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Dividends of 25% or More of a Company's Stock Price

http://groupssa.com/understandingdividenddates.html#the_following_section
(It took me 3 months to find this info)

Cash dividends of 25% or more of a company's stock price represent a fraction of one percent of all dividends paid and are handled quite differently from normal dividends. There are some similarities, however. Like normal dividends, unusually large dividends have a declaration date, a record date, an ex-dividend date and a payment date. Also, like normal dividends, the ex-dividend date for a dividend of 25% or more of a company's stock price is set by the exchange, not the company. Here's the big (and confusing) difference: While the ex-dividend date is indeed set by the exchange, it occurs not before the record date, but after. In fact, the ex-dividend date is not even before the payment date! By rule, the ex-dividend date is one business day after the payment date. (In such cases the term deferred ex-date applies.)

Here's the exact quote from the New York Stock Exchange Listed Company Manual: "When the distribution is 25% or more, the Exchange will defer trading the security "ex" until one day after the mail date for the distribution."

And Nasdaq Rule 11140(b)(2) states: "In respect to cash dividends or distributions, stock dividends and/or splits, and the distribution of warrants, which are 25% or greater of the value of the subject security, the ex-dividend date shall be the first business day following the payable date."

Although the wording is slightly different, the meaning is the same.

This can be very confusing, having the ex-dividend date after the payment date. To further confuse things, in such circumstances, any shareholders of record who sell their shares before a deferred ex-dividend date also sell the right to receive the dividend. This is not optional to the seller, it is mandatory. The right to receive the dividend is contained in an attachment to the sold shares and that attachment is called a due bill.

The payment of a dividend via due bills is quite unlike a normal dividend payment. Shares that are purchased after the record date but before the deferred ex-date (the due bill period) are traded with a due bill attached. The chain of events that begins on the payment date works like this: The dividend is first paid to the shareholder of record, then, on the due bill settlement date, which is commonly one trading day after the ex-date, the dividend is withdrawn from the account of the shareholder of record who sold the shares during the due bill period and is then paid to the shareholder who bought the shares during the due bill period.

The dividend is paid to all shareholders of record first because that is the only information the company has on who is eligible for the dividend. The due bills are then executed by the stock brokerages of the buyers and sellers during the due bill period. The company does not participate in the due bill process.

A very unusual circumstance, to be sure. But there are good reasons for such a procedure.

On big percentage distributions one of the reasons the ex-date is after the payment date is to prevent the chaos that would be triggered if the the ex-date was before the payment date as is normally the case. For example, if the ex-date was before the payment date for a stock that was selling for $21 and they paid out a distribution of $7, such a dramatic drop in price could potentially, and unfairly, trigger margin calls in margin accounts holding the stock. To the stock brokerage it would appear that the total value of the stock had dropped precipitously when in reality the dividend that had not yet been paid would make up the difference. By making the dividend payment before the stock price is adjusted down on the ex-dividend date, no margin call would be issued because the value of the account would not be unfairly compromised.

Another reason for the use of due bills with stock dividends, spinoffs and extra large cash dividends is that it allows shareholders to receive the full value of their holdings if they choose to sell during the due bill period. Otherwise they would have to wait the days or weeks between a normal ex-dividend date and the payment date.