The relationship between record dates and ex-dividend dates (or “ex-dates”) for dividends is sometimes unclear to market participants, which can lead to unpleasant surprises and costly mistakes. To determine the stockholders entitled to receive a dividend under state corporate law, boards of directors generally establish a record date for the dividend. From a corporate law perspective, the record date identifies the group of stockholders entitled to the dividend. But if a stockholder of record as of the record date subsequently sells its shares, it may have to give the dividend to the buyer if the ex-date occurs after the record date. 

When an issuer establishes a record date for a dividend on any class of publicly traded securities in the United States, including securities traded over-the-counter, the issuer is required to provide notice to the Financial Industry Regulatory Authority (Finra) or the national securities exchange on which the class is listed. This requirement is set forth in Rule 10b-17 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), one of the general antifraud rules under Section 10(b) of the Exchange Act. The notice is required to be given at least ten days prior to the record date for the dividend and must include specified information (such as the declaration date, the record date and the date on which the dividend is to paid (or the “payable date”)). The New York Stock Exchange (NYSE) and The Nasdaq Stock Market also require a public announcement at least ten days prior to the record date (NYSE Rule 204.12; Nasdaq Rule 5250(e)(6)).

Once the exchanges (or Finra) receive notice of the record date for a dividend, they will determine the appropriate ex-date and provide notice to the broker-dealer community. In most cases the ex-date, rather than the record date, determines the stockholders entitled to the dividend (a notable exception being for distributions under a plan of reorganization in bankruptcy, as discussed below). Starting on the ex-date, the shares trade without the right to the dividend. The opening price on the ex-date will be lower to reflect the fact that buyers from that point forward are not entitled to the dividend.

For standard quarterly dividends, the ex-date is the business day prior to the record date (NYSE Rule 235; Nasdaq Rule 11140(b)(1); Finra Rule 11140(b)(1)). For a normal trading week without holidays, if the record date is Tuesday, the shares would begin trading ex-dividend on Monday. A stockholder that sold shares on Monday would still be entitled to the dividend because (1) it owned the shares immediately prior to the Monday ex-date, and (2) it would still be the holder of record on Tuesday (the record date) because the trade would not settle until Wednesday (trades in the United States currently settle the second business date after the trade date, or T+2). The opening price of the shares on Monday would reflect the fact that investors that purchase shares beginning Monday would not be entitled to the dividend. If the record date is not a business day, the ex-date typically would be the second business day prior to the record date (although the NYSE discourages the use of Saturdays, Sundays or holidays as record dates—see NYSE Rule 204.21).

However, for special dividends, the exchanges (or Finra) may set the ex-date after the record date (often the next business day after the payable date) depending on the size of the dividend relative to the price of the shares. Both Nasdaq Rule 11140(b)(2) and Finra Rule 11140(b)(2) provide that if the value of the dividend is 25% or greater than the value of the subject security, the ex-date will be the first business day after the payable date.  NYSE Rule 235 does not have a similar specified threshold, but it does provide the exchange with the ability to specify an alternative ex-date. The predecessor to Finra, the National Association of Securities Dealers (NASD), issued Notice to Members 00-54 (August 2000) to remind broker-dealers that ex-dates are determined differently depending on the size of the dividend and cautioning them to be cognizant of these differences when providing ex-date information to customers. (In calculating the ex-date, days on which the exchanges or the banks, transfer agencies and depositories for securities in New York State are closed are not counted as business days.)

The exchanges (or Finra) may also set the ex-date after the record date when the dividend is payable in shares (either additional shares of the issuer or shares of a subsidiary in a spinoff) or is contingent upon the occurrence of some event, like the closing of an acquisition. In these circumstances, the ex-date also likely would be the first business day after the payable date.   

If the ex-date is the first business day after the payable date, an investor needs to own the shares on the payable date to be entitled to the dividend (although perhaps not if the distribution is pursuant to a plan of reorganization in bankruptcy, as discussed below). When shares are sold after the record date but before the ex-date, the shares trade with “due bills,” meaning the seller has to give the dividend to the buyer (i.e., the right to the dividend travels with the shares). The period between the record date and the ex-date is referred to as the “due bill period.”  For shares held through The Depository Trust Company, DTC debits the account of the seller’s clearing broker and credits the account of the buyer’s clearing broker by the amount of the dividend.  In some cases, such as in connection with a spinoff, shares may trade on both “regular way” and “ex-distribution” prior to the ex-date.  In that case, if a record holder sells shares regular way after the record date, it will not be entitled to the distribution, but if the record holder sells shares ex-distribution, it will retain the right to the distribution.  The price in the ex-distribution market would reflect the fact that the buyer is not entitled to the distribution. 

When the ex-date is after the record date, problems may arise if market participants are not aware of this fact or fail to understand the consequences.

