What You Need to Know About Corporate Actions

Hi there! Here are a list of corporate actions that routinely affect Robinhood users. Our brokers have provided an explanation of these topics below.

 

What’s a stock split?

A stock split is a decision by a corporation to increase or decrease its number of outstanding common shares.

When a corporation decides to execute a forward stock split, the number of outstanding shares will increase while the overall market value of the position will remain the same. This means that you will see the number of shares you own in the corporation increase, though the value of each individual share will decrease proportionally.

If you own 10 shares of XYZ valued at $10 each, and XYZ executes a 10 for 1 (10:1) stock split, you will now own 100 shares valued at $1 each.

Similarly, when a corporation executes a reverse stock split, the number of outstanding shares will decrease while the market value for each of those individual shares will increase.

If you own 10 shares of XYZ valued at $10 each, and XYZ executes a 1 for 10 (1:10) reverse stock split, you will now own 1 share worth $100.

Please note, that the overall value of the position always stays the same in a stock split.

 

What’s a merger?

Sometimes a corporation will choose to acquire another corporation. The buying corporation may choose to undergo a cash merger/liquidation or stock merger.

Cash Merger & Liquidation: Company X purchases Company Y and declares Company Y shareholders will receive $10.00 for every 1 Y share they owned. Company Y common stock stops trading and Y shareholders are paid cash instead.

Stock Merger: Company X purchases Company Y and declares that Company Y shareholders will receive 2 shares of X for every 1 share of Y they owned. Company Y common stock stops trading and Y shareholders now own X shares instead.

 

What's a fractional share?

After a stock split is carried out, sometimes there are extra shares left over.

A fractional share is a share of equity that is less than one full share.

Corporations have a few options when dealing with fractional shares that result from a corporate action: they can pay cash-in-lieu, pay nothing, round-up to the nearest whole share.

Example: You own 10 shares of XYZ. XYZ undergoes a 1:3 reverse stock split. You will technically now own 3.33 post-split shares of XYZ.


Robinhood does not support fractional shares, so you will receive one of the above-mentioned payments: a cash-in-lieu payment proportional to the value of the fractional shares owned; additional shares based on a roundup of any fractional share to a full share; or nothing, depending on the corporation’s mandate.

 

What's cash-in-lieu?

Cash-in-Lieu is a cash payment made to owners of fractional shares that result from corporate actions (like stock splits and mergers and acquisitions). The cash rate is predetermined by the corporation and can be found on the corporation’s corresponding SEC 8-K document.

You should expect cash-in-lieu payments to settle in your Robinhood account 3-4 weeks after the corporate action has been completed. Confirmation of this payment can be found in your monthly account statements.

 

What’s a spinoff?

Sometimes a corporation will choose to create a new, independent company under its umbrella. The original corporation may choose to issue common shares of the new independent company to its previous shareholders.

Example: Company X spins-off Company Y. Company X decides to issue common stock of Company Y to shareholders who owned shares of X by a predetermined date.

 

What’s delisting?

Delisting simply refers to a stock’s removal from an exchange. Oftentimes when we refer to a stock’s delisting, we mean that it has been removed from a major exchange we support and now trades on the OTC markets.

 

How do I participate?

The issuing company determines the terms of corporate actions and how stockholders will be compensated for fractional shares.

Stock splits, mergers, and acquisitions are processed by our Corporate Actions team in concert with our clearing partner, APEX. All necessary adjustments will be made to your portfolio in a timely manner.

Please keep in mind that certain stocks will be restricted from trading while the Corporate Actions team works to process these changes.

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