Split Share Corporation

A split share corporation is a corporation that exists for a defined period of time to transform the risk and investment return (capital gains, dividends, and possibly also profits from the writing of covered options) of a basket of shares of conventional dividend-paying corporations into the risk and return of the two or more classes of publicly traded shares in the split share corporation. Most commonly a split share corporation issues equal numbers of shares from a class of preferred shares and a class of capital or class A shares. The proceeds of the share offering are invested in conventional dividend-paying shares according to the regulations of the split share corporation. The preferred shares typically offer relatively high and secure dividend yield at a fixed coupon rate but with no expectation of capital gain by the time that the split share corporation is wound up. The capital shares often (but not in every corporation) pay a dividend like the preferred shares; in addition, the capital shares offer participation in the leveraged capital gains (or losses) of the underlying basket of conventional shares.

The total market value of the shares of the split share corporation is backed by the value of the underlying basket of shares. The value of the preferred shares is further reinforced by the priority given to those shares over the capital shares in the payment of dividend income and in the eventual return of the full initial price of the preferred shares.

The underlying basket of shares may include shares from only one conventional corporation (e.g. one large-cap bank or insurance company); however, greater diversification, and usually lowered risk, is afforded if the basket contains shares from many corporations in the same sector (e.g. financial services) or across different sectors. The composition of the underlying basket of shares could be relatively fixed, that is, managed passively as in an exchange-traded fund; however, it is usually the case that the managers of the split share corporation have some flexibility to actively manage the relative proportions of the holdings within the basket in an attempt to increase the return.

The preferred and capital shares of the split corporation are issued in some fixed ratio. Often the preferred and capital shares are issued in precisely equal numbers. In such a case, each pair of preferred and capital shares is sometimes called a unit. However, the proportion of preferred and capital shares does not necessarily have to be one-to-one. Reducing the ratio of issued preferred shares to capital shares (e.g., one preferred share for every two capital shares) would reduce the risk and safely support higher yield for the preferred shares at the cost of making the capital shares less attractive to investors due to increased risk, lower sustainable yield payout and smaller capital gain leverage.

The dividend income from the underlying shares may be insufficient to pay out the dividend income for both the preferred and capital shares. In order to produce more income, split share corporations will sometimes employ covered call writing and cash-covered put writing.

As of April 2013 there are 34 split share corporations on the Toronto Stock Exchange. Back in March 2008 there were 63 split share corporations.