Apr 21, 2025

Corporate Actions and the Role of Custodians in Navigating Them

Corporate Actions: Understanding Their Impact and Role of Custodians
Corporate actions refer to events or decisions made by a company that affect its securities (stocks, bonds, etc.) and can have a significant impact on shareholders, bondholders, and other stakeholders. These actions are typically carried out by the company’s board of directors or management and can result in changes to the company’s structure, financial standing, or distribution of profits.

Importance of Corporate Actions
Corporate actions are crucial because they directly impact a company’s financial structure, shareholder value, and overall market perception. Companies undertake these actions for several reasons:

Enhancing Shareholder Value: Actions like dividends, stock buybacks, and stock splits can increase shareholder confidence and attract more investors. Custodians play a vital role in processing these actions, ensuring that custody services in investment banking are executed efficiently.
Raising Capital: Companies issue new shares, bonds, or rights issues to raise funds for expansion, acquisitions, or debt repayment. The custodians facilitate the process through their custodial services in financial services to raise capital market products and capital markets services.
Restructuring & Growth: Mergers, acquisitions, and spin-offs help companies streamline operations, enter new markets, or increase efficiency. These actions require custody and clearing services to manage the exchange of securities effectively.
Debt Management: Actions like bond redemptions and conversions help companies manage debt levels and optimize financial health. This involves collateral management to ensure that assets are properly secured.
Regulatory & Compliance Requirements: Some actions, such as delisting or stock consolidations, may be taken to meet regulatory norms or stock exchange requirements. Custodians ensure compliance through their regulatory reporting tools and custodial management software.
Market Positioning & Liquidity: Stock splits and reverse stock splits help adjust stock price levels to make shares more attractive to investors and improve market liquidity. This can be supported by capital market software solutions that analyze market trends.
Tax Efficiency & Cost Optimization: Corporate actions like buybacks can be more tax-efficient than dividends, and restructuring can help reduce operational costs. Custodians assist in ensuring compliance with regulatory requirements, utilizing regulatory reporting tools to manage tax implications effectively.

Common Types of Corporate Actions

Dividends: Payments made by a company to its shareholders, usually in cash or additional shares. This is often a way for companies to share profits with investors through custody services in banking.
Stock Splits: When a company increases the number of its outstanding shares by issuing more to current shareholders. This reduces the price per share but does not change the overall value of the shareholder’s holdings.
Mergers and Acquisitions (M&A): When one company merges with another, or when one company acquires another, the M&A activities can significantly affect stock prices, ownership, and corporate strategy. This process can be simplified by providing secure, efficient, and compliant Custody Solutions.
Rights Issues: A company offers additional shares to existing shareholders at a discounted price, usually to raise capital. Shareholders have the “right” to purchase these shares in proportion to their current holdings.This process involves custody services to ensure that the rights are properly allocated and that shareholders receive their entitled shares
Tender Offers: A company offers to buy back its own shares or bonds from shareholders, often at a premium to the market price. This is typically done to reduce the number of outstanding shares or to restructure capital. Custodians assist in this process by providing custody solutions that manage the tender offer process efficiently, ensuring compliance with regulatory requirements through regulatory reporting tools.
Spin-offs: When a company creates a new independent company by separating a part of its business. Shareholders of the parent company often receive shares in the newly formed entity. This transaction requires custody operations to ensure that shareholders receive their proportionate shares in the new company. Custodians use custodial management software to streamline this process.
Stock Buybacks (Repurchases): When a company buys back its own shares from the open market, often to reduce the number of outstanding shares and increase the value of remaining shares. With the help of Custody Solutions you can secure financial obligations and ensure compliance.

Role of Custodians in Handling Corporate Actions
Custodians play a crucial role in corporate actions by acting as intermediaries between companies and investors. Their primary responsibility is to ensure that corporate actions are processed efficiently and accurately while safeguarding the interests of their clients.

- Monitoring and Notification: Custodians continuously monitor corporate actions that affect the custody account securities held by their clients. They ensure that their clients are informed of relevant corporate events (like dividends, mergers, stock splits, or tender offers) in a timely manner, as these actions can impact the value of the assets and may require decisions from the client.
- Processing Corporate Actions: Once a corporate action is identified, Custodian Services will process it on behalf of their clients. This commonly includes:
  - Dividend Processing: Custodians manage the receipt and distribution of cash or stock dividends to clients.
  - Stock Splits and Consolidations: They handle the adjustment of share quantities and values when stock splits or reverse stock splits occur.
  - Rights Issues: Custodians help clients decide whether to exercise their rights to buy additional shares and may handle the subscription process for these rights.
  - Mergers and Acquisitions: They assist clients in deciding whether to accept an offer for the shares, manage the exchange of securities, or provide voting instructions.
  - Tender Offers: Custodians facilitate the participation of clients in tender offers, helping them tender shares or reject offers as required.
  - Spin-offs and Demergers: When a company spins off a new entity, custodians will ensure that clients receive their proportionate share of the new company’s stock.
- Holding Reconciliation: Custodians ensure that any changes resulting from corporate actions (such as new shares, changes in value, or cash payments) are accurately reflected in the client’s account. They reconcile asset holdings to ensure that all adjustments are in line with the corporate action terms.
- Tax Withholding and Reporting: In some corporate actions, especially dividend payouts or certain types of mergers, there may be tax implications. Securities Custodians often assist in calculating and withholding taxes on income generated from corporate actions, and they provide the necessary tax reports to clients.
- Recordkeeping and Reporting: Custodian Solutions keep detailed records of corporate actions and provide regular reports to their clients. This helps clients track any changes to their holdings and ensures they have the necessary information for regulatory reporting or tax filings.
- Voting and Proxy Services: In cases where corporate actions require shareholder approval (such as in mergers, acquisitions, or changes to the company’s structure), Custodian Depository may also handle the collection of proxy votes from investors, ensuring that they have the opportunity to vote on relevant corporate matters.

Importance of Custodians in Corporate Actions

Accuracy and Compliance: Corporate actions can be complex, and failing to manage them properly can result in financial losses, missed opportunities, or regulatory penalties. Custodians bring expertise and technology to ensure that corporate actions are processed correctly and in compliance with relevant regulations through custodial management software.
Efficiency: Handling corporate actions can be time-consuming, especially for institutional investors with large portfolios. Custodians help streamline the process, reduce administrative burdens, and ensure that decisions are made quickly and accurately.
Risk Management: Custodians help clients mitigate risks associated with corporate actions by providing expert guidance, timely notifications, and assisting with complex decisions.

Intellect’s eMACH.ai custody solution is a cutting-edge platform that provides a comprehensive and customizable suite of functionalities that custodians can leverage to play a vital role in the execution and management of corporate actions for their clients. These functionalities help custodians offer a wide range of services that help institutional investors navigate the complexities of corporate actions and ensure that their assets are managed efficiently and in compliance with regulatory requirements. This aligns with capital market solutions and supports custody operations.

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