We are both right. For distributions > 25% the ex-date is AFTER the Record Date. Very unusual but that's the way it is. So you still qualify if you buy between the Record Date and the ex-date.
And that's the confusing part of these distributions.
Just read this this. It tells you exactly how it works.
Dividends of 25% or More of a Company's Stock Price
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.
Note: The 25% rule is a general rule, not a strict one. It is not always applied with distributions of 25% or more of a stock's price. Foreign stocks traded on U.S. stock exchanges may or may not be subject to the rule, the decision being made on a case-by-case basis. The 25% rule is not always applied to U.S. companies either; there are occasional exceptions granted.
Unfortunately, the criteria used by FINRA to determine whether or not the rule applies in any specific case has not been shared with the public. While FINRA's rule provides for the case-by-case determination when foreign stocks are involved, it does not specify the occasions when the rule does not apply to U.S. companies.
As an example of when the 25% rule did not apply to a U.S. company, on November 29th, 2012, Enzon Pharmaceuticals (ENZN) declared a special dividend of $2, with a record date of December 10th. The stock's closing price on the day of declaration was $6.47. The declared dividend represented 31% of the stock's trading price, well above the 25% threshold. The 25% rule would dictate the ex-dividend date to be December 24th, the first business day after the December 21st payment date. Yet the ex-dividend date was December 6th, the same as it would have been under normal dividend rules. No explanation was given. (That circumstance occurred when the trade settlement period was three days, as did the following example.)
On rare occasions the exchanges make a mistake with the implementation of the 25% rule. On the same day that Enzon Pharmaceuticals declared their 31% dividend, November 29th, 2012, Tellabs, Inc. (TLAB) declared a dividend of $1, with a record date of December 14th. The stock's closing price on the day of declaration was $2.95. The declared dividend represented 34% of the stock's trading price, well above the 25% threshold. The 25% rule would dictate the ex-dividend date to be December 24th, the first business day after the December 21st payment date. Yet the ex-dividend date was determined to be December 12th, the same as it would have been under normal dividend rules, and published as December 12 on both the NASDAQ and Chicago Board Options Exchange websites on December the 6th. But unlike the ENZN example, on December 11th, only one day before the published ex-date of December 12th, the NASDAQ changed the ex-date to December 24th, the first business day after the payment date. They notified the options exchange of the change that same day and the CBOE issued a notice of the change. For five days the officially published ex-dividend date was December 12th, then abruptly changed on the 11th, to December 24th. Again, no explanation was given.
Here is the CBOE Research Circular #RS12-669, dated December 6th, 2012, informing options traders of the December 12th ex-dividend date.
And here is the CBOE Research Circular #RS12-682, dated December 11th, 2012, informing options traders of the ex-dividend date being changed to December 24th.
Note: Although this page is an explanation of how cash dividend dates work, deferred ex-dates are also used, under certain circumstances, with stock dividends, spinoffs and warrant issues. With those types of distributions the 25% threshold is not a factor, as often times the value of a spinoff or warrant is not known at the time of declaration. However, any time a deferred ex-date is applicable, no matter if the distribution is in cash or securities, the deferred ex-date rules explained here, including the due bill process, apply.
To summarize, in cases of a deferred ex-date, stock traded between the record date and the ex-date trades with a due bill attached that specifies that the right to receive the dividend is sold with the stock. With electronic trading and electronic book entry accounting, due bills are rarely seen by stock investors today but they are usually noted on the trade confirmation slips.
The Purpose of the Record Date
With all dividends, the record date establishes that only the shares outstanding as of that date are eligible for the dividend. With normal dividends that is a moot point because the ex-dividend date, being one business day before the record date, has already established which shares (and which shareholders) qualify for the dividend. But in the case of a dividend of 25% or more of the company's stock price, the ex-dividend date is after the record date, usually many days or weeks after, so the company may, if it chooses to do so, issue additional stock after the record date but before the ex-dividend date without affecting the gross amount of the declared dividend. While occasions of a secondary offering during such a period are rare, there are many more instances of shares being issued through dividend reinvestment plans and through exercise of stock options and convertible securities.
In cases of a deferred ex-date, the only function of the record date is to determine on which shares the dividend is paid. Because of that -- and this is a critical point -- it is the ex-dividend date that determines who qualifies for the dividend, not the record date.
While initially confusing, there are valid, rational reasons why on big percentage distributions the ex-dividend date is after the record date and after the payment date. It doesn't happen often, but big percentage distributions don't happen often. That's why most investors aren't familiar with how they work.
Note: As of February 21, 2012, Canada has adopted the same due bill process.
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