Notice of corporate action: Overview, definition, and example
What is a notice of corporate action?
A notice of corporate action is a formal communication issued by a corporation to inform its shareholders, investors, and other stakeholders about important decisions or actions taken by the company’s board of directors or management. These actions may include events such as dividend payments, mergers, acquisitions, stock splits, rights offerings, or any other significant corporate events that may impact the shareholders or the company’s stock. The notice provides details about the event, including the date, terms, and any actions required by the shareholders.
For example, if a company decides to pay a dividend, a notice of corporate action would be sent to shareholders informing them of the dividend amount, the record date, and the payment date.
Why is a notice of corporate action important?
A notice of corporate action is important because it ensures that shareholders and stakeholders are well-informed about significant company decisions that could affect their financial interests, voting rights, or investment strategy. It is a key part of corporate governance, as it provides transparency, ensures compliance with regulations, and keeps shareholders engaged in the company’s activities.
For businesses, issuing a notice of corporate action is essential to communicate key changes and decisions effectively, maintain regulatory compliance, and avoid confusion among investors. For shareholders, these notices provide the information needed to make informed decisions regarding their investments.
Understanding notice of corporate action through an example
Imagine a public company announces a merger with another company. The company issues a notice of corporate action to its shareholders detailing the terms of the merger, the timeline, and how the merger will affect the shareholders, such as whether they need to approve the transaction or how their shares will be converted. This gives shareholders the necessary information to participate in the decision-making process or take any required actions.
In another example, a company decides to issue stock dividends instead of cash dividends. The company sends a notice to shareholders specifying the dividend distribution rate, the record date to determine eligibility, and the date on which the new shares will be issued. This allows shareholders to know what to expect and how to handle the dividend they are receiving.
An example of a notice of corporate action clause
Here’s how a notice of corporate action clause might appear in a corporate resolution or shareholder agreement:
“The Corporation shall issue a formal notice of corporate action to all shareholders no later than [X] days prior to the record date for any corporate action, including but not limited to dividend declarations, mergers, stock splits, or changes in capital structure. The notice shall include the terms of the action and any necessary instructions for shareholder participation.”
Conclusion
A notice of corporate action is a vital tool for keeping shareholders and stakeholders informed about significant decisions made by a company. It provides transparency about corporate events such as mergers, dividends, or stock changes, ensuring that shareholders have the information they need to make informed decisions.
For businesses, sending timely and clear notices of corporate action helps ensure compliance, improve investor relations, and maintain transparency. For shareholders, these notices are crucial for understanding how corporate decisions will affect their investments and what actions, if any, they need to take.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.