Notable Cases

In COR Clearing, LLC v. Calissio Res. Grp., Inc., 918 F.3d 579 (8th Cir. 2019), Calissio Resources Group, Inc., a penny stock company, announced a special dividend of $0.011 per share, or about $1.3 million in total, payable August 17, 2015, to holders of record of its common stock as of June 30. Subsequent to the June 30 record date, Calissio issued 400 million new shares of common stock upon conversion of outstanding convertible debt securities. Because those shares were issued after the record date, they were not entitled to the special dividend under applicable corporate law. At least 340 million of those shares were delivered to COR, a DTC participant, which deposited them in its account at DTC.  Calissio had instructed its transfer agent to give these new shares the same CUSIP number as the shares that were already in DTC, so the new shares (which were not entitled to the special dividend) were indistinguishable from the shares outstanding on the record date (which were). All of these newly issued shares were sold on or prior to the August 17 payable date.

The amount of the dividend on the Calissio common stock was more than 25% of the value of the subject security, so Finra set the ex-date as August 19, the first business day after the payable date.  Because the ex-date was after the record date, the shares sold by COR were sold with due bills, so DTC debited COR’s account and credited the accounts of the buyers’ clearing brokers with the amount of the dividend (even though the shares sold by COR were not entitled to the dividend under applicable corporate law).  As a result, DTC debited COR’s account $3.7 million and credited the accounts of the buyers’ clearing brokers with a corresponding amount, effectively forcing COR to pay the dividend on those 340 million shares (or go after its client and others that had caused the dividend ineligible shares to be deposited with COR and subsequently sold).   

COR was able to recover a portion of its loss from the sellers’ introducing broker, which had helped move the shares from the sellers to COR. In an attempt to be made whole, however, COR also sued the buyers’ clearing brokers, claiming conversion of COR property and unjust enrichment. The court denied both claims.  On the conversion claim, the court noted that COR has no claim against the buyers who received DTC credits as a result of misconduct by the sellers (in misrepresenting to the market that the shares were entitled to the dividend) on whose behalf COR acted. And the court relied on the same rationale in rejecting the unjust enrichment claim, commenting that the defendants’ account holders, the buyers of the new shares, “were not unjustly enriched by receiving due bill credits to remedy the…sellers’ misconduct.”  COR’s losses could have been avoided if it had understood the significance of having shares issued and sold between the record date and the subsequent ex-date.  

Occasionally issuers fail to comply with the requirements of giving advance notice of record dates as required by Rule 10b-17, which can also result in costly mistakes. In Gold v. Ford Motor Co., 852 F. Supp. 2d 535 (D. Del., 2012), aff’d Gold v. Ford Motor Co., 2014 U.S. App. LEXIS 15700 (3rd Cir., 2014), a trust associated with Ford had issued a series of trust preferred securities that traded on the NYSE and entitled holders to quarterly distributions. The trust held debt securities issued by Ford, the interest payments on which were used by the trust to make the quarterly distributions. Ford had the right to suspend interest payments on the debt securities for a period of up to 20 consecutive quarters, in which case the trust would suspend distributions on the trust-preferred securities. Ford exercised this right beginning with the quarterly distribution due on April 15, 2009. 

A little over a year later, on the morning of June 30, 2010, Ford announced that it would pay the deferred interest and resume quarterly interest payments on July 15, and that the trust would pay the deferred distributions and the current quarterly distribution on July 15 to holders of record as of June 30.  In the afternoon of June 30, the NYSE posted an electronic notice that the ex-date for the forthcoming distribution was July 1 (after the June 30 record date), and set a due bill period of June 28, 29 and 30. 

The plaintiff in the case sold trust preferred securities on June 30 after Ford had announced resumption of the distributions but before NYSE issued notice of the ex-date. The plaintiff was the record holder of those securities because the trades would not settle until July 6 (the settlement cycle was T+3 at the time). However, because those securities were sold before the July 1 ex-date, the plaintiff was not entitled to the July 15 distribution on those securities. The plaintiff promptly sued Ford and the trust, alleging they had committed securities fraud under Section 10(b) of the Exchange Act by failing to give the NYSE ten days advance notice of the record date as required by Rule 10b-17. The court denied the claim on the basis that one of the required elements of a Section 10(b) claim, loss causation, was not present. The court determined that it was the NYSE’s decision to set a July 1 ex-date, not any action by Ford or the trust, that caused the plaintiff’s losses.  The court also denied the plaintiff’s motion to amend its complaint, finding that there is no private right of action under Rule 10b-17. See Gold v. Ford Motor Co., 937 F. Supp. 2d 526 (D. Del., 2013).  The district court’s decision was upheld by the Third Circuit, which found that the plaintiff failed to adequately plead scienter (the intent to deceive, manipulate or defraud). This case illustrates the pitfalls of making trading decisions without understanding when the ex-date will occur.

