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A buyback ’off market’ occurs when a company reduces the number of their shares on issue in the market by offering to buy back their shares directly from existing shareholders. The price is set by the company (often lower than the prevailing market price) and in return the shareholder receives a payment, which includes a special dividend that may have tax benefits for some taxpayers.
Example: James’ buyback
James held 2,000 Big Mining (a fictional mining company) shares through his wrap pension account. In December 2017, Big Mining announced a buyback which included a guaranteed buy back amount of 165 of his shares for $28 per share. The current market price was $32 however, the buyback included a special dividend with tax rebates that increased James’ net benefit.
James’ compensation is:
*This example is simplified for illustrative purposes.
A share purchase plan is offered by a company to existing shareholders and gives them to opportunity to buy more shares in the company or entity, usually at a discount to the current share price.
Example: Laura’s share purchase plan
In April 2018, Big Aviation (a fictional aviation company) announced a share purchase plan offering existing shareholders new shares at a discounted cost of $5.50. At the time of the corporate action, Laura held 1,000 Big Aviation shares in her wrap superannuation account and noted that Big Aviation shares traded at an average price of $6.50 throughout the offer period.
In this situation, we’ve assumed that Laura would have participated in the share purchase plan and bought 1000 shares at $5.50 per share and sold 1000 of her existing shares on the share market for $6.50 to make a financial gain of $1.00 per share, less expenses.
Laura’s compensation is:
A renounceable rights issue gives existing shareholders the right to buy more shares in the company. The shareholder can buy any number of shares up to a maximum that is based on a ratio of their existing shares, and the price is typically offered at a discount to the prevailing share market price e.g. 1 for every 5 shares they own at a 10% discount. If the shareholder does not want to purchase more shares, they can sell their rights to another shareholder on the share market.
Example: John’s renounceable rights
John owned 1,000 Big Telco (a fictional telecommunications company) shares in his wrap superannuation account which were trading at $6.50 in August 2014. In September 2014, Big Telco made a renounceable rights offer to existing shareholders to purchase 1 new share for every 5 shares held at $5.05. The offer allowed John to either sell his rights or apply for 200 new shares. At the time of the corporate action, the rights were trading at $2.50 on the share market. By selling his 200 rights, John could have made a potential financial gain of $461 after costs.
John’s compensation is:
A non-renounceable rights issue gives existing shareholders the right to buy more shares in the company. The shareholder can buy any number of shares up to a maximum that is based on a ratio of their existing shares, and the price is typically offered at a discount to the prevailing share market price e.g. 1 for every 5 shares they own at a 10% discount. Non-renounceable rights cannot be sold on the share market and can only be exercised to buy additional shares.
Example: Mary’s non-renounceable rights
In April 2012, Big Media (a fictional media company) announced an offer giving existing shareholders non-renounceable rights to buy 1 new share at $3.55 for every 5 held. Mary held 5,000 shares in her superannuation wrap account and was entitled to buy up to 1000 shares.
Following the corporate action notification, Mary checked the share market and saw Big Media shares were trading at $5.05. Mary accepted the offer of 1000 shares and sold 1000 of their existing shares to make a potential financial gain of $1,461 after costs and before tax.
Mary’s compensation is:
Options involve the offer (“option”) to buy an additional amount of a company’s shares on a future date at a set price.
Example: Jess’ Options
In April 2015, Big Equity (a fictional listed investment company) shares were trading at an average price of $2.88 when they made an offer to existing shareholders of one free bonus option for every 10 shares held at $3.75 before October 2015. At the time of the corporate action, Jess owned 5,000 Big Equity shares in her wrap investment account, giving her the option to buy 500 new shares.
In October 2015, Jess decided to sell her 500 options for a potential financial gain of $396 after costs.
Jess’s compensation is:
A takeover occurs when a shareholder receives an offer from another party to buy their shares with an intention to take over the company. The offer is typically at a premium (higher) compared to the share market price.
Example: Oscar’s takeover
In October 2016, Global Shipping (a fictional shipping company) announced an off-market takeover offer to buy Big Shipping (another fictional shipping company) at $3.65 per share. At the time of the takeover, Oscar owned 500 Big Shipping shares in his investment wrap account which traded at an average of $2.50 on the share market.
Oscar could have accepted the offer from Global Shipping to buy all his shares and make a potential financial gain of $575.
Oscar’s compensation is:
Share top-ups occur when a company offers existing shareholders the opportunity to buy a small number of new shares to increase or ‘top-up’ existing holdings. These are typically offered to enable shareholders with small amounts of shares that may be unmarketable because of stock market minimums, to ‘top-up’ their holdings to a more tradeable amount. They are often offered in combination with other corporate actions such as ‘Sale of Unmarketable Parcels’ noted below.
A convertible security is a financial instrument that is typically a 'hybrid security' that can be converted to an ordinary share at a predetermined price anytime during the agreed convertible period. Convertible securities pay dividends/ interest during the life of the security, usually twice a year. Sometimes a corporate action may affect the terms of the underlying securities.
Share sale facilities offer small shareholders who hold a small amount of shares the opportunity to sell their shares without brokerage costs. They are only typically available to shareholders who hold certain quantities of shares between a minimum and a maximum amount.
Unmarketable parcels are offered to shareholders who hold parcels of shares that are typically less than $500 (this is usually the minimum that can be traded on the share market). Companies offer these periodically to help those small shareholders sell their shares without brokerage costs.
Partly paid shares are offered as a way of buying shares in two or more instalments on set dates. Where the final instalment is not paid by the final date, the owner of the partly paid shares may forfeit the shares and receive the difference between the value of the shares minus the amount of the call owed and any expenses. Sometimes a corporate action may affect the underlying shares.
Instalment warrants are financial products issued by banks and other financial institutions that enable an investor to buy an asset over time rather than paying the full amount all at once. The investor typically pays an initial amount upfront, with the balance being spread over a series of instalments for a pre-agreed period. When all instalments are paid, the investor takes ownership of the underlying share or asset. The warrants can be traded on the share market until the last instalment is due. Sometimes a corporate action may affect the terms of the Instalment Warrant.
A priority offer is a special offering made to shareholders for a new investment opportunity before it is made available to the general public. It helps the company raise capital or debt while also giving priority to existing shareholders ahead of the general public. No compensation has been calculated for this corporate action because the terms offered did not enable a financial gain without materially increasing market risk.
Redeemable securities are debt securities purchased by existing shareholders that pay recurring distributions until a maturity date. Upon maturity, the redemption value is repaid. If the issuing company changes the terms of the security, they will notify the holder. No compensation has been calculated for this corporate action because the terms offered did not enable a financial gain without materially increasing market risk.
A scheme of arrangement is an arrangement to reconstruct a company’s capital, assets or liabilities with the approval of shareholders and the Court. This arrangement is typically entered into as an agreement with another company to merge. These events are generally mandatory and do not give the shareholders a choice. No compensation has been calculated for this corporate action because the terms offered did not enable a financial gain without materially increasing market risk.
