Companies whose shares are trading on stock exchanges occasionally perform corporate actions that may have a material impact on their share price. Corporate actions can be either considered mandatory (shareholders have no choice whether to participate in the action or not) or voluntary (shareholders can decide whether to participate or not).
Mandatory corporate actions are directly decided upon by a company’s board of directors and do not require shareholders’ intervention. The most common of such corporate actions include the issuance of a cash dividend, share splits and bonus issues (at times specific approval may be required by shareholders in a general meeting to enable a bonus issue to take place). Some mandatory corporate actions may also offer options for shareholders such as a scrip dividend whereby the company offers dividends either in the form of new shares or cash.
For voluntary corporate actions to move ahead, shareholders’ approval must be sought at a general meeting. A common example of a voluntary corporate action is a rights issue. If such a corporate action is approved, shareholders are not forced to buy additional shares. If they do not wish to take up their proportionate entitlement of shares, they can either transfer their share entitlement to a third party or allow them to be offered to the public.
A number of the above-mentioned corporate actions above have regularly been undertaken by companies whose shares are listed on the Malta Stock Exchange. However, some anomalies took place in the market in recent weeks and months.
The most recent corporate action took place in Lombard Bank Malta plc. The bank announced on September 20 that it would hold an extraordinary general meeting (EGM) on November 10 to approve a number of resolutions. The bank said the resolutions were required for the purpose of issuing new shares that will form part of the existing class of ordinary shares and rank pari passu with the existing share capital.
Then, on October 4, the bank announced that during the EGM, one of the resolutions would be a two-for-one share split with the resultant effect that subject to shareholders’ approval, each share having a nominal value of €0.25 would be split into two shares, each with a nominal value of €0.125.
On October 20, the bank issued an announcement explaining all the resolutions being presented at the EGM. Regarding the first resolution related to the share split, it had been announced on October 20 that should this be approved, this would take effect as at close of trading on November 14. This meant that the adjustment to the share price was scheduled to take place as from November 15.
Although some media coverage ahead of the EGM may have overshadowed the various resolutions presented to shareholders on November 10, the bank immediately announced the outcome of the meeting that same evening. The company announcement issued late on November 10 stated that the three extraordinary resolutions had been approved while the ordinary resolution was not carried.
In this announcement, the bank reproduced the wording and subsequent impact of the extraordinary resolutions that were approved with a clear reference to “the last trading date being 14 November 2022” with respect to the share split.
On November 14, Lombard’s closing price was €1.95, which was equivalent to an adjusted price of €0.975 in view of the doubling in the issued share capital and the reduction of the nominal value. Although the MSE trading platform removes all outstanding orders on the effective date of such corporate actions, the first trade on November 15 for 2,000 shares took place at a price of €1.76 (equivalent to a pre-split price of €3.52). The share price drifted to a closing level of €1.51, which still represented a gain of almost 55 per cent from the previous day’s adjusted level of €0.975. The following day, a further 4,500 shares traded at €1.48, equivalent to a pre-split price of €2.96 – still a significant increase from the price of November 14. On November 17, a total of 6,000 shares traded at €1.10. Although this represented a decline of 26 per cent from the previous day, the overall impact of the corporate action still resulted in an increase of 12.8 per cent when comparing the price of November 17 of €1.10 to the adjusted price on November 14 – the last day prior to the share split.
The failure or inefficiency of the market to fully adjust to a corporate action is not solely limited to the Lombard share split. Earlier this year, Simonds Farsons Cisk plc performed a bonus share issue by allotting one new share for every five shares held by shareholders as at close of trading on June 1. The share price of €8.95 ought to have adjusted to €7.45 as from June 2. However, the share price closed at €8.35 on June 2, increased to €8.85 on June 3 before dropping to €7.65 on June 6, which was still equivalent to a pre-bonus price of circa €9.18.
Since most corporate actions can lead to wide share price movements as explained above, it is very important for shareholders to follow company announcements and understand the implications of the changes taking place. Unfortunately, it is evident from recent developments in Malta that due to a number of factors, the investing public and other stakeholders across the capital market may not be fully aware of all the changes taking place in certain companies. This is leading to a degree of confusion in certain instances, apart from being potentially detrimental to investors acquiring shares without the full knowledge of the timing of corporate actions.
There remains a significant amount of work to be done to improve investor education
In essence, it is evident that there remains a significant amount of work to be done by various stakeholders to improve the overall level of investor education in order to ensure a continued positive development of Malta’s capital market.