How corporate actions and dividends work

Learn about the mysterious world of corporate actions and dividends, and how they work with Dodl.

Authored on
24 Nov 2022
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Category
How Dodl works
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Read time
  5 minute read

Welcome to the wonderful world of corporate actions and dividends. 🤘 They can sound little scary if you’ve never come across them before, but they’re just some of the extra bits which come with owning shares – or being a ‘shareholder’ in a company. Let’s break down how each work and what you need to do (if anything) when you get them.  

Part 1: Corporate actions 

So what exactly is a corporate action? 📄 

A corporate action happens when something about a company changes, or a change is proposed, that might materially affect its shareholders and/or its share price. 📈📉 As a shareholder, you have the right to know about the change and for some corporate actions, you can vote on it too. 

If a corporate action happens for one of your investments, a message will be sent to your account with what’s happening to your investment and what you need to do (if anything). You’ll also get a notification to let you know a message has arrived (it’s worth keeping notifications on for this kind of thing!).  

Your message will also tell you when you need to respond by, if a response is needed. If you don’t respond in time, or at all, then the default option will go through for you. Just so you know, compulsory mergers and takeovers (types of corporate actions) will always be accepted. For these corporate actions, you’ll be told the outcome and if/how your shares will change. 

You’ll get plenty of notice about a corporate action, so you’ll have time to add cash to your account if it’s needed. If you don’t manage to add enough cash this by the deadline date, the corporate action won’t go forward for you. 

Good to know: There’s usually no charge for a corporate action. But if it involves converting a foreign currency to £, there’ll be a foreign exchange charge of 0.5% of the value being converted. 

How the most common corporate actions work ⚙ 

There are lots of different corporate actions but the ones you’re most likely to come across are: 

  • Rights issues 

  • Open offers 

  • Offers for subscription 

  • Mergers (also called schemes of arrangement) 

  • Consolidation & stock splits 

  • Tenders 

 

That’s A LOT of jargon to work through here, 😨 so let’s look at each individually!... 

 

  1. How rights issues work: 

This is when a company offers its shareholders the right to buy new shares for cheaper than the market price. The more shares you already hold, the more new shares you’ll have the right to buy.  

For example, let's say you own 100 shares in a company, and you're offered the right to buy one share for every five you own. That means you could buy 20 new shares. And as these shares are offered at £1.20 each – rather than the market price of £2 – you can buy them for a total of £24 (a discount of £16!). 

As a shareholder you’ll have a couple of options with a rights issue: 

  • Take up your rights in full – pay the discounted price of the shares and increase your investment in the company. You won’t be charged anything for this. 

  • Take no action – your rights will lapse and the offer passes. In some cases you’ll get cash from lapse of your rights, but not always. 

If a company you have shares in announces a rights issue, you’ll be sent a corporate action notification with all the details of this. 

 

  1. How open offers work 

This is when a company may offer its shareholders the right to buy new shares for cheaper- than-the-market price. Which means they work very similarly to rights issues, but open offers also give you the chance to buy additional discounted shares, though that’s not guaranteed and can be scaled back if 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. Because you don’t have this option, if you do nothing, you won’t get any cash from the sale. 

So as a shareholder, you usually have a couple of options when an open offer is announced: 

  • Take up all or part of the basic entitlement of shares – by paying the discounted price of the shares and increasing your investment in the company. You’re guaranteed the basic entitlement as a minimum and may also get an excess too, depending on the offer. There’s no stamp duty payable when you buy shares in an open offer. 

  • Take no action – you won’t buy the basic entitlement of shares, and won’t receive any cash from the sale (as you might do with a rights issue) 

If a company you have shares in announce an open offer, you’ll be sent a corporate action notification with all the details of this. 

 

  1. How offers for subscription work 

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

But unlike a rights issue or open offer, you aren’t offered shares in proportion to the number you already own. Instead, you can apply for as many as you’d like (subject to the offer’s terms). 

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

If a company you have shares in announces an offer for subscription, you’ll be sent a corporate action notification with all the details of this. 

 

  1. How mergers (also called schemes of arrangement) work 

A merger is when two similarly sized companies become one (usually bigger) company. The corporate action for this one lets you know that the structure of the company could be changing, subject to the terms of the ‘scheme of arrangement’.  

If a company you have shares in announces a scheme of arrangement, you’ll be sent a corporate action notification with all the details of this.  

 

  1. How share consolidations & stock splits work 

A share consolidation is when a company decreases the total number of shares it has in the market, by increasing the value of each share it has there. This means that if you’re a shareholder, you’ll have fewer but more valuable shares. 

A stock split is sort of the opposite of a share consolidation. It’s when a company increases the number of its shares in the market by proportionally decreasing its share value. So if you’re a shareholder of a company which does this, you’ll have more shares but the value of your investment is the same as before the stock split. 

When either a share consolidation or stock split happens on one of your investments, you’ll get a corporate action notification to let you know this and your shares will be replaced with the new number – which’ll total the same investment value as before the corporate action. 

 

  1. How tenders work 

A tender is when a company you’re invested in, or another party, offers to buy your shares. The price which is offered will be stated in the tender offer’s terms. An example of when this might happen is if a company ‘delists’ from the stock exchange to become private. It’ll then make a tender offer to buy back your shares. 

If a company you have shares in announces a tender offer, you’ll be sent a corporate action notification with all the details of this. 

Part 2: Dividends 

What are dividends? 💰 

Often when you invest in a company, the aim is to make a profit by eventually selling your shares at a higher price than you bought them. That’s one way to make money from investing in a company. Another way is to invest in companies which pay out a portion of their profits to their shareholders, in a form of income called dividends! So dividends are just another way we can make money from our investments. 🤑 

How do dividends work with Dodl? 

Dodl does everything for you. If a dividend is paid on one of your investments, it’ll be picked up by Dodl and paid directly into your account as cash. 💸 You’ll get a ping to say it’s arrived (another good reason to keep those notifications on!), and you can log in, see the amount that’s been paid to your account, and either reinvest or withdraw it to your bank account (remembering lifetime ISA and pension withdrawal restrictions apply).  

Dodl doesn’t currently offer the option to reinvest your dividends automatically, but if you’d like to see this soon drop the team a line in the app. 

Good to know: If a company you're invested in pay you a dividend in a foreign currency, this'll have to be converted to pounds before it can be paid into your Dodl account. For this there is a 0.5% foreign exchange charge.

Some the wiser? 🤓 

We hope so! But if you ever need more clarity on corporate actions or direction on dividends, the team is ready to help and is just a chat away in the help centre or app. 📲 

🔔 As always, nothing in this article should be taken as advice - Dodl doesn't give advice, but we do hope the info is helpful!

Red Monster Head


Important to know

You have to be a UK citizen and resident to open an account with Dodl. 

The past performance of investments isn't an indicator of their future performance and their value can go down as well as up. This means you could get back less than you originally invested. 

Dodl doesn’t offer any advice so if you’re not sure about the risks involved with investing, you should speak to a suitable financial adviser. 

How you're taxed depends on your circumstances, and tax rules can change in future.