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.

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