A Company can decide to decrease the amount of its outstanding shares while at the same time Increasing the nominal share price proportionally.
A Reverse Split is a corporate action in which a company decreases the total amount of issued shares while increasing the nominal value of each share proportionally. The market price of the shares will increase also in line with the ratio of the event (all other circumstances remaining the same), meaning that the total market capitalisation of the company remains the same as well. From the Investor’s perspective this means that they will see the quantity of shares they hold before the event reduced and the nominal value per share increased. The total market value of their holding remains the same though. This is because the market price will increase with the same multiple as the event ratio.
Asset Classes that can be affected / involved
Longer Description from the point of view of different market participants
Assumption: the assumption is made that with the event, the ISIN is changed.
The issuer will see the base security ISIN being debited from their Issuer Account at the CSD (if they have one) and the new ISIN being credited with the event ratio applied. The issued amount of both securities will be amended correspondingly, ie the old one to “0” and the new one to the new amount.
The Registrar will need to record all the eligible positions as per close of day Record Date. On the Effective Date of the event they will need to close the register for the old ISIN and update the register with the new security identifier and the new amount of outstanding shares.
First, the agent bank will have to request a new ISIN which can be done online here. https://www.isin.org/apply-for-isin/ It can be that other security identifiers like Sedol, Ticker, WKN etc which may have to be requested anew from different Security Identification Providers. A similar request will have to be submitted to the exchanges at which the stock is listed.
The Agent Bank (Paying Agent of the event) will credit the shares under the new ISIN onto the issuer account at the CSD (if they have one) and debit the shares under the old ISIN that will be taken out of circulation. The issued amounts of each line of securities will be amended accordingly. It will often be the Paying Agent who triggers the payment downstream. This means that the transactions will be effected in the accounts of the CSD participants and messaging is sent.
Numbering Agencies need to update the status of the old ISIN to “extinct”, “deleted” or “pre-reverse-split” or something that reflects that the transaction has taken place. Equally, the issued amount of the shares under the new ISIN needs to be decreased and the nominal value increased and it will probably need a status update as well (something like “post-reverse-split”).
Any exchange that was listing the base security will need to delist the old ISIN and list the new ISIN. Trading status of something along the lines of “post-reverse-split” needs to be assigned to the new ISIN.
Any index that included the base security will need to exclude the old ISIN from the index and include the new ISIN.
At CSD level the base shares under the old ISIN need to be booked out and the new shares under the new ISIN need to be booked in the accounts of the market participants. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Reverse Split event need to be cancelled and reinstated on the new ISIN. Messaging is initiated and sent down the chain.
At Custodian level the base shares under the old ISIN need to be booked out and new shares under the new ISIN need to be booked in the accounts of clients. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Reverse Split event need to be cancelled and reinstated on the new ISIN. Messaging is received from the Issuer CSD and (often ingested by automated systems) and subsequent messaging is generated and sent further down the chain.
At Broker Dealer level the base shares under the old ISIN need to be booked out and the new shares under the new ISIN need to be booked in the account of clients. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Reverse Split event need to be cancelled and reinstated on the new ISIN. Messaging is received from the Custodian and ingested by automated systems after which – in turn – messaging is sent further down the chain.
If the stock is on loan, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) need to effect the transaction in their books. Stock may have to be recalled. The same applies to stock that is held as collateral.
Fund Manager need to include the change in the fund accounting
- In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the Reverse Split event and update their systems accordingly.
- These transactions need to be included in investment statements that are sent to investors also.
Vendors will have to update their systems with the correct information for both securities (old and new ISIN) and send messaging to their clients about it.
- At Retail Bank level the base line shares under the old ISIN need to be booked out and the new shares under the new ISIN need to be booked in with the event ratio applied. To effect this, bookings (free of payment) need to be made. Trades on the base line under the old ISIN that are in “matched” status as of Record Date of the Stock Split event need to be cancelled and reinstated on the new ISIN. Messaging is received from the Custodian/Broker and ingested by automated systems after which – in turn – messaging is sent further down the chain.
- When the beneficial owner holds the absorbed securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event.
Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable)
Companies may have several reasons for announcing a Reverse Stock Split. They may want to:
Penny Stocks are stocks that are trading at a market price lower than US$ 1.00.
When the company does no longer comply with the Listing Rules of the Exchange it risks being delisted, thereby risking access to the wider investment pool that exchanges offer.
