Untying the Knots: Simplifying Corporate Actions

Understanding the impact of corporate actions is necessary when contemplating the right investment strategy. This impact is driven by timely awareness, accuracy, and attention to detail. In this blog, IHS Markit's Managed Corporate Actions™ team will discuss some of the most dominant corporate actions announced each month and the roles they take in the marketplace.

The Russian Invasion of Ukraine

On February 22, 2022, Russian President Vladimir V. Putin signed a decree to send Russian troops into Ukraine's separatist regions of Luhansk and Donetsk after recognizing them as independent. Since then, Russia has infiltrated towns and villages in the path of their advance to capture several key cities in Ukraine.

The International Response

On March 2, the UN General Assembly voted 141-5 to demand that Russia immediately end its military operations in Ukraine (34 countries abstained) [1].

Since February 21, numerous countries have banned together to show support for Ukraine through sanctions on Russia, including but not limited to:

• European Union:
  • Removal of select Russian banks from the SWIFT network, limiting the ability of Russian banks to transact: VTB Bank, Bank Oktkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, and VEB [2].
  • Sanctioned and froze the assets of over 700 individuals and 53 entities who financially or materially support the military operations in Ukraine [3].
  • Direct or indirect dealing is prohibited in any transferable securities and money market instruments issued after April 12, 2022, by 23 Russian banks and entities.
  • Nord Stream 2 gas pipeline from Russia to be suspended by Germany [4].
  • Closed airspace to every Russian plane [5].
• United States:
  • Immobilized Russian bank assets held in the US, barring Americans from taking part in any transactions involving the Russian Central Bank, Russia's National Wealth Fund, or the Russian Ministry of Finance, Russian banks include Sberbank, VTB Bank, Bank Otkritie, Sovcombank OJSC, Novikombank, and its subsidiaries [6].
  • Imposed debt and equity restrictions on Russian enterprises and entities, making it impossible to raise capital via the US market.
  • Banned Russian aircrafts from entering and using US airspace [7].
  • Banned the import of Russian oil, natural gas, and coal imports [8].
  • The NYSE and Nasdaq have suspended trading in stocks of certain Russian companies.
• Switzerland:
  • Adopted sanctions against Russia matching those of the European Union [9].
• United Kingdom:
  • Targeted economic sanctions on 5 Russian banks: Rossiya, IS Bank, General Bank, Promsvyazbank, and the Black Sea Bank [10].
  • Froze UK assets of wealthy Russian individuals and banned their travel into the country.
  • The London Stock exchange has suspended trading of all Russian securities and Global Depository Receipts [11].
• Additional global impact includes:
  • The Moscow Exchange has been suspended by the World Federation of Exchanges (WFE) [12].
  • Euronext, Borse Italiana, and Deutsche Boerse suspended trading on multiple Russian ETFs until further notice [13].
  • S&P Dow Jones, MSCI, Morningstar, and many others stripped Russian securities from their indices [14].
  • Corporations across all industries around the globe are pulling out their stake in Russia, from McDonald's to Apple, to Disney, to Shell. It's a long list [15].

And then Russia said…

• Following these (and many unmentioned) sanctions on Russia, the Central Bank of the Russian Federation (CBR) announced a series of measures in response to those sanctions, including [16] [17]:
  • Required brokers to "suspend the execution of all orders by foreign legal entities and persons who want to sell off their Russian investments", making it impossible for foreign investors to liquidate their now-worthless positions.
  • On February 25, the Moscow stock exchange closed. As of March 9, it has not re-opened.
  • Issued a moratorium on income payments. As of February 28, depositories and registrars have been ordered to "suspend the transfer of payments on securities of Russian issuers to foreign individuals and legal entities".

• Access to the Moscow exchange and the National Settlement Depository (NSD) sites remain inaccessible from foreign IP addresses.

So how do we make sense of this in Corporate Actions?

While the full impact of these financial casualties is unknown, the bearing on global markets is undeniable, massive, and unprecedented. Will investors ever receive their distributions? If so, when? And who? We can't expect all holders to receive payment simultaneously, so how are firms best able to reconcile (eventual) payments against events that were already supposed to have paid? Without access to the Moscow exchange and the NSD, a lack of transparency certainly leaves us wondering… what happens next?

