Section 2.5 Study Guide: Corporate Actions & Proxy Voting

  • Corporate actions are events initiated by a company that affect its shareholders.
    There are five main types:

1. Overview of Corporate Actions:

Corp Action / Description / Effect on Shareholder / Taxable?

  • Merger / Two or more companies combine operations and assets. / Shareholders of both receive new shares in the merged company; old shares are canceled. / ❌ Generally not taxable.

  • Acquisition / One company takes over another’s operations and assets. / Shareholders of acquired company receive shares of acquiring company; old shares canceled. / ❌ Generally not taxable.

  • Spin-Off / A company forms a subsidiary out of part of its assets or operations. / Shareholders receive shares of the new company in addition to their existing ones. / ❌ Generally not taxable.

  • Buyback / Company repurchases its own shares from the open market. / Reduces number of outstanding shares → increases share value. ✅ / Usually taxable (cash paid to shareholders).

  • Tender Offer / Company offers to buy securities directly from shareholders (not through the market). / Often used to retire debt or reduce share count. ✅ / Usually taxable (cash offer).

💡 Note:

  • Stock splits and stock dividends are never taxable because shareholders don’t receive cash.

  • Mergers, acquisitions, and spin-offs are generally not taxable events because ownership continues, just in a different form.

  • Buybacks and tender offers are usually taxable since shareholders receive cash.

2. SEC Requirements for Corporate Action Notices:

  • When companies perform corporate actions, they must notify shareholders and the SEC.

  • The notice must include:

    • Title of security

    • Date of declaration (when it’s announced)

    • Record date (who is eligible to receive)

    • Payment or distribution date

    • Amount (for cash dividend)

    • Rate (for stock dividend or split)

    ⏱ Timing Rule:
    The notice must be given no later than 10 days before the record date

3. Proxy Voting:

  • Proxy Voting = When shareholders vote electronically or by mail instead of attending meetings in person.

  • A proxy solicitation occurs when third parties (such as activist investors or management teams) ask for shareholder votes.

  • The SEC requires companies to give stockholders information about all items to be voted on and to allow SEC review before mailing proxies.

4. Broker-Dealer (BD) Responsibilities:

  • Member firms (broker-dealers) often hold securities in street name (the firm’s name, not the customer’s).

  • They must act as forwarding agents and ensure customers are informed of all corporate actions.

  • Voting Rules:

    • If a customer returns a proxy but doesn’t indicate how to vote →
      the member must vote as recommended by the issuer’s management.

    • If a customer does not return a proxy 10 days before the annual meeting →
      the member may vote the shares as it sees fit, except on major issues.

    • On major matters (e.g., mergers, takeovers), if the proxy is not returned, the BD cannot vote those shares.

Action

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Action 〰️

Situation / Action by Member Firm

  • Customer returns proxy, leaves vote blank / Vote as recommended by issuer’s management

  • Customer doesn’t return proxy by 10th day before meeting  / May vote as it sees fit (only on minor issues) 

  • Vote is on major importance (e.g., merger) / May not vote shares at all

  • Stock held in street name / Must vote in accordance with BD’s customer instructions

Summary Table: Proxy Voting Responsibilities

Chapter 3

✺ Review questions ✺

  • Merger, acquisition, spin-off, buyback, and tender offer.

  • Old shares are canceled, and shareholders receive new shares of the combined company.

  • A merger combines two companies; an acquisition is when one company takes over another.

  • Shareholders receive new shares in the spun-off (subsidiary) company.

  • Buybacks and tender offers.

  • No later than 10 days before the record date.

  • A method of voting electronically or by mail instead of attending the meeting in person.

  • The BD may vote as it sees fit, but only on minor issues.

  • No, shares may not be voted on major issues without customer authorization.

  • No, they are not taxable events because shareholders receive no cash.