This publication is an extension of our webinar “Navigating Corporate Actions Beyond Drafting the Legal Framework.” Watch here.
In the context of restructurings and liability management transactions, a company will often initiate a corporate action event to effect a major change to the company’s outstanding debt liabilities and/or equity securities. The target of these corporate actions is often the holders of the company’s publicly traded securities who are required to surrender their existing securities in exchange for some new entitlement or other consideration. This article addresses various types of corporate actions with a focus on the mechanics used by companies to administer such corporate actions.
As an introductory matter, the industry customarily defines a corporate action as any activity or series of events initiated by a company that brings substantial change to a company and its key stakeholders.
Common corporate actions include:
- Exchange offers
- Tender offers
- Rights offerings
- Consent solicitations
- Stock splits
Registered Holders and Beneficial Holders
There are two primary ways securities are held—either (i) by the underlying beneficial holder directly on the books and records of an agent such as a transfer agent or indenture trustee or (ii) by the underlying beneficial holder through a bank, broker or other financial institution (each, a Nominee), who (in turn) holds the securities “in street name” at a securities depository such as the Depository Trust Company (DTC). Transfers of securities that are directly registered are tracked, cleared and recorded through a transfer agent or indenture trustee, while transfers of securities held at a depository are tracked, cleared and recorded at the Nominee level through the depository with the benefit offered by the depository’s trading and settlement platform.
The manner by which the securities are held dictates the method used to administer the corporate action. For directly registered securities, the company must rely on the transfer agent or indenture trustee to identify and track participation, which can be a slower, more cumbersome and manual process, whereas the depositories offer specialized electronic platforms to effectuate participation in corporate actions.
This article focuses on the securities held at DTC with transfers cleared through DTC.
Surrender and Exchange
In most events, the underlying holder of the target securities (either debt or equity) must relinquish or surrender their existing holdings in exchange for a new entitlement. The surrender, also referred to as presentment, accomplishes two goals—it makes certain that the existing holder of the securities receives the benefit of the exchange, and it makes certain that only the existing holder receives such benefit.
If a participating holder was not required to surrender the securities, there could be no guarantee that the holder would not reap the benefits of participation and then trade out of the position, leaving the unsuspecting new holder with securities bereft of the benefit being offered in the corporate action. Similarly, the company would confront the dilemma of having a holder claim a right to payment for a security as to which the entitlement had already been delivered. Requiring surrender is one way to solve the aforementioned problems.
The target securities are often cancelled upon surrender but not always.
There are two primary types of corporate actions: a mandatory corporate action event or a voluntary corporate action event.
Mandatory Exchange Event
A mandatory event is precisely as it sounds—the holders of the underlying securities have no choice but to participate in a corporate event. In other words, it has been preordained that holders will receive some form of consideration in exchange for surrendering their securities. Individual holders cannot assert a preference regarding the event. Mandatory exchanges are frequently seen in Chapter 11 bankruptcy restructurings where every holder of securities in a certain class of creditors must exchange their holdings in return for the prescribed treatment under a confirmed plan. Distributions are then made equitably among holders, meaning all holders receive the same treatment. Mandatory exchanges are also used in the context of stock splits, mergers, name changes and liquidations, to name a few.
Voluntary Exchange Event
Voluntary events, on the other hand, provide holders with the option to choose to participate or not (which is also referred to as “taking no action”). In these scenarios, a holder can choose to maintain their existing instrument, or they can elect to surrender their instrument in exchange for the offered entitlement. The hallmarks of voluntary corporate action events are the following: (i) the event provides a choice to the holder (ii) the holder must take affirmative steps to participate in the event, including coordinating with the holder’s DTC-participating Nominee (iii) there is a chance that one or more holders do not participate, thereby leaving a “stub” or “remnant” of the target securities behind (iv) in some corporate events, for the event to succeed, the company must reach a threshold amount of participation and (v) there may be incentives for participation—sometimes multiple layers of incentives, including an extra fee for early participation. Voluntary exchanges are used in the context of consent solicitations, rights offerings and exchange offers, to name a few.
Securities depositories offer tools and platforms for use in conducting voluntary events. For example, DTC maintains a platform called the Automated Tender Offer Program (or ATOP), which seamlessly collects holders’ participation through the voluntary tendering of their underlying securities. Upon tendering into ATOP, the participating holder segregates the participating securities from the non-participating securities, freezing any further trading of the participating securities, and earmarking such securities for receipt of the designated entitlement.
As an important caveat: When facilitating voluntary corporate action events through a depository such as DTC, a company must (i) be cognizant of the specific rules surrounding ATOP’s use for the event and (ii) coordinate early and often with DTC to ensure that the terms of the event comply with the applicable rules.
Information or Disbursing Agent
Due to the complexities involved in various types of corporate action events, an information or disbursing agent (Agent) is often engaged to act as the point of contact between the company and the underlying stakeholders. In this role, the Agent ensures seamless facilitation of both mandatory and voluntary corporate action events. As an Agent, Kroll’s Issuer Services team collaborates with issuers and advisors to craft the most efficient, practicable and comprehensive procedures with a specialization in unique deal structures such as complex rights offerings and private placement transactions. Further, Kroll expertly coordinates the distribution and allocation of cash, new securities or other designated entitlements. The team also works to make new securities eligible at DTC while addressing the needs of both the company and stakeholders through outstanding client service.
With over 200 years of combined solicitation and public securities experience, Kroll’s Issuer Services team members are experts in partnering with clients to provide strategic, effective and well-communicated issuer services. Successful outcomes in these engagements require deep subject matter expertise and a high level of professionalism to effectively interact with a client’s key constituents. Our team has led some of the most complex global consent solicitations, exchange offers, rights offerings, tender offers, and annual and special proxy solicitations.
Written with the help of Emma Greeley, Kroll 2023 Issuer Services intern.