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.