payable when you take up shares in a rights issue.
  2. Sell all of your rights. You can choose to sell the right to purchase new shares at a discount. These are traded on the market as ‘nil paid shares.’
  3. Take up part of the rights and sell the balance. This could involve selling some of the rights offered to cover the cost of taking up the remaining rights (often known as ‘tail swallowing’).
  4. Do nothing. Your rights will be sold in the market at the best available price, and the proceeds (after charges) paid to you. These are known as ‘Lapsed Proceeds’.

Offer for subscription

Like a rights issue or open offer, this allows shareholders to buy additional shares, usually at a fixed price.

However, unlike a rights issue or open offer, you aren’t offered shares in proportion to the number you already own. Instead, you can subscribe for as many as you’d like, subject to the terms of the offer.

With an offer for subscription, there’s usually a minimum level of total subscriptions for the shares. If this level isn’t met by shareholders collectively, the offer can be withdrawn. If the company receives more applications for shares than are on offer, it can reduce the number of shares it allocates to each applicant.

Scheme of arrangement

A scheme of arrangement is typically used to execute a change in the structure of a company, such as during a takeover. It is a court-approved agreement between a company and its shareholders or creditors. It allows a bidder to acquire all of the shares in the company.

For a scheme of arrangement to pass, shareholders holding at least 75% of the issued shares must vote in favour. If this happens, the bidder or ‘buying company’ will obtain 100% of the shares in issue. This happens regardless of whether a shareholder voted in favour or not, and the shareholders will receive payment (shares, cash, or a combination of both).

Open offer

An open offer is also known as an entitlement issue. In order to raise money, a company may offer its existing shareholders the right to buy new shares at a discount to the market price. It works similarly to a rights issue.

For example, let’s say you own 400 shares in a company. They announce an open offer of subscription shares, giving you the right to buy one share for every five you own. This means you could buy up to 80 overall – known as the ‘basic entitlement’. It’s a guaranteed offer that can’t be scaled back. If the company is offering these shares at £1.20 each, rather than the market price of £2, you can buy these 80 shares for a total of £96 (a discount of £64).

On top of your ‘basic entitlement’, open offers also have an ‘Excess Application Facility’. This gives you the chance to buy additional discounted shares from a separate pool of subscription shares. As it isn’t guaranteed, it can be scaled back if it’s oversubscribed.

Where an open offer differs from a rights issue is that you don’t have the option to sell your rights in the market, and if you do nothing, you won’t receive a lapsed payment.

As a shareholder, you typically have three options when an open offer is announced:

  1. Take up all or part of the basic entitlement. You do this by paying the discounted price of the subscription shares and increasing your holding in the company. There are no dealing charges or stamp duty payable when you take up shares in an open offer.
  2. Do nothing. You won’t buy the basic entitlement of subscription shares, and won’t receive a lapsed payment (as with a rights issue).
  3. Take up excess shares. You do this by buying more discounted shares on top of your basic entitlement. If this is scaled back, the additional cash put forward will be returned to you.

If a corporate action is announced relating to a company that you hold shares in, we'll get in touch. See how to respond to a corporate action.