Tracking or Targeted Stocks

In addition to common stock, companies may issue what is known as tracking or targeted stock. For example, a large automaker that acquires a company in the computer industry may issue a tracking stock that tracked the performance of the acquired company once it began operating as a division of the automaker.

A tracking stock follows the financial performance of a particular division or operating unit of a company rather than the performance of the company as a whole. A tracking stock trades separately from common stock of the company, and the value of a tracking stock may increase even while the value of common stock of the company declines. Tracking stocks may be issued through an initial public offering or through a spin-off to existing shareholders of common stock.

Tracking stocks must meet Securities and Exchange Commission requirements for a newly-issued class of stock. If the tracking stock will be in a public offering, the stock must first be registered with the Commission under the Securities Act of 1933. The company making the public offering of the tracking stock also must meet reporting requirements established under the Securities Exchange Act of 1934. Those reporting requirements, however, do not require separate reports for the tracking stock if the company already is filing reports pursuant to the Securities Exchange Act. For such companies, reports on the tracking stock may be included within reports of the company on all its publicly traded securities.

The financial interest of owners of tracking stock is less than the interest of owners of common stock issued by a company. While owners of common stock normally will have full share votes in elections to decide matters of importance for the company, owners of tracking stock issued by the company may have fractional votes or no votes at all in shareholder elections. In the event of dissolution of the company, owners of tracking stocks normally will have a lower priority claim on company assets or no claim at all. Any dividends that might be declared for owners of tracking stocks will depend upon performance of the company operations underlying the tracking stock rather than the company as a whole, and there may be no obligation of the company to issue dividends despite good performance of operations underlying the tracking stock.

Several reasons may prompt a company to issue tracking stock. Tracking stock allows the company to maintain control over operations underlying the tracking stock while obtaining capital or credit through the issuance of the tracking stock. Issuance of a tracking stock also allows the company reduce overall costs by maintaining common administrative and overhead functions with the operations underlying the tracking stock. Issuance of a tracking stock may further allow the company to benefit from any increase in the trading value of the tracking stock because tracking stock would have greater value as payment for an acquisition by the company.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.


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