A stock trading at a very low value, may influence the perception of investors about the quality of the company.
A stock trading at 10 Pence going up 1 Pence will see a share price increase of 10% which is a high number and will distort volatility calculations making investing in the company look more risky.
If a competitor’s shares are trading at double the amount, it may create perceptions that it may be better or more valuable which is something the company can avoid by increasing the market price of their own shares.
If a company completes a reverse split in which 1 new share is issued for every 100 old shares, any investor holding fewer than 100 shares would simply receive a cash payment (if cash in lieu is paid for fractions). If the number of shareholders drops, the company may be placed into a different regulatory category and may be governed by different law—for example, in the U.S., whether a company is regulated by the SEC depends in part on the number of shareholders.
Reverse stock splits are not seen as positive by investors as they underscore the fact that shares have declined in value. So Reverse Splits are not seen very often. However, they may be necessary cases where many institutional investors and mutual funds, for example, have rules against purchasing a stock whose price is below some minimum, perhaps USD 2,00. A common reason for a reverse stock split is also to satisfy a stock exchange’s minimum share price as part of the listing rules.
- Qualifier CAEV = SPLR
- CAOP = SECU
- Mandatory event => field 22F: CAMV = MAND
Qualifier CAEV = SPLR Qualifiers CAOP = SECU + CASH => in this case, CASH is applicable for processing omnibus accounts as the account holder may answer for positions that give rise to an indemnification. Example: total holding on account = 13. Ratio of the event = 10:1. Instruction SECU for 10 shares AND instruction CASH for 3 shares to be indemnified. In this case, options SLLE and BUYA may be present if necessary.
A Reverse Split requires Shareholder approval at an Annual General Meeting pursuant to the Board’s proposal. The proposal includes a resolution on a change in the articles of association with regards to the highest and lowest number of shares that may be issued.
A reverse split will result in all shareholders holding fewer shares in the company. However, the STAKE in the nominal value of the company per share will remain the same (the share’s portion in the share capital). The nominal value per share will increase. Each new consolidated share will carry the same rights as the pre-reverse-split shares (including voting rights and dividend entitlements).
Example 1: a 1 for 4 reverse stock split
BEFORE THE REVERSE SPLIT:
Amount of outstanding shares: 1,000,000
Nominal value per share: EUR 0.50.
Total nominal value: 1,000,000 x EUR 0.50 = EUR 500,000
AFTER THE REVERSE SPLIT
Amount of outstanding shares: 250,000
Nominal value per share: EUR 2.00
Total nominal value: 250,000 x EUR 2.00 = EUR 500,000
Example 2: An investor experiences a 1:4 reverse split (from an investor’s point of view)
BEFORE THE REVERSE SPLIT:
A shareholder holds 1000 shares of company ABC
Nominal Value per share: EUR 0.50
Market Value per share: EUR 0.60 (this is an assumption)
Total value of his holdings: 1000 shares x EUR 0.60 = EUR 600
AFTER THE REVERSE SPLIT:
The shareholder holds 250 shares
Nominal Value per share: EUR 2.00
Market value per share: EUR 2.40 (the market value of the shares does not have to equal the nominal value of the shares)
Total value of his holdings: 250 shares x EUR 2.40 = EUR 600
- Ex Date (or Effective Date, depending on industry SLA’s)
- Record Date
It’s been estimated that 3 out of 2 people have problems with fractions…
However, as there is a ratio in Reverse Splits, fractions will pretty much be unavoidable.
There are two types of fractions in Reverse Splits:
- Fractions on settled balances (also referred to as “positions”)
- Fractions on pending positions (also referred to as “flows”)
The agent has three options when it comes to fractions handling:
- Round Up
- Round Down
- Cash in lieu (round down, but fractions are being paid out at a certain cash rate)
The agent can also add two additional options to the event: BUYA and SELL, meaning that investors can buy the missing amount of shares to complete a multiple of the ratio, or alternatively, sell off the shares that don’t fit in a multiple of the event ratio.
Under the T2S market standards for Corporate Actions additional PfoD transactions need to be generated by the Investor CSD.
It’s not really possible to say anything specific about taxation of Corporate Actions Events, but
Reverse Splits will generally not trigger Income Tax, but they will affect the adjusted cost base of the shares for Capital Gains Tax which will become due upon sale (in part or in full) of the shares. More about Tax and Corporate Actions can be found here.
