Share dividends split ups: Overview, definition, and example
What are share dividends split ups?
A share dividend split-up refers to a corporate action where a company increases the number of its outstanding shares by issuing additional shares to current shareholders in proportion to their existing holdings. In the case of share dividend split-ups, the company distributes dividends in the form of additional shares, rather than cash. This action effectively "splits" the value of each share, making each individual share worth less, but the total value of the shareholder's holdings remains the same. The term "split-up" may also refer to the division of a company into smaller, independent companies, although in the context of share dividends, it primarily refers to the issuance of additional shares.
Why are share dividends split ups important?
Share dividends split-ups are important because they can help make shares more affordable and accessible to a broader range of investors. By issuing additional shares, the company lowers the per-share price, which might attract more investors or improve liquidity in the market. For existing shareholders, it provides an increase in the number of shares they hold without any additional financial investment. While the value per share decreases after a split-up, the overall value of the shareholder's investment remains the same. It’s also a way for companies to signal confidence in their growth and financial health, offering shareholders additional shares as a form of reward or benefit.
Understanding share dividends split-ups through an example
For example, a company declares a 2-for-1 stock dividend, which means that for every share an investor holds, they will receive an additional share. If a shareholder owns 100 shares before the dividend, they will now own 200 shares after the dividend split-up. However, the price per share will typically decrease to half of the pre-dividend price, so the total value of the shareholder's holdings remains the same (assuming no market fluctuations). The shareholder’s investment value doesn't change, but the number of shares they hold has increased.
In another example, a company might declare a 10% stock dividend. If an investor holds 1,000 shares, they would receive 100 additional shares as part of the dividend. After the stock dividend is distributed, the total number of shares held by the investor will increase to 1,100, but the price per share will adjust downward accordingly to reflect the new shares issued.
An example of a share dividend split-up clause
Here’s how a share dividend split-up clause might appear in a company’s shareholder agreement or corporate policy:
“The Company may, at its discretion, declare a share dividend split-up in the form of additional shares issued to shareholders. The amount of the dividend split-up shall be determined by the Board of Directors, and the dividend will be distributed to shareholders in proportion to the number of shares held as of the record date. The Company will adjust the price per share accordingly, ensuring that the overall value of shareholders’ investments remains unaffected by the dividend split-up.”
Conclusion
Share dividends split-ups are a way for companies to reward their shareholders by increasing the number of shares they own without requiring additional investment. While the market price per share typically decreases following the split-up, shareholders’ overall investment value remains unchanged. This corporate action helps improve liquidity, makes shares more affordable, and can attract new investors. Share dividends split-ups also serve as a positive signal from the company, indicating confidence in its future growth and profitability.
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.