What happens when the stock you short has a non-transferable distribution?

M

martingale

Suppose you short some a stock over an ex-date when the stock has a spinoff of non-tradable shares of another company (or some non-transferrable contingent valuation rights, etc.)

I guess the brokers typically would call in the borrow before the ex-date. But if they did not, then you the borrower would be liable for the distribution. There is no place you can buy such spun-off shares (or CVRs). And nobody knows what is the fair cash-in-lieu amount.

What happens in this situation, for those who borrowed the shares and those who lent?

I never ran into this situation, but always wondered. Anyone knows the answer?
 
I read a horror story once describing one of such edge cases.

A guy got stuck with paying borrow interest for years after the event. Can't find a link. He said broker was no help and it was kinda grey territory. There was mention of some agencies he tried to get involve and no one could tell him what to do.

Take it with a grain of salt as I don't remember enough details on that specific case.

Val
 
I bought stock in an oil exploration company years ago...Bought it cheap then did a covered call. It went straight down hill...Could not buy back the option. It went into bankruptcy and would have been on my books for years. I just wanted it off my books!! Found a buyer...The stock was still listed on the Venezuela exchange (pre collapse). I sold the stock for pennies and never looked back.

My brother passed away about 7 years ago. He had a stock from Morgan Stanley (he had tried to close his account years before). I was in charge of his estate. Maybe twenty years after bankruptcy this stock won't go away. Lawsuits are still running through the courts on this one. Still get paperwork (for a paper trail) each quarter. I think it was a pink sheet company.

Another horror story not related. I live in California...Had a farm. I switched electric companies to get a cheaper rate. I would get a extra bill each year from P G & E (large utility in the area). They had closed down a nuclear power plant. The bill was for the fee for the cost of closing the plant. I sold the property and still would get the bills...About $20. a year. I would just pay it for about 5 years. At some point I said this had to stop. Finally got it worked out (with the threat of a lawsuit). It could have gone on for years and through my estate.

Never did answer your question...One last story. My dad owned a farm in California...He then sold it. He retained 50% of the oil and mineral rights to it. He would get a tax bill on it for a couple dollars a year. He offered to sell it to me or my brother. My brother bought it for $1...I didn't want it. Fast forward (not going where you think), the property's owner wants to sell the property to a developer. In order to close the escrow, the owner needs 100% of the oil and mineral rights. It was a family friend...So he sold his rights for $2,000. He could have gotten more, but didn't want to squeeze every penny he could...

Just an older man rambling...
 
Depends on the situation. With Interactive Brokers, you can file Special Position Liquidation Agreement to request the position to be liquidated at nominal value, mainly for long positions but I’m not sure if they can help with shorts too. In some cases you could try contacting the Transfer Agent.
In other cases you may get screwed.
 
Cabin111 said:
I bought stock in an oil exploration company years ago...Bought it cheap then did a covered call. It went straight down hill...Could not buy back the option. It went into bankruptcy and would have been on my books for years. I just wanted it off my books!! Found a buyer...The stock was still listed on the Venezuela exchange (pre collapse). I sold the stock for pennies and never looked back.

My brother passed away about 7 years ago. He had a stock from Morgan Stanley (he had tried to close his account years before). I was in charge of his estate. Maybe twenty years after bankruptcy this stock won't go away. Lawsuits are still running through the courts on this one. Still get paperwork (for a paper trail) each quarter. I think it was a pink sheet company.

Another horror story not related. I live in California...Had a farm. I switched electric companies to get a cheaper rate. I would get a extra bill each year from P G & E (large utility in the area). They had closed down a nuclear power plant. The bill was for the fee for the cost of closing the plant. I sold the property and still would get the bills...About $20. a year. I would just pay it for about 5 years. At some point I said this had to stop. Finally got it worked out (with the threat of a lawsuit). It could have gone on for years and through my estate.

Never did answer your question...One last story. My dad owned a farm in California...He then sold it. He retained 50% of the oil and mineral rights to it. He would get a tax bill on it for a couple dollars a year. He offered to sell it to me or my brother. My brother bought it for $1...I didn't want it. Fast forward (not going where you think), the property's owner wants to sell the property to a developer. In order to close the escrow, the owner needs 100% of the oil and mineral rights. It was a family friend...So he sold his rights for $2,000. He could have gotten more, but didn't want to squeeze every penny he could...

Just an older man rambling...
More...

Thanks for sharing your (and friends/family's) stories... Real world is a messy place.
 
guru said:
Depends on the situation. With Interactive Brokers, you can file Special Position Liquidation Agreement to request the position to be liquidated at nominal value, mainly for long positions but I’m not sure if they can help with shorts too. In some cases you could try contacting the Transfer Agent.
In other cases you may get screwed.
More...

Transfer agent probably will hang up on short sale borrowers, who are really not company investors. For short positions, probably can request a cash cover value from broker. Likely will get a rip-off number. Guess one must be very vigilant on corporate actions when short selling.
 
ValeryN said:
I read a horror story once describing one of such edge cases.

A guy got stuck with paying borrow interest for years after the event. Can't find a link. He said broker was no help and it was kinda grey territory. There was mention of some agencies he tried to get involve and no one could tell him what to do.

Take it with a grain of salt as I don't remember enough details on that specific case.

Val
More...
What you mentioned sounds like someone who shorted shares that got delisted -- so he could not cover the borrow and had to wait for the shares to be cancelled and deemed worthless by DTC. Lessons there: Don't be a pig --- if you shorted something correctly, don't try to get the last penny.
 
Well, I don’t think that it is something that you can be prepared for. It depends on the situation you are in. You might have to try out different things on the basis of the situation to make it work for you.
 
Cabin111 said:
I bought stock in an oil exploration company years ago...Bought it cheap then did a covered call. It went straight down hill...Could not buy back the option. It went into bankruptcy and would have been on my books for years. I just wanted it off my books!! Found a buyer...The stock was still listed on the Venezuela exchange (pre collapse). I sold the stock for pennies and never looked back.

My brother passed away about 7 years ago. He had a stock from Morgan Stanley (he had tried to close his account years before). I was in charge of his estate. Maybe twenty years after bankruptcy this stock won't go away. Lawsuits are still running through the courts on this one. Still get paperwork (for a paper trail) each quarter. I think it was a pink sheet company.

Another horror story not related. I live in California...Had a farm. I switched electric companies to get a cheaper rate. I would get a extra bill each year from P G & E (large utility in the area). They had closed down a nuclear power plant. The bill was for the fee for the cost of closing the plant. I sold the property and still would get the bills...About $20. a year. I would just pay it for about 5 years. At some point I said this had to stop. Finally got it worked out (with the threat of a lawsuit). It could have gone on for years and through my estate.

Never did answer your question...One last story. My dad owned a farm in California...He then sold it. He retained 50% of the oil and mineral rights to it. He would get a tax bill on it for a couple dollars a year. He offered to sell it to me or my brother. My brother bought it for $1...I didn't want it. Fast forward (not going where you think), the property's owner wants to sell the property to a developer. In order to close the escrow, the owner needs 100% of the oil and mineral rights. It was a family friend...So he sold his rights for $2,000. He could have gotten more, but didn't want to squeeze every penny he could...

Just an older man rambling...
More...
NEVER sell mineral rights. And given the opportunity to buy land in CA for $1, always outbid your brother.
 
You must log in or register to reply here.
Back
Top