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People who have invested in the stock market may sometimes receive a notice of an "OST", otherwise known as a "securities transaction". Sometimes, they are even asked to make a decision. But what is it all about and how should one react?
You have received a corporate action notice, and the message asks you to make a decision by a certain date. Little information is provided, and you want to know more. The first step is to look at the definition of a corporate action. A corporate action refers to a transaction carried out by a company that impacts the capital or rights of security holders, whether it's shares, bonds, etc. They should be considered as major financial events with significant implications for shareholders and other stakeholders. Very often, a corporate action results from a decision made by the issuing company. However, it can also occur following an external event (public offering...). Among the actors involved, there are also banks and brokers. They act as intermediaries between the security issuer and investors. Corporate action notices are therefore often received through them, often without further explanation. You now know that the corporate action notice received concerns a transaction that will have a impact on your stock portfolio. To know what to do, you need to identify the type of corporate action involved. The reaction to adopt will depend on the company's objective, your own wealth objectives, and the impact that the transaction will have on the security holders.
Simple securities transactions correspond to operations that take place in the daily life of the company. Shareholders are, as a general rule, not even informed in advance since this has little consequences: they receive simple information. Things do not happen in the same way during a complex OST: it necessarily has consequences on the structure of capital ownership and the rights attached to it. These operations, always carried out with the approval of the AMF (Financial Markets Authority), can be of several types.
A capital increase is a transaction in which a company collects fresh capital from new investors by issuing new shares. This results in a reduction of the share for existing shareholders. In other words, the same pie is divided into more pieces, thus diminishing the size of existing slices. The immediate effect is a more or less significant dilution of old shareholders: their share gets reduced and their voting rights weigh less, even if new shareholders come in paying an issue premium. To keep it fair, the issuing company offers old shareholders to subscribe to new titles. Most of the time, these subscriptions can be made at a preferred rate. The investor is under no obligation to buy new shares if they do not wish to do so. Such refusal does not question the ownership of the shares already in their portfolio. The risk of being slightly diluted: the participation in profits will be less significant, since their ownership percentage will reduce due to the entry of new investors. Although issuing new shares is the most common form, there are other types of capital increases. One can find OSTs focusing on: - The allocation of free shares: shareholders have an allocation right and receive additional shares. This was the case during the IPO of Française des Jeux: in 2021, shareholders who participated in the IPO received 1 free share for every 10 they owned. - The increase in the nominal value of the share: the company incorporates its reserves and undistributed profits into its capital. This increases the nominal value of each investor's shares.
With the optional dividend, shareholders can receive their dividend either in shares or in cash. During this Tender Offer, the holder must express their choice before a deadline. If they do not, the default option is imposed on them. But should you choose cash or share distribution during an optional dividend Tender Offer? If cash payout is of interest if you wish to reinvest the money in other stocks or withdraw earnings, converting into new shares has its benefits. Especially when the issue price of the new share is lower than the market price. The investor then benefits from a discount and immediately reinvests their gain in the company. This lowers the average cost of the portfolio line. Moreover, there are no brokerage fees in this configuration. The limit is that the stock's value can fluctuate during the time gap between the information campaign launch and the due date. It is therefore better to decide at the last minute. While the company benefits as it retains its cash flow, the operation also implies a capital increase. This can dilute existing shareholders. Finally, it should not be forgotten that the tax authorities treat the reinvested dividend in the same way as a received dividend. If the operation is not taxed within the framework of a PEA, it assumes a 40% deduction and income tax for securities accounts.