The application of ex-dates to distributions under a confirmed plan of reorganization in bankruptcy also has resulted in misunderstandings and costly mistakes. In Zardinovsky v. Arctic Glacier Income Fund (In re Arctic Glacier Int’l, Inc.), 901 F.3d 162 (3rd Cir., 2018), Arctic Glacier, an income trust based in Canada, entered into a plan of arrangement (overseen by a monitor under Canadian law) under which it would sell its assets and distribute proceeds first to its creditors and then to its unitholders. Its units were listed on the Canadian Securities Exchange and traded in the U.S. over-the-counter market. The plan included broad releases of liability for Arctic Glacier and its trustees, officers, employees and other parties. 

In November 2014, the monitor disclosed that it estimated the upcoming unitholder distribution would be $0.153 per unit, in excess of 75% of the value of the units. On December 11, 2014, Arctic Glacier published notices that it would make the distribution to unitholders of record as of December 18.  Despite this announcement, Arctic Glacier’s unit price “held steady” after the record date, which the company “found puzzling, as its [units] no longer traded with the [distribution] and should have lost value equal to the [distribution].” But Arctic Glacier did nothing to respond to this anomaly regarding its unit price. In addition, Arctic Glacier did not notify Finra of this distribution or the record date, as required by Rule 10b-17. 

It seems clear that at least some investors assumed Finra would set an ex-date after the payable date, so that they would be entitled to the distribution even if they purchased units after the record date. That certainly appears to be the case for the plaintiffs. Between December 16 and January 22, the plaintiffs bought more than 12.6 million units. On January 21, the monitor for the plan announced that it would pay a distribution of $0.15557 per unit on the next day, January 22. The distribution was paid to holders of record as of December 18, as provided for in the plan.  On the next day, regulators in Canada and the United States froze trading in Arctic Glacier’s units and, when trading resumed, its unit priced dropped from $0.21 to $0.05, reflecting the value of the distribution that had been paid.

The plaintiffs claimed that Arctic Glacier and the individual defendants committed negligence and fraud by failing to comply with U.S. securities laws and regulations, particularly Rule 10b-17, and Finra regulations. The plaintiffs claimed that if the defendants had complied with these laws and regulations, Finra would have set an ex-date as the next business day following the payable date (because the amount of the distribution was more than 75% of the value of the underlying security), in which case the plaintiffs would have received the distribution on the units they acquired after the record date. 

The court denied the plaintiffs’ claims, noting that the plan had detailed distribution provisions and did not incorporate or even refer to Finra’s rules. The court held that the plan, which had been subject to a recognition order in U.S. bankruptcy court, and the releases were res judicata—the plan “bars all challenges to the plan that could have been raised.” As a result, the plaintiffs effectively paid for a distribution that Arctic Glacier paid to someone else (the investors that sold the plaintiffs their units after the record date at a price that assumed the plaintiffs would be entitled to the distribution). See also Karathansis v. THCR/LP, 2007 U.S. Dist. LEXIS 30772, aff’d In re THCR/LP Corp., 2008 U.S. App. LEXIS 23151 (3rd Cir., 2008) (where the court found that stockholders as of the record date that subsequently sold their shares were entitled to the distribution in accordance with the terms of the confirmed plan or reorganization notwithstanding the fact that the NASD had established an ex-date as the next business day after the payable date and DTC had used due bills so that the distribution actually was made based on the holders as of the payable date rather than as of the record date). 

Conclusion

Record dates, ex-dates and the due bill process have been a part of the U.S. securities markets for many years, yet market participants continue to make mistakes, occasionally with costly results.  Where the ex-date is the business day prior to the record date (or the second business day prior, if the record date is not a business day), which is case for standard quarterly dividends, there seems little risk of problems—stockholders that own the shares immediately prior to the ex-date will also be stockholders of record as of the record date.

Problems are more likely when the ex-date is after the record date, which typically would be the case if the amount of the dividend is 25% or more of the value of the underlying security. It also may be the case if the dividend is payable in shares (either additional shares of the issuer or a spinoff of a subsidiary) or is contingent on the occurrence of some event, such as the closing of an acquisition. In those cases, stockholders of record as of the record date will lose their entitlement to the dividend if they sell their shares prior to the ex-date. Also, for distributions pursuant to a plan of reorganization in bankruptcy, the distribution provisions of the plan, rather than Rule 10b-17 and exchange/Finra rules, likely will control. 

Investors should make sure they understand when the ex-date is (or if there even will be an effective ex-date in the bankruptcy context) before making an investment decision after a dividend has been declared. Intermediaries should ensure their policies adequately identify and address issues relating to record dates and ex-dates and that their customers understand the significance of ex-dates when making trades. And issuers that do not already disclose the ex-dates for their dividends should consider whether to make a public announcement of the ex-date if it will be after the record date, which may reduce the risk of unpleasant surprises for investors.

Bruce F. Perce is a partner in the Corporate and Securities practice at Mayer Brown LLP.