Record date: Overview, definition, and example
What is a record date?
A record date is a specific date established in a contract, often related to corporate governance, that determines which shareholders or stakeholders are entitled to receive certain benefits, such as dividends or voting rights. The record date is used to establish eligibility for participation in corporate actions or events, such as dividend payments, stock splits, or voting on resolutions. Only individuals or entities listed as shareholders or stakeholders on the company's records as of this date are entitled to those benefits.
For example, if a company is issuing a dividend, the record date determines which shareholders will receive the payment based on their holdings as of that specific date.
Why is the record date important?
The record date is important because it:
- Clarifies entitlement: It determines who is eligible for benefits such as dividends, voting rights, or other corporate actions. This ensures that only those who own the shares on the record date are considered for these benefits.
- Helps with logistics: It provides a clear cutoff for the company to determine the list of eligible stakeholders, making it easier to manage distributions, voting, and other corporate events.
- Prevents confusion: The record date reduces the potential for disputes over who is entitled to certain benefits, providing clarity to shareholders and stakeholders alike.
- Establishes ownership for corporate actions: It enables companies to identify ownership for corporate purposes like mergers, acquisitions, or voting on board decisions.
The record date is typically set well in advance of corporate events like dividend distributions or annual meetings to allow the company to update its records and communicate with eligible parties.
Understanding the record date through an example
Imagine a company declares a dividend of $1 per share and sets a record date of June 15th. If you are a shareholder as of June 15th, you will receive the dividend payment. However, if you sell your shares after June 15th, you will still be entitled to the dividend because your name was on the company’s records on the record date.
In another example, a company is holding an annual general meeting (AGM) to vote on new board members. The company sets a record date of July 1st. Shareholders who are listed on the company’s records as of that date will be eligible to vote at the meeting, regardless of whether they sell their shares before the meeting takes place.
Example of a record date clause
Here’s how a record date clause might look in a shareholder agreement or corporate charter:
“For the purpose of determining shareholders entitled to receive the dividend, vote at the annual meeting, or participate in any other corporate action, the Corporation shall establish a record date, which shall be no less than 10 days before the date of such action. The record date shall determine the shareholders eligible for such rights.”
Conclusion
The record date is a key element in corporate governance, ensuring that only eligible shareholders or stakeholders are entitled to receive benefits, vote, or participate in corporate events. By establishing a clear record date, businesses can effectively manage their corporate actions and prevent confusion or disputes. It is a simple but essential tool for maintaining transparency and order in the corporate environment.
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.