A reverse stock split is a common financial move made by publicly-traded companies to boost their stock's share price. Shares of stock are divided by a multiple such as two, which effectively doubles the value of the individual share price. Primary reasons for using a reverse stock split include making shares more attractive to institutional buyers that only purchase stocks over a certain price point and avoiding de-listing from a major stock exchange.
De-listing can occur from either the NASDAQ stock exchange or the New York Stock Exchange if a company's share price falls below $1 at market close for 30 straight days. Once either exchange determines a company is non-compliant with its share price minimum, it sends the company notification that it has six months to regain compliance with listing requirements to avoid de-listing. The company generally responds with its plan of action, which may include a reverse stock split to boost its share price.
Costs and Documentation
Reverse stock splits are costly and require detailed filings with the respective stock exchange. NASDAQ requires a minimum of 15 days advance notice before the split takes effect and charges a $7,500 fee. The company must indicate in its notice whether the split was voted on and approved by shareholders or a vote of the company board. The United States Securities and Exchange Commission, which oversees corporate stock activity, indicates that shareholder approval is not required for a reverse stock split, but companies can instead notify shareholders of the move on its 8-K, 10-Q and 10-K form filings. Additional items included in the exchange filing are the ratio of the split, changes in outstanding shares and par value of the stock and any amendments to company articles of incorporation.
A reverse stock split could confuse the market without proper notification. Investors would see one share price the day before the effective date and a sharply higher price the next. NASDAQ adds a "D" to the company's stock symbol for 20 days, beginning with the effective date, according to the NASDAQ OMX Listing Center. This helps investors know that a trade at that share price follows the reverse split.
In his March 2010 USA Today article "Reverse stock splits: No limit, but not a good sign," Matt Krantz points out that there are no formal limits on how many times a company can perform reverse stock splits, but there are practical limits. The company must maintain at least 500,000 outstanding shares to stay listed. Each reverse split reduces the amount a company has. Companies may conduct their splits using any ratio, but to achieve compliance with NASDAQ, share prices must stay above $1 for at least 10 days.
- NASDAQ OMX Listing Center: Continued Listing FAQs
- NASDAQ OMX Listing Center: Frequently Asked Questions: General Questions
- USA Today: Reverse Stock Splits: No Limit, But Not a Good Sign
- United States Securities and Exchange Commissison: Reverse Stock Splits
- Forbes.com: Kodak Faces Possible NYSE Delisting On Low Stock Price
- Jupiterimages/BananaStock/Getty Images
- Does a Stock Split Affect EPS?
- Disadvantages of Stock Splits
- How to Find Stocks That Are Going to Split
- What Happens if I Have a Short Position in Shares That Do a Forward Split?
- Penny Stock Dangers
- Stock Split Benefits
- How to Calculate the Common Stock Account Balance After a Stock Split
- What Is a 3-for-2 Stock Split?