Given the recent declines in stock markets, many listed companies are currently trading at significantly reduced stock prices compared to the start of 2022. Falling stock prices can cause many challenges for a listed company, one of which is is that if a company listed on the NYSE or Nasdaq trades below $1.00 per share for 30 consecutive trading days, the company may be delisted by the applicable exchange. One of the main ways that companies seek to increase their stock price and, if necessary, maintain their listing eligibility is to implement a reverse stock split (sometimes called a reverse stock split). Below, we discuss some of the key issues a board and management team should consider when evaluating the costs and benefits of a stock split.
What is a reverse stock split?
In a stock split, a company reclassifies its issued and outstanding shares into a smaller number of shares (for example, all five outstanding shares are reclassified into one share). When the stock split becomes effective, the outstanding shares are exchanged for a lower quantity of shares based on the designated ratio, and these “post-split” shares trade under a new CUSIP number. At least initially, the company’s stock price increases in the same proportion as the number of shares decreases.
What triggers delisting from NYSE or Nasdaq?
The NYSE and Nasdaq both require listed companies to maintain a stock price above $1.00.
- The NYSE will send a deficiency letter to a listed company if the average closing price of its stock is less than $1.00 over a period of 30 consecutive trading days. NYSE-listed companies must notify the NYSE within 10 business days of receiving notice of deficiency of their intent to remedy or be subject to suspension and delisting proceedings. NYSE-listed companies have six months to cure the default after receiving the letter of default. The cure period may be extended until the next annual meeting of the company if a vote of the shareholders is required to approve the share consolidation (even if beyond six months from the receipt of the letter of deficiency).
- The Nasdaq will send a deficiency letter to a listed company if its shares fail to meet the minimum closing bid price requirement of $1.00 for 30 consecutive business days. Like NYSE-listed companies, Nasdaq-listed companies have 180 days to remedy the default after receipt of the letter of default. However, unlike the NYSE, a second 180-day period is available for companies listed on the Nasdaq Capital Market level if the company meets the market value requirement of $1 million of publicly held stock and satisfies all other initial Nasdaq Capital Market inclusion requirements (other than the $1.00 closing bid). Companies listed on the Nasdaq Global Select Market or Nasdaq Global Market tiers that are unable to comply with the initial 180-day compliance period may be transferred to the Nasdaq Capital Market to take advantage of the additional 180-day compliance period. days offered by this level.
Should companies publicly disclose upon receipt of a deficiency letter from NYSE or Nasdaq?
Domestic registrants are required to file a Form 8-K (Item 3.01) within four business days of receiving the deficiency letter from the exchange, disclosing non-compliance with a continuing NYSE listing requirement or of the Nasdaq and, if applicable, any action or response that, at the time of filing, the company has decided to take in response to the deficiency letter. NYSE-listed companies are also required to issue a press release indicating receipt of the deficiency notice. If the company does not issue the press release, the NYSE will issue one.
Foreign private issuers are not required to file a Form 8-K upon receipt of a letter of deficiency. However, NYSE-listed companies are required by NYSE rules to issue a press release within 30 days of receiving the deficiency letter. A foreign private issuer would also be required to disclose receipt of a notice of deficiency on a Form 6-K if the company was otherwise required to disclose the notice under the rules of its home country.
Key Considerations for a Stock Split
1. Does it make sense commercially?
A stock consolidation will reduce the number of shares issued and outstanding, and this reduction can be substantial depending on the ratio used. If a listed company has a relatively small number of shares issued and outstanding before the stock split, then even fewer shares will remain outstanding after the stock split with which to maintain a trading market. Similarly, if a listed company has a concentrated shareholding (for example, because one or more founders or pre-IPO investors hold large stakes), the free float after a stock split may be quite low. If few shares remain outstanding or within the free float after the reverse stock split, there may not be enough trading to support the stock price (or to attract Investors). In addition, companies should be aware of the minimum number of outstanding shares required under the applicable listing standard for the exchange on which they are listed.
2. Are there other options?
The companies intend, by implementing a reverse stock split, to increase their share price in proportion to the split ratio used (for example, a 1:5 stock split ratio would result in an increase in the share price after the 5x split initially). A company may seek to increase its share price in other ways, some of which may be more attractive depending on the circumstances. For example, some companies seek to increase the price of their stock by buying back their stock in open market purchases or otherwise. Others may seek to increase value through a merger, financing, or other significant corporate event. Because a reverse stock split significantly reduces the number of shares outstanding and does not take into account other factors that may affect the valuation of the company, a reverse stock split may not be possible. be attractive to all societies.
3. How does a company do a reverse stock split?
Typically, approval of a stock consolidation requires the adoption of an amendment to the company’s certificate of incorporation (or comparable governing document) to reflect the reclassification or consolidation of shares. This, in turn, usually requires shareholder approval. The specific requirements arise from the law of the jurisdiction in which the company is incorporated, as well as from the terms of the company’s incorporation documents. Local law requirements will determine whether a company will need to amend its organizational documents, which will require the company to undertake a proxy solicitation, and ultimately obtain a shareholder vote, in order to effect the share consolidation. .
Appendix A includes an indicative timeline for a Delaware corporation to call a special meeting of shareholders at which to approve a stock consolidation.
4. What vote is required?
The approval threshold required to implement a stock consolidation may affect its feasibility. Under Delaware law, a stock split requires the approval of a majority of the outstanding shares. Under Cayman Islands law, a stock split requires an ordinary resolution (which requires a majority of the shares present at the shareholders’ meeting). The relative concentration (or lack thereof) of a company’s shareholder base can make shareholder approval easier or harder to obtain. In addition, a corporation’s charter may establish a voting threshold above the threshold required by applicable law, and the charter (or other agreements) may grant approval authority to specific shareholders. Any higher approval thresholds or special approval rights may also affect feasibility.
5. How quickly can a company carry out a reverse stock split?
It depends, but the process can take a few months. The law of the jurisdiction of organization and the corporation’s charter will establish the requirements for the notice period that a corporation must provide to its shareholders prior to a meeting of shareholders. If the company is subject to US proxy rules, the proxy statement it prepares must comply with the disclosure requirements of the Securities Exchange Act of 1934 and will be subject to review by the SEC. In addition, the company’s proxy must conduct a broker search prior to the record date of the meeting. Given these requirements, companies should plan ahead if they intend to seek approval for a reverse stock split. This is especially true if they are considering a stock split following receipt of a deficiency letter from the NYSE or Nasdaq, as recovery periods under stock exchange rules are of limited duration. .
6. How would a reverse stock split affect outstanding equity-linked securities and other arrangements?
Convertible notes, warrants and other equity-linked securities will generally include adjustment provisions whereby the conversion rate or exercise amount is changed following a stock consolidation. Companies will also need to consider the impact of a stock split on their employee benefit plans and any outstanding stock options and other stock awards. If companies have entered into agreements with clauses that could be affected by a reverse stock split, they will need to determine whether a modification of these agreements is necessary. Any such requirement to obtain changes to the Company’s contracts could affect the timing of the implementation of a reverse stock split.
7. Practical considerations and final thoughts
Completing a reverse stock split requires close coordination between the company, the attorney, the company’s transfer agent and the company’s agent. In addition to obtaining shareholder approval, behind-the-scenes work is required to meet exchange requirements and to implement the stock consolidation in the DTC system. Companies looking to complete a stock split will be well served to organize their team of advisors and service providers as early in the process as possible, to pay close attention to the key issues discussed above, and to develop a timeline. details and a breakdown of responsibilities. as soon as possible.
________________________
Appendix A: Indicative Timetable for the Extraordinary Meeting of Shareholders*