Navigating through the unknown alongside the rest of the industry, MCA called upon our user community with an off-cycle, "Special" Working Group to discuss the impact on corporate actions with one primary objective: To understand how MCA can best serve the community with data that will help to minimize customer risk in the face of so much uncertainty.

Subject matter experts across Investment Banks, Custodians, and Asset Managers joined MCA in the open forum to discuss the current state of closures, relevant sanctions, impacted securities, known customer concerns, and much of the unknown. The wealth of knowledge shared was incredible, as stakeholders discussed pre-crisis Russian market payment trends that may help predict future payment practices and shared insights on manual workarounds planned for settlement and reconciliation.

Are you interested in joining this user community or hearing more from MCA on this topic? Please reach out to our Managed Corporate Actions Experts for more information or questions.

All Aboard the SPAC Train - Next Stop… Gulf Region

Since 2020, the popularity of Special Purpose Acquisition Companies (SPAC) has drastically increased year over year, with 248 SPAC IPOs listed in 2020, to a whopping 613 in 2021. What started in the US has expanded across the globe. In 2021 we saw the UK and the Singapore Exchange (SGX) announce their own SPAC framework, and we can now add the UAE to the growing list.

Last month, the United Arab Emirates' Securities and Commodities Authority (SCA) approved a SPAC regulatory framework developed by Abu Dhabi Securities Exchange (ADX) and Abu Dhabi's Department of Economic Development (DE), which will be the first of its kind in the region. Abu Dhabi is banking on a melting pot of its strong regulations, tax-free status, stable business environment, and pipeline of fast-growing regional companies to attract SPAC sponsors looking to take companies public.

Some key provisions:

• A minimum of AED 100 million raised in its initial IPO
• To protect investors, 90% of IPO proceeds will be placed in a non-interest-bearing account
• Sponsors outside the UAE can apply to have their SPAC listed on ADX [18]

Is it too crowded?

Of the 248 SPACs listed in 2020, little more than half have found and closed deals. With a typical shelf life of two years, time is running out for those who haven't. Currently, 602 SPACs, with a combined $162.4 billion in funds, are chasing down acquisitions [19]. With such stark competition to find and close deals, hundreds of SPACs may find themselves forced to liquidate and return money to investors. Bill Ackman's $4 billion Pershing Square Tontine Holdings Ltd. (NYSE: PSTH), is an example where, in a matter of months, they'll be facing their July 24 deadline to close a Merger.

As many SPACs may be forced to liquidate, it will alleviate pressure on those remaining to find deals. Stay tuned as we approach these deadlines!

MCA is ready

With our long-standing expertise in US SPACs (which has been used as the baseline for other markets developing their own SPAC frameworks) and experience with SPAC announcements from the UK and Singapore, MCA remains perfectly poised to tackle the Gulf region's entry into the industry.

Company Announcements - Confusing the Market

On December 6, 2021, and again on February 3, 2022, ConocoPhillips (NYSE: COP) published news releases referencing distributions to their shareholders, excerpts below:

December 6 Release:

Expected 2022 return of capital to shareholders of ~$7 billion, representing a ~16% increase versus 2021. The company is initiating a three-tier capital return program that will consist of a compelling ordinary dividend tier, a share repurchase tier, and a newly authorized quarterly variable return of cash (VROC) tier. The first VROC of $0.20 per share will be paid on January 14, 2022, to shareholders of record as of January 3, 2022 [20].

February 3 Release:

ConocoPhillips announced a quarterly ordinary dividend of $.46 per share, payable March 1, 2022, to stockholders of record at the close of business on February 14, 2022. In addition, the company announced a second-quarter VROC of $.30 per share, payable April 14, 2022, to stockholders of record at the close of business on March 31, 2022 [21].

How were these distributions perceived in the market?

The terminology "Variable Return of Cash" (VROC) confused the US Depository, custodians, and data vendors about which corporate action event type should represent the VROC. MCA saw data providers refer to the event as a Return of Capital, Special Dividend, or Cash Dividend. With different tax applications across these event types, stakeholders were understandably frustrated by the ambiguous language provided by the company.

So… which is it?

MCA contacted Conoco's Investor Relations department and, after much back and forth, was able to conclude that the $0.20/share VROC paid on January 14 is a quarterly variable cash distribution to shareholders in addition to the ordinary dividend of $0.46/share. The VROC should be treated as an ordinary dividend for tax purposes.

