Article 26 of MiFIR Corporate Actions
In which level do the transaction reporting requirements under Article 26 of MiFIR apply to corporate actions? Point nine has the answer to this question.
Paragraph 5.6.2.7 Exclusions under Article 2(5)(i) of the Guidelines states:
“There is a carve out from the exclusion in 2(5)(i) which states that where the activities in Article 2(5)(i) occur in relation to initial public offerings, secondary public offerings or placings or debt issuance, they should be reported.
The exclusion under 2(5)(i) includes the termination of financial instruments at their maturity on expiry date.
Where acquisitions or disposals take place in connection with mergers, takeovers, insolvency proceedings under Council Regulation (EC) 1346/2000, stock splits or reverse stock splits, these are not reportable. In these situations, the conditions are usually set in advance at the shareholders meeting, are displayed through a relevant information announcement, and investors are subject to this agreement without the investor making any further decisions.”
For ease of reference, Article 2(5)(i) of RTS 22 stipulates that,
“the creation, expiration or redemption of a financial instrument as a result of pre-determined contractual terms, or as a result of mandatory events which are beyond the control of the investor where no investment decision by the investor takes place at the point in time of the creation, expiration or redemption of the financial instrument does not fall under the reporting obligation contained in Article 26 of MiFIR.”
What is a corporate action?
Corporate actions could be either mandatory or voluntary. A mandatory action is the result of a decision taken by the company’s board of directors, such as mergers or stock splits. Shareholders are affected since they are the beneficiaries though they dont need to take any actions. On the other hand, voluntary events occur when shareholders need to participate in the decision and the company can not act without their response, such as tights issues and open offers.
Rights issues
A right issue is when a company offers shares at a significant price to existing shareholders. This leads to a considerable opportunity to increase their shareholding in a firm. Companies choose rights issues when they want to raise money either to pay down debt or to expand. New shares are tempting to shareholders because they will be cheaper instead of the present market price.
Nevertheless, shareholders do not have the obligation to buy rights issues.
According to Article 2(5)(h) of RTS 22
“the exercise of a right embedded in a financial instrument, or the conversion of a convertible bond and the resultant transaction in the underlying financial instrument is not subject to transaction reporting.”
Paragraph 5.6.2.6 Exclusions under Article 2(5)(h) of the Guidelines state the following:
“Exercising a financial instrument such as an option, a covered warrant, a convertible or exchangeable bond, an allotment right or a subscription right by the owner of the financial instrument does not trigger transaction reporting obligations for the Investment Firm exercising the option or the Investment Firm being exercised against. Where the exercise results in the delivery of another financial instrument this is also not reportable by either the Investment Firm exercising the option or by the Investment Firm being exercised/assigned against.”
If a shareholder decides to take up rights issues (partially or fully) and pays the issuer the specific price in exchange for the extra shares (which shares have the same characteristics as the ones that the shareholder already have), this will not make the reporting mandatory as it is containing in the exemptions of the article Article 2(5)(h) of RTS 22. If the shareholder prefers not to take up any rights issue and the rights lapse, there won’t be any transaction hence no reporting obligation in regards to the exclusion in Article 2(5)(h) of RTS 22.
However, if a shareholder decides to transfer their rights shares (fully or partially) to a third party, this transaction needs to be reported in accordance with Article 26 of MiFIR, since there is an investment decision made by a shareholder at a specific time and at a specific price.
Likewise, since an investment decision is required when taking up the rights issue or taking additional shares that were not taken up by other shareholders, the reporting obligation is applied also in this case.
Changes in Share Capital (Redenomination, Bonus Shares or Share Splits)
When a stock is split, companies have an increase in their number of shares but their actual value is not affected. For example, when you own 500 shares in a company at €100 per share, this leads to an investment valued at €50000. If that company does a 2-1 stock split, then you would then own 1000 shares of €50 each, which is the same investment valued of €50000.
In conclusion, this mandatory corporate action will not modify the value of a company but could improve investors’ perceptions of the company.
Paragraph 5.6.2.7 Exclusions under Article 2(5)(i) of the Guidelines also states that
“automatic increases or decreases of notional stemming from amortization schedules are also not reportable since the conditions have been already set at the point in time of the initial contract with no decision being made at the time of decrease/increase of notional.”
Accordingly, changes in share capital through for instance, allotment of shares (bonus share), share splits, redenomination of shares and so on, would not be reportable under Article 26 of MiFIR if the conditions have been already set at the point in time of the initial contract, with no decision being made by the investor.
Dividends
Dividends are payments that a company gives to its shareholders out of its post-tax profits. These payments are not standard and it’s up to a company whether they will pay a dividend or not. If they decide to do so, there is no obligation to do it only once, this may happen multiple times throughout a year. If a dividend is paid in the middle of the year, is called the interim dividend because it is made at the same time with a company’s interim report, which shows the company’s progress up to date.
The board of directors have the responsibility of setting divided payments. Preferably the payments would be an improvement of last year’s divided payment or at least not below that.
When a company has a fair track record of generous dividend payments, the demand of investors are strong enough. The best case scenario for long-term investors, is when they get an income from dividends and a capital gain from the share price.
Paragraph 5.6.2.7 Exclusions under Article 2(5)(i) According to the Guidelines
“the issuance of scrip dividends are not reportable subject to the carve out above as this involves the creation of financial instruments as a result of pre-determined contractual terms where no investment decision is made by the investor at the time of the instruments’ creation…”
“… However, events where the investor makes a decision at the point in time of creation, expiration or redemption are reportable. These events include where the client is electing to receive cash or instruments in a takeover bid or where an issuer has a choice whether to deliver in cash or in financial instruments.”
Therefore, the eligibility for reporting of the scrip dividends depends on whether the investor made an investment decision. Specifically in case the issuer automatically provides additional shares to shareholders as a proportion to the shares that they already have, because of a scrip dividend, this is not subject for reporting in terms of Article 26 of MiFIR. In case the issuer gives the choice to the shareholders between cash dividend or shares and the shareholders opt to receive shares, these transactions are subject for reporting since the investments decision is required.
Corporate Action Summary
| Corporate Action | Reportable | Comments |
|---|---|---|
| Rights issues | Yes/No | Article 2(5)(h) of RTS 22
|
| Redenomination | No | Paragraph 5.6.2.7 Exclusions under Article 2(5)(i)
|
| Bonus Shares | No | Paragraph 5.6.2.7 Exclusions under Article 2(5)(i)
|
| Share Splits | No | Paragraph 5.6.2.7 Exclusions under Article 2(5)(i)
|
| Dividends | No | Paragraph 5.6.2.7 Exclusions under Article 2(5)(i)
|
Conclusion
For further clarification in relation to the reporting of corporate actions please contact us.
