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 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.

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