Adjusting for corporate actions

Article #776 by Edward Rizzo - Published Weekly

Companies whose shares are trading on stock exchanges occasionally perform corporate actions that generally may have a material impact on the company’s share price. Corporate actions can be either considered mandatory (shareholders effectively have no choice as to their participation) or voluntary (each shareholder decides if he/she will participate in the action or not).

Mandatory corporate actions are directly decided upon by a company’s board of directors and do not require intervention by shareholders. The most common corporate actions of this nature include the issuance of a cash dividend, share splits and bonus issues (at times specific approval may be required by shareholders in a general meeting to enable a bonus issue to take place). Some mandatory corporate actions may also offer options for shareholders such as a scrip dividend whereby the company offers dividends either in the form of an allotment of new shares or by way of cash.

Voluntary corporate actions require approval by shareholders in a general meeting to enable the company to move ahead with the corporate action. A common example of a voluntary corporate action is a rights issue. Once this corporate action is approved, shareholders are not forced into buying additional shares. If they do not wish to take up their proportionate entitlement of shares, they can either transfer their share entitlement to a third party or allow these shares to be offered to the general public.

A number of the various corporate actions mentioned above have regularly taken place across a number of companies whose shares are listed on the Malta Stock Exchange. The thought of writing an article about such corporate actions came about following some anomalies that took place in the market over recent weeks and months.

The most recent corporate action took place in Lombard Bank Malta plc. Lombard Bank first announced on 20 September that it will hold an Extraordinary General Meeting (EGM) on 10 November in order to approve a number of resolutions. The announcement confirmed that the resolutions were required for the purpose of issuing new shares which will form part of the existing class of ordinary shares and rank pari passu with the existing share capital.

Thereafter, on 4 October, Lombard Bank announced that during the EGM, one of the resolutions referred to a 2-for-1 share split with the resultant effect that subject to approval by shareholders, each share having a nominal value of €0.25 will be split into two shares, each with a nominal value of €0.125.

On 20 October, Lombard Bank issued an announcement explaining all the resolutions being presented at the EGM. With respect to the first resolution which related to the share split, it had been announced on 20 October that should this be approved at the meeting, this will take effect for shareholders as at close of trading on 14 November 2022. In essence, this meant that the adjustment to the share price was scheduled to take place as from 15 November.

Although some media coverage ahead of the EGM may have overshadowed the various resolutions presented to shareholders on 10 November, Lombard Bank immediately announced the outcome of the meeting that same evening.

The company announcement issued late on 10 November clearly stated that the three extraordinary resolutions were approved while the ordinary resolution was not carried. Within the same announcement, the bank also reproduced in detail the wording and subsequent impact of the extraordinary resolutions that were approved with a clear reference to “the last trading date being 14 November 2022” with respect to the share split.

On 14 November, Lombard’s closing price was €1.95 which was equivalent to an adjusted price of €0.975 in view of the doubling in the issued share capital and the reduction of the nominal value. Although the trading platform used by the MSE removes all outstanding orders on the effective date of such corporate actions, the first trade on 15 November for 2,000 shares took place at a price of €1.76 (equivalent to a pre-split price of €3.52). The share price drifted to a closing level of €1.51 which still represented a gain of almost 55% from the previous day’s adjusted level of €0.975. The following day, a further 4,500 shares traded at €1.48, which is equivalent to a pre-split price of €2.96 – still a significant increase from the price of 14 November. On 17 November, a total of 6,000 shares traded at €1.10. Although this represented a decline of 26% from the previous day, the overall impact of the corporate action still resulted in an increase of 12.8% when comparing the price of 17 November of €1.10 to the adjusted price on 14 November which was the last day prior to the share split.

The failure or inefficiency of the market to adjust fully to a corporate action is not solely limited to the Lombard share split. Earlier this year, Simonds Farsons Cisk plc performed a bonus share issue by allotting 1 new share for every five shares held by shareholders as at close of trading on Wednesday 1 June. The share price of €8.95 ought to have adjusted to €7.45 as from 2 June. However, the share price closed at €8.35 on 2 June, increased to €8.85 on 3 June before dropping to €7.65 on 6 June which was still equivalent to a pre-bonus price of circa €9.18.

Since most corporate actions can lead to wide share price movements as explained above, it is very important for shareholders to follow company announcements and understand the implications of the changes taking place. Unfortunately, it is very evident from recent developments in Malta that due to a number of factors, not only the investing public but also other stakeholders across the capital market, may not be fully aware of all the changes taking place across certain companies. This is leading to a high degree of confusion in certain instances apart from being potentially detrimental to those investors acquiring shares without the full knowledge of the timing of corporate actions.

In essence, it is very evident that there remains a significant amount of work to be done by various stakeholders to improve the overall level of investor education in order to ensure a continued positive development of Malta’s capital market.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.