DATES FOR TRADING
When trading securities in general, an investor needs to consider 3 dates:
- Trade date
the date at which the securities change legal ownership
- Contractual settlement date
the dates at which the securities need to be physically settled out of and into the safekeeping accounts of the trading partners and on which the money needs to be debited from the buyer and credited to the seller.
- Actual settlement date
the date at which the trades actually get settled (should in theory be the same as contractual settlement date)
This means that there is a difference between purchasing the shares (and gaining ownership of them) and the date at which the shares actually physically settle in their safekeeping account and the money is debited from their cash accounts. This phenomenon is also called a settlement cycle.
However, in 2015, most of the countries who were still on a T+3 Settlement Cycle have moved to a T+2 Settlement cycle. For readers who are interested in the history of the settlement cycles, please find an interesting article here.
From the 1700’s onward there has been a push to decrease the settlement cycle from 14 days to 2 days at present. This is because new technology is able to facilitate ever faster settlement cycles.
This process applies to both On-Exchange Trades as well as OTC trades.
DATES FOR REVERSE SPLITS
When dealing with transformations on Reverse Splits, an investor needs to consider 3 dates: Ex Date and Record Date and Pay Date.
The Ex Date is the date at which the shares start trading at post reverse split prices.
The Record Date is used by the CSD/Custodian/Broker to establish whom to debit and credit the shares from and to.
Reverse Splits are now being processed with the Ex Date before the Record Date and the Pay Date 1 day after the Record Date.
With the introduction of the T+2 Settlement Cycle in 2015 as a result of the Giovannini barriers program, many countries changed from being using a Record Date followed by an Effective Date to an Ex Date followed by a Record Date and Pay Date. This eliminated about 95% (this is my own guesstimate – I have no actual figures on this) of the transformations. This made things a lot easier. Concurrently, the Corporate Actions Event Date Sequences were also made one day shorter (meaning Ex date was now 1 day before Record Date).
With the migration of most of the countries in the world to T+2, the Corporate Actions Event Date Sequence was also amended to: Ex-1, Ex, RD, PD.
When combining the settlement cycles with the different market principles there are several possible scenarios. However for the purpose of this page, I will only consider the T+2 Settlement Cycle and Record Date driven markets for transformations as most markets in the world have now adopted this practice.
Change of ISIN
On some occasions the ISIN will change along with the ratio being applied – it can also remain the same. The examples below assume the Isin is changed.
In the below examples Trader A buys 100 securities from Trader B.
SCENARIO 1 – Equities – Settlement Cycle = T+2 and Market = RECORD DATE Driven (the most prevalent scenario).
In the example above there is NO NEED to transform trades. All trades that were traded before the Ex Date (at pre-reverse-split prices) have settled on the Record Date. The buyer will have the shares in their account at the close of business on the Record Date. So the new shares will be credited to the buyer. This is the way it is intended to go; the ideal scenario is that no trades need to be transformed.
SCENARIO 2 – Equities – Settlement cycle is T+2 and Market is RECORD DATE driven – parent trade settles late
In this Scenario trader A buys the shares before the EXDATE and will therefore be entitled to the proceeds of the Corporate Actions Event. There could be several reasons why a trade is settling late, for example the buyer has not got enough cash in their cash account or the seller is short on stock (ie has sold more shares than they have). It can also be that the matching instruction for the other leg of the trade gets stuck somewhere. Since the shares on the parent line are settling late, the shares will still be on trader B’s (the seller’s) account on record date and therefore the custodian will credit the Corporate Actions Proceeds to Trader B on record date+1 (the Pay Date). Trader A needs to claim the entitlements from Trader B.
A new trade needs to be created to replace the parent trade. The new trade needs to be created from both sides and should be a Delivery versus Payment (and matching Receive versus Payment) instruction whereby the ISIN is changed to the new Isin in the event, the quantity of stock is decreased in proportion with the event ratio and the total cash consideration of the original (which should be the same). The earliest settlement date (SD) of the new transaction(s) should be the latest between the payment date (PD) of the entitlement and the SD of the underlying transaction.
