Stock Dividends

A distribution of stock may be required for either the payment of a stock dividend or a stock split. This guide will walk you through the planning and processing requirements and other considerations for a distribution of stock. Review this information carefully and well in advance of the stock distribution payable date. Additional documents are required by R&T to properly authorize your distribution.

Planning for any stock distribution should include the following steps:

1. Direct Registration: Determine if the Stock Issuance will be in Book Entry, Direct Registration, or in Certificated Form: Issuers need to decide if they are going to issue the stock distribution in book form rather than certificated form. Issuers must verify that their by-laws permit book issuance; their issue is included in the DTCC FAST system; and R&T has made the issue eligible for the DTCC Direct Registration System. There may be an additional expense and the process much be discussed with your account executive. If you elect to pay your stock distribution via book entry, statements will be generated in lieu of stock certificates. A percentage of stockholders will call and request certificates, so you must still verify that an adequate certifcate inventory is available. Fractional shares should be treated the same regardless of whether the decision is to issue the stock distribution via Direct Registration or in certificated form (see paragraph #9).
2. Certificate Inventory: Verify at least 30 days in advance that a sufficient certificate inventory exists. The certificate inventory should be approximately 1.5 times the number of registered shareholders if you elect to make the stock distribution in certificate form. If additional certificates are required, your bank note company may need additional lead-time to print them. Also, if you have more than 3,000 registered shareholders, the certificate inventory may require mounting onto computer printer carrier paper and imprinting with a facsimile signature. Additional lead-times are required in these instances. If you're not sure, discuss the issue with your account executive.
3. Opinion Letter and Adequate Authorized Shares: Adequate inventory of authorized unissued shares must exist for the outstanding shares to be increased. If the authorized shares outstanding are increased, then an opinion of counsel for the corporation regarding the registration or exemption from registration under the Securities Act of 1933, as amended, for these shares. Whenever issuers increase their number of authorized shares, a Certificate of Amendment to their Articles of Incorporation must be filed with their state of incorporation and a certified copy must be provided to R&T.
4. Restricted Shares: Some of the shares issued for a stock distribution may require restrictive legends. Issuers should verify when restrictions must be placed on securities with their counsels and provide the shareholder names and appropriate legends to R&T.
5. Delivery of Shares: Issuers may want to deliver or hold some certificates. Any special delivery instructions should be provided to the account executive. R&T will purchase mail-loss insurance for issuers to cover the surety expense should the certificate become lost during delivery. For this reason, issuers may want R&T to mail all certificates directly to the registered shareholders.
6. Board Resolution Declaring the Distribution: A certified copy of the Board Resolution or a secretary's certified statement is needed indicating that the distribution was duly authorized by Board of Directors.
7. Record Dates, Notify Exchange and Ex Dates: Depending on the listing stock exchange rules, companies may be required to notify the exchange and follow any rules of the exchange for the conduct of a stock distribution. Companies should check their exchange's rules before announcing a stock distribution. Also, if the stock distribution is large, for example, more than 25%, then the ex date may be after the payable date. This will affect DRP and company stock transactions, if any.
8. Stock Distribution Rates: Care must be taken when describing the stock distribution rate. This can be confusing, so here are some examples of common rates and terminology:
   
   
   2 for 1 is a 100% distribution
   3 for 1 is a 200% distribution
   4 for 1 is a 300% distribution

   3 for 2 is a 50% distribution
   5 for 4 is a 25% distribution
   4 for 3 is a 4/3 distribution

   6 for 5 is a 20% distribution

   (Note: A 4 for 3 should not be confused with a 33% distribution)
9. Fractional Shares and Cash-in-Lieu: Many stock distributions result in the calculation of fractional share positions for stockholders. When this occurs, companies normally elect to either: round off, dropping the fraction; round-up to the next whole share; or, in most instances, pay the fractional share at a rate fixed by the company upon declaration of the distribution or determined by having the agent sell the aggregated fractional shares on the open market after the distribution. The latter alternative is rarely used and has numerous disadvantages. The issuer must also determine if beneficial shareholders will be treated the same as registered shareholders and paid at the same rate.
10. Tax Reporting: The issuer must determine what, if any, are the tax consequences of the distribution and CIL payment. Usually the CIL payment is reportable (when the de minimus is exceeded) on IRS Forms 1099DIV or 1099B.
11. Dividend Reinvestment Plans: If a DRP exists, the issuer should review the DRP rules and determine how shares are to be paid on Plan shares. Usually, a certificate is issued for distribution shares paid on underlying (certificated) shares; full and fractional shares paid on DRP shares are credited to the participant's plan position.