The extra steps that matter

When companies fail to provide clear language in their corporate action announcements, it is imperative that information data providers do not regurgitate details via scraping tools, rather due diligence must be performed, even when (or especially when) it is a "simple" cash distribution. As always, MCA keeps customer needs and downstream processes at the forefront of event validation.

The Spanish Market Says "Adios" to SICAVs… and to Mariachis too

Last year Spain's parliament approved a legal change that tightened the tax regulation for SICAVs (investment companies with a variable share capital). After many years of warnings and attempts to toughen conditions, the legislative change to establish more demanding requirements to benefit from low taxation came into force on January 1, 2022.

Previously, SICAVs could benefit from a 1% taxation rate if they had at least 100 partners, with no minimum investment required. Bankers typically structured SICAVs with the principal owner holding the majority of shares and associates holding single shares to make up the necessary numbers to create the SICAV. In the financial world, these fictitious investors have been dubbed "mariachis". Ranging from bank employees to friends or relatives, mariachis receive small participation in the form of free shares or for a symbolic price (i.e., one euro).

Under the new Anti-Tax Fraud Law, eachof the 100 participants must have at least 2,500 euros invested in the SICAV or hold shares in the SICAV for at least 3 quarters of the financial year for it to continue benefiting from the low taxation regime. If that condition is not met, the more than attractive 1% tax rate jumps to 25%! [22] [23]

As a result of these legal modifications, the Spanish National Securities Market Commission (CNMV) beseeched impacted companies' board of directors to determine the most likely steps forward under the new tax regime and communicate it to the market accordingly.

So… what are their options?

In light of the new reform, SICAVs now have until the end of 2022 to determine their fate:

1. Remain a SICAV and adapt to the new regime to benefit from the 1% tax rate, OR do not adapt and be taxed at 25%.
2. Liquidate - Investors could switch to other funds without being taxed for transferring their money, provided the entire amount of capital gains is reinvested in a Spanish collective investment institution.
3. Move the vehicle to a third country not under Spanish jurisdiction, such as Luxembourg, where they can operate under the same conditions they enjoyed prior to the reform.

The deadline to communicate their decision to the regulator expired on January 31, 2022, which led to a barrage of notifications in the surrounding days by these collective investment institutions.

How is it all going down?

Financial experts estimate that the new regulations will end about 80% of the 2,300 SICAVs opened today in Spain [24].

According to CNMV Chairman Rodrigo Buenaventura, more than half of the SICAVs that have communicated the next steps have expressed their intention to dissolve and liquidate. This will encompass 37% of SICAV managed assets, totaling approximately 10,300 million euros [25]. 33% plan to meet the requirements outlined in the new legislation and continue to pay taxes at 1%, while the remainder will either be transformed into other investment vehicles, have not yet adopted a decision, or have not reported it to the CNMV [26].

Buenaventura remains optimistic and hopes "an important part of the 28,000 million euros that are currently invested in SICAVs can be retained through other Spanish collective investment vehicles and that those assets do not emigrate to other jurisdictions". In this scenario, investments funds would be the primary recipients of the newly liquid assets. Conversely, the primary victim of these changes will be the Alternative Stock Market (MAB), now called BME Growth, where SICAVs are currently listed.

The influx of corporate actions

MCA has created 1,100+ Liquidation events in the last two months, their status' pending the announcement of the AGM date where the Liquidations will be approved. Procedures surrounding the cancellation of company registrations must be carried out before June 30, 2023, and the partners will have until July 31, 2023, to reinvest their capital. As information is released in the market, MCA will continue to update the events.

Our Managed Corporate Actions Experts will continue to monitor future announcements made to all the above postings to ensure the most accurate and reliable corporate actions data coverage. Please reach out for more information or questions.

Interested in more? Please find:

Managed Corporate Action's January Postings

Managed Corporate Action's November Postings

Managed Corporate Action's October Postings

Managed Corporate Action's September Postings

Managed Corporate Action's August Postings

Managed Corporate Action's July Postings

Managed Corporate Action's June Postings

Posted 28 February 2022 by Madhu Ramu, Managing Director, Corporate Actions, S&P Global Market Intelligence

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.