How Many Reverse Splits Can a Company Do?

A reverse stock split is a corporate action where a company reduces its total number of outstanding shares, consolidating them into fewer, proportionally more valuable shares. This differs from a regular stock split, which increases the number of shares while decreasing their individual price. The primary aim is to increase the stock’s price per share.

What is a Reverse Stock Split?

A reverse stock split merges existing shares to create a smaller number of shares, each with a higher price. For instance, in a 1-for-10 reverse stock split, ten old shares combine to form one new share. An investor holding 100 shares would then hold 10 shares after the split.

While the number of outstanding shares decreases and the price per share increases, the company’s overall market capitalization and a shareholder’s total investment value remain the same immediately after the split. For example, if a company has 10 million shares trading at $5 each, its market capitalization is $50 million. After a 1-for-5 reverse split, there would be 2 million shares trading at $25 each, maintaining the $50 million market capitalization.

Companies undertake reverse stock splits for various reasons. A common objective is to meet or maintain compliance with minimum bid price requirements of stock exchanges, such as Nasdaq or the New York Stock Exchange, to avoid delisting. Another reason is to make shares appear more attractive to institutional investors, many of whom have policies against investing in stocks below a certain price threshold, such as $5 per share.

Rules Governing Reverse Stock Splits

There is no strict numerical limit on how many reverse stock splits a company can execute. Each reverse stock split must adhere to a set of rules and requirements, which can be repeated if needed.

Stock exchanges, such as Nasdaq and the New York Stock Exchange, enforce minimum bid price requirements for continued listing. Both exchanges generally require a minimum bid price of $1.00 per share. If a company’s stock price falls below this threshold for a certain period, typically 30 consecutive business days, the company may receive a deficiency notice and be granted a compliance period, often 180 days, to regain compliance. A reverse stock split is a common strategy to increase the share price and avoid delisting. Recent rule changes by Nasdaq and NYSE have made it more challenging to use repeated reverse splits to maintain compliance, for instance, by limiting eligibility for compliance periods if a company has recently effected a reverse stock split.

Shareholder approval is typically required to implement a reverse stock split. This usually involves a vote at a shareholder meeting, which could be an annual or specially convened meeting. The specific majority required can vary, but generally, it involves the affirmative vote of a majority of votes cast by shareholders. Companies often file proxy statements, such as Form DEF 14A, with the U.S. Securities and Exchange Commission (SEC) to solicit these votes, providing details about the proposed split.

A company’s foundational documents, including its corporate charter and bylaws, can also contain provisions or limitations regarding reverse stock splits. These internal rules might specify a higher approval threshold than required by state law. State corporate laws provide the legal framework for corporate actions like reverse stock splits. These laws, such as those in Delaware, generally outline how such actions can be authorized and implemented. State laws do not typically impose a specific limit on the number of times a company can undertake a reverse stock split.

Implementing a Reverse Stock Split

The process of implementing a reverse stock split begins with a formal decision by the company’s board of directors through a resolution. This resolution authorizes the company to pursue the action and sets parameters for the split, including a range for the potential split ratio.

Regulatory filings are a crucial step. Companies must file an amendment to their certificate of incorporation with state corporate authorities to reflect the change in capital structure. Publicly traded companies must notify the SEC of the reverse stock split by filing a Current Report on Form 8-K, typically within four business days of the effective date. Exchanges like Nasdaq and NYSE also require advance notice, often 10 calendar days, before the effective date.

On the designated effective date, the reverse stock split officially takes effect. Old shares are converted into new, consolidated shares. The company’s stock symbol might temporarily have a “D” appended on Nasdaq for a short period to indicate the split. The “ex-date” for trading, which is the first day the stock trades without the right to receive pre-split shares, is typically set around the effective date.

The company’s transfer agent plays a central role in converting existing shares into new shares. The transfer agent updates shareholder records to reflect the reduced share count and increased per-share value. They manage the adjustment of shares held electronically in brokerage accounts, ensuring all shareholders’ holdings are accurately adjusted according to the reverse split ratio.

Direct Effects on Shareholder Holdings

A reverse stock split directly impacts a shareholder’s holdings by reducing the number of shares they own. The reduction is proportional to the chosen split ratio. For example, if a company executes a 1-for-5 reverse split, an investor who previously held 50 shares will now hold 10 shares.

While the share count decreases, the price per share of the investor’s holdings increases proportionally. This proportional adjustment means that the total value of an investor’s investment remains unchanged immediately after the split, assuming no other market factors are at play. The underlying value of the company does not change as a direct result of the split itself.

The handling of fractional shares is a specific detail in reverse stock splits. A fractional share occurs when the number of shares an investor holds is not evenly divisible by the reverse split ratio. For instance, if a 1-for-10 split occurs and an investor owns 13 shares, they would be entitled to 1.3 new shares. Companies typically do not issue fractional shares. Instead, they usually handle these in one of three ways: cashing out the fractional amount, rounding up to the nearest whole share, or issuing scrip that can be combined to form a whole share. Most commonly, shareholders receive a cash payment for any fractional share that would have resulted from the split. This cash payment is generally based on the closing price of the stock on the day the split becomes effective.