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How Corporate Actions Affect Shareholders

Aug 17, 2007
Corporate actions affect the rights and privileges of the shareholders to a great extent. Shareholders are of two kinds, the common shareholders and the preferred shareholders. Companies do offer all their shareholders voting rights if agreed upon by the board of directors. The following corporate actions can have a great impact on the fortune of shareholders.

Liquidation: In case of the liquidation of a company, the common shareholders are at a maximum risk. The funds raised by the liquidation of a company would be distributed to the preferred shareholders first. However, preferred shareholders do not enjoy voting rights in the company, and aren't able to influence corporate actions.

Capital Redemption: In this process the registered shareholders receive the redemption of capital either by cash payment or by new securities. Capital Reduction is one step ahead of capital redemption where the excess capital is distributed to the shareholders.

Conversion of Securities: Shareholders are also affected by dealing in convertible securities. For instance, if a particular shareholder is holding convertible preference shares, the company may declare that he or she can get them converted into debentures or ordinary shares. Conversion can be full or partial. In a partial conversion the shareholders are required to convert only a percentage of their shares. In full conversion no such option is available.

Minority Offer: At times, a small group of shareholders is required to sell their shares to a large group that is already holding a majority stock. This is termed a minority offer. This may not always be done with the consent of the minority shareholders. It is therefore said that the board of directors determines the fate of minority shareholders.

Stock Split: The board of directors sometimes decides to split the company's shares in order to boost the liquidity of the stock. Although more shares would be available in the market either to buy or sell, this action does not add much value to the company's stock. Stock split also leads to dilution in a company's earnings per shares, commonly known as EPS.

Interest Payment: At times, the profit earned by the company can be further distributed amongst the shareholders in the form of interest. Different companies have different policies in this regard and some prefer not giving any interest at all, but utilizing the profits for further expansion. It is in the long-term interest of shareholders if the company grows significantly. But most of the investors prefer to gain immediate rewards rather than waiting for the share prices to appreciate.

Further Information
To better understand the information mentioned above and other related corporate actions there is lot of information available on the Internet. Also there is software to help companies to make documents related to the corporate actions listed above in an easy and cost effective way.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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