Four Steps to Prepare for an Upcoming Corporate Action

In launching a corporate action, small nuances can make a big difference when it comes to assessing the event’s tax, accounting, legal and financial reporting implications. As such, a good place to start is by defining the various types of corporate actions you may engage in. These could include:

• Stock split/consolidation: an increase or decrease to the number of shares held by shareholders based on current holdings and a specified ratio.
• Special dividend: a non-recurring distribution of cash to shareholders.
• Reduction in force: the permanent elimination of positions for employment within an entity.
• Mergers and Acquisitions (M&A): the combination of two separate entities into a single organization.
• Award exchange: the replacement of existing outstanding grants for new grants under a different award type or terms.
• Spin-off: the creation of a new and separate entity from a pre-existing subsidiary or division.
• Tender offer: the purchase of shares by a person or company, either to offer liquidity options to shareholders or to facilitate a change in majority ownership.
• Delisting: the removal of a listed security from an exchange.
• Award modification: changes to the terms, vesting conditions or details of an existing award.

While each of these events falls under the definition of a “corporate action,” the technical details that relate to them can vary. The discovery process is designed to pin down those technical details in advance. This generally involves clarifying elements, such as the action’s effective date, the ratios that will dictate post-action share ownership and the distribution methods that will govern payouts. It also means determining the participant impact of the corporate action, including whether participation is mandatory or will require an election. Finally, the discovery process aims to uncover the potential reporting impact of the event, including the kinds of reporting each team may need before, during and after the event is processed. 

In navigating the discovery process, it often becomes evident that corporate actions require the involvement of multiple teams. The planning process is designed to help determine who should be included in critical discussions and what roles they may play before, during and after the event.

Internal stakeholders will generally include:

• Legal counsel to interpret the plan documents and award agreements, set expectations and requirements as directed by the plan, and determine whether the event results in a modification.
• Equity plan administrators to coordinate internal and external teams, determine how the event should be reflected in participant accounts and sign off on administrative updates.
• Accounting teams to communicate the expected treatment for financial reporting purposes, calculate incremental expenses (if applicable) and sign off on financial reporting updates.

Depending on the type of corporate action, you may also consider including representation from other internal teams, such as tax, payroll and HR.

From an external perspective, stakeholders will generally include a/an:

• Equity plan provider to help coordinate resources to process the event and bring together key teams such as a client success manager, corporate actions specialist and financial reporting manager.
• Transfer agent to process share movement effectively, if this is required as part of your corporate action.
• Valuation firm to advise on the expected financial reporting treatment and calculations, depending on the type and size of corporate action you are engaging in.

In an ideal scenario, you would aim to bring these teams together at the outset. In addition to smoothing out the entire process, this type of advance planning can contribute strongly to a more manageable and positive participant experience. 

Corporate actions can impact your stock plan participants in various ways. This makes it crucial to think through how and when you plan to communicate the details of a corporate action to them. In putting together a communication plan, it can be helpful to work with your equity plan provider to determine the types of questions participants may have.

Reviewing the participant view of the event in advance may also help you better explain these various impacts and communicate more effectively.

In some cases, various factors may come into play that can complicate corporate actions. Some examples of these special considerations include changes to vesting schedules, the use of exchange ratios and rounding, issuance of qualified awards, tracking incremental expenses, managing disconnected timelines, changing entitlement types or navigating a potential “chill period” imposed by the Depository Trust Company (DTC).

Each of these situations may introduce unexpected impacts to your accounting, participants, plan administration, legal and/or tax structure, so it’s critical to plan for them in advance.