A voluntary corporate action is an event affecting a security in which each holder decides whether to take part. The company, or a third party such as a bidder, makes an offer or grants a right, and the holder must send an instruction by a deadline to accept it. A holder who does nothing keeps the existing position unchanged.
Corporate actions are conventionally divided into three groups. In a mandatory corporate action, such as a cash dividend or a share split, the event applies to every holder automatically. In a mandatory with options corporate action, the event will happen in any case but holders may choose its form, for example cash or shares. Voluntary events are the third group and the most demanding for custodians and brokers, because they depend on collecting a decision from every investor in time. The work is part of corporate action processing.
Common types
- Tender and takeover offers. A bidder or the issuer offers to buy securities from holders at a stated price; see tender offer processing.
- Exchange offers. Holders are invited to swap their securities for different ones, as in an exchange offer made in a debt restructuring.
- Rights and warrants. Holders may subscribe for new shares through a rights exercise or a warrant exercise, paying the subscription price.
- Conversions. The holder of a convertible bond or convertible preference share may convert it into ordinary shares.
- Bondholder options. A holder may be able to put a bond back to the issuer on set dates, or to give consent to a change in terms, sometimes for a fee.
- Share repurchase offers and odd-lot programmes. The issuer offers to buy back shares from those who wish to sell.
Enrolment in a dividend reinvestment plan is also voluntary, though once a holder has enrolled it usually runs as a standing instruction.
How a voluntary event is processed
Processing begins when the event is announced and its terms are captured: the options available, prices or ratios, conditions, and the key dates. Each intermediary in the chain between the issuer's agent and the investor passes the information on, and the custodian sends its clients a corporate action notification describing their choices.
The investor replies with an election instruction stating the option chosen and the quantity of securities to which it applies. A holder may elect on only part of a position or split it between options. The custodian checks that the securities are available, blocks them so that they cannot be sold or delivered elsewhere, and forwards the instruction to the depository or agent. On the payment date the outcome is applied: securities are debited and cash or new securities credited, any subscription money is collected, and a confirmation is sent to the client.
Under the ISO 15022 messaging standard used between custodians, each event carries an indicator showing whether it is mandatory, mandatory with choice or voluntary, so that systems know whether to wait for an instruction.
Deadlines and the default option
Two deadlines matter. The market deadline is the latest time at which the issuer's agent or the depository will accept instructions. Each intermediary sets its own earlier election deadline, so that it has time to gather, check and pass on its clients' choices. The further an investor is from the issuer in the custody chain, the earlier it must decide, which can mean replying days before the official expiry.
Every event has a default option that applies when no instruction is received. For a purely voluntary event the default is to take no action, and the holder simply does not participate. That is not always harmless: subscription rights that are neither exercised nor sold may lapse without value, and a holder who ignores a takeover offer may be left with an illiquid minority holding or be bought out compulsorily later. The handling of holders' decisions is described more fully under corporate action election.
Risks and controls
Voluntary events carry the highest operational risk of all corporate actions. Typical failures are a notification that never reached the investor, an instruction received after the deadline, an election keyed for the wrong option or quantity, and an instruction placed on securities that had been lent or sold. Because the terms can be complex and may change during the offer period, with extensions, improved prices or competing bids, misreading them is another source of error. Where an intermediary's mistake causes a client to miss a valuable offer, the client will normally claim compensation.
Custodians and asset managers therefore apply close controls: comparison of event terms from more than one source, chasing of clients who have not replied as the deadline approaches, independent checking of instructions before release, recall of securities on loan, and reconciliation of proceeds against the elections made. Asset managers add a decision step of their own, since the portfolio manager must judge whether accepting the offer is in the interests of each fund.