A Takeover Bid (TOB) occurs when a company proposes to the shareholders of another company to buy their shares. Ultimately, its goal is to take control of it. A TOB can take multiple forms (friendly TOB, hostile TOB...), but it generally causes the stock price to rise. The investor then has 3 options: - Sell at market price: it is possible that the TOB will not be successful, in which case the price will quickly drop. If the final goal is to sell or take profit, this is the best solution. - Submit the shares to the buying company: this operation takes place without brokerage fees and at a determined price. If this is attractive, waiting for confirmation of the TOB and submitting your shares can be interesting. - Keep the shares: the TOB doesn't obligate an investor to sell their shares. They can choose to keep them, especially if the offer seems too low or if they still believe in the project. The risk is missing the opportunity to profit at the right time, or being forced to sell later during a squeeze-out (see below).
Public exchange offers (PEOs) are security transactions that occur when a company offers to exchange its own shares for those of the company it wants to take control of. Shareholders can then decide to contribute their shares in exchange for those of the future parent company, or they can choose to retain their shares. During a PEO, it is often the shareholders of the predatory company who can be disappointed. The company indeed issues new shares to conduct exchanges of securities, which can result in dilution. Likewise, its share price often drops. The shareholder of the target company must therefore ensure that the exchange value accounts for this decrease to determine whether the operation can be profitable for them. From a tax perspective, since the PEO consists of a share exchange, the potential capital gain achieved is not taxable. If, following the PEO, the minority shareholders represent less than 5% of the target company's capital, the parent company can initiate a withdrawal process. Investors are then left with no choice but to part with their shares.
If, once the takeover bid or the exchange offer is completed, there are less than 5 or 10% of the shares remaining in the hands of third-party shareholders, the majority holder can initiate a mandatory public withdrawal offer (OPRO). They have 3 months to trigger it. At this point, shareholders are obliged to sell their shares at the price of the previous takeover or exchange offer. If the majority holder does not do this, they can always launch a public withdrawal offer (OPR) later. The goal here is to delist the company from the stock exchange. In this case, the price of the shares is based on an evaluation of the company, carried out by an external professional. An OPR can also be initiated by small shareholders (minority shareholders), if they are clearly in the minority and market conditions have become illiquid.
With a public tender offer (PTO), the company itself seeks to buy back its own shares. Investors can respond positively to this proposition or choose to keep their shares. During this period, a generally observed trend is the rise of the company's share price. This rise could be permanent as the repurchased shares are canceled and the company proceeds with capital reduction. This may result in earnings per share also rising. There are other equity transactions. For example, the initial public offering (IPO) is frequently encountered during new market introductions or privatizations of public companies. A shareholder proposes to sell their shares in a pre-determined quantity at a fixed price. Investors have a choice whether to acquire these shares or not. How should an investor react to an equity tender offer?When an investor learns of an equity tender offer, questions arise about the appropriate response. The answer can greatly vary depending on the type of operation, the price offered, the market context, and the objectives of the investor, among other factors. It is generally recommended to begin by studying the operation, informing yourself on all related details (financial, impacts on the company, etc.). You should also estimate the impact that the equity tender offer will have on your portfolio, more specifically the effects on the value and risk of your investments. Don't hesitate to read multiple analyses and consult a financial advisor, especially if you are unsure of the best course of action. This individual can help you understand the implications of the equity tender offer in light of your financial situation. Don't fall into the trap of investing too quickly. It is important to take time to reflect. Keep in mind that equity tender offers often have a short-term effect on financial markets. Therefore, you need to be able to ignore these passing effects and keep a long-term perspective. However, an equity tender offer might sometimes be an opportunity to reassess your investment objectives. How does an equity tender offer unfold: Standard timelineEach type of equity tender offer follows a specific timeline and is regulated. Typically, the process begins with an announcement from the issuing company. This announcement provides details on the operation, including its terms and conditions. It is followed by an option period in which shareholders have a specific window of time to exercise their rights within the framework of the equity tender offer. The next step is the execution of the equity operation. This can take different forms depending on the type of equity tender offer. Once the operation is completed, the issuing company communicates its results to the shareholders and the market. It is crucial for shareholders to regularly consult the communications from their company and the stock exchange to be informed of equity tender offers and their timeline.
