Question: Following up on Leo S.’s question concerning delisted stocks…

Last week we answered a BuyandHolder’s question about a stock he previously had owned that was delisted. Click HERE to read. In that column, we mentioned that one of the strategies corporations facing delisting may resort to is to declare a reverse stock split.

Here’s what you need to know about them.

A reverse stock split simply reduces the number of a company’s outstanding shares and increases the share price proportionately. However, the market value of the total number of shares remains the same.

The SEC provides this example:

If you own 10,000 shares of a company and it declares a one for ten reverse split, you will own a total of 1,000 shares after the split. A reverse stock split has no affect on the value of what shareholders own.

Or, let’s look at it this way. In a one for two reverse split, you wind up with half as many shares, but at twice the price.

Companies often split their stock when they believe the price is too low to attract buyers or when they are facing delisting. The hope is that it will make their stock appear more valuable, but in reality, the status quo remains in place.
In certain instances, small shareholders may be “cashed out” by a reverse stock split. In other words, they no longer own the company’s shares.

The legal rules behind reverse splits

Shareholder approval is not necessary. Nor is SEC approval. A company’s board of directors may declare a reverse stock split at any time as long as its articles of incorporation and by-laws allow such splits.

If you own shares in a company that is required to file periodic reports with the SEC, then you must be notified of the action.

More Information

If you want to track corporations that have recently authorized stock splits, simply go to: www.google.com and click on “News” and type in the search box “reverse stock splits”.