To Illustrate this a bit further:
Reverse split on ISIN NL0000001234
NEW ISIN: NL00005678
RATIO: 1:10 (1 new for 10 old)
Nominal value per share pre-reverse-split: EUR 0.20
Nominal value per share post-reverse-split: EUR 2.00
Market price per share Pre-split: EUR 0.50
Market price per share Post-split: EUR 5.00
Ex Date of the Reverse Split = 29OCT2019
Record Date of the Reverse Split = 30OCT2019
Trader A buys 1000 Shares with ISIN NL0000001234 from Trader B at a price of EUR 0.50 per share. So total cash consideration in the trade is EUR 500.
Trade Date = 28OCT2019
Contractual Settlement Date = 30OCT2019
Trader A instructs a Receive versus Payment instruction –> 1000 shares NL0000001234 versus EUR 500 (1000 x EUR 0.50).
Trader B instructs a Delivery versus Payment instruction –> 1000 shares NL0000001234 versus EUR 500 (1000 x EUR 0.50).
The trades were supposed to settle on the Record Date of the Reverse Split Event. However, the scenario is that at the close of business on the Record Date they will still be pending and they are in “matched” status. On the Pay Date the CSD/Custodian/Broker will debit the 1000 shares NL0000001234 from Trader B’s account and credit them with 100 new shares NL00005678. After the Record Date no trades will get settled anymore on the old ISIN NL00001234. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000005678 with the ratio applied.
Unless the Traders have opted out of the auto-transformation services that CSD’s/Custodians/Brokers offer, the old trades will be automatically cancelled and there will be 2 new trades instructed at each level in the chain of market players in the industry:
For Trader A a Receive versus Payment –> 100 shares NL000005678 versus EUR 500 (100 x EUR 5.00).
For Trader B a Delivery versus Payment –> 100 shares NL0000005678 versus EUR 500 (100 x EUR 5.00).
The earliest settlement date (SD) of the new transaction(s) should be the latest between the payment date (PD) of the entitlement and the SD of the underlying transaction. In this case the Settlement Date of the new trade should be the same as the Paydate of the Event (this is because the intended settlement date of the original trade was on Record Date).
(Note the total consideration of the trades does not change does not change).
Conclusion about Transformations
Whenever shares are bought before Ex Date the buyer will buy the shares at pre-reverse-split quantities, ISIN and prices. If the settlement date of the trades between the traders is after the record date of the event, the old trades have to be cancelled and re-instructed on the new ISIN with the ratio applied.
The below is an example of an Announcement of a Reverse Stock Split. It was announced on www.Businesswire.com. The announcement itself can be found here. Below follows an extract:
STONY BROOK, N.Y.–(BUSINESS WIRE)–Applied DNA Sciences, Inc. (NASDAQ: APDN) (“Applied DNA” or the “Company”), a leader in polymerase chain reaction (PCR)-based DNA manufacturing for product authenticity and traceability solutions, announced today that it will effect a 1-for-40 reverse split of its outstanding common stock effective at 12:01 AM Eastern Time on Friday, November 1, 2019. The Company’s common stock will begin trading on a split-adjusted basis when The Nasdaq Capital Market opens on Friday, November 1, 2019 under the existing symbol “APDN.” Applied DNA’s common stock will trade under a new CUSIP number, #03815U300.
“The reverse split has had very solid support from stockholders, and from the board of directors. We believe the change in capital structure can strongly benefit our stockholders”
This announcement of the reverse stock split follows the Company’s special meeting of stockholders on October 31, 2019, at which the stockholders approved an amendment to the Company’s certificate of incorporation to implement a reverse split of its common stock, at a ratio in the range of 1-for-15 to 1-for-50 shares, and authorized the Company’s board of directors to determine the specific ratio.
The reverse stock split is intended to increase the per share trading price of Applied DNA’s common stock to satisfy the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Requirement”), and the terms of the Nasdaq Hearings Panel (the “Panel”) decision dated October 1, 2019, which requires that the Company evidence compliance with all applicable criteria for continued listing on or before December 31, 2019.
The Company can provide no assurance that the market price of its common stock will sufficiently increase following the reverse stock split to satisfy the Bid Price Requirement. Even if the reverse stock split results in a closing bid price in excess of $1.00 per share, there can be no assurance that the market price of the Company’s common stock following the reverse stock split will remain above the minimum level required to evidence full compliance with that requirement; that is, a closing bid price of at least $1.00 per share for a minimum of ten, but generally not more than 20, consecutive business days. The Company must also evidence compliance with the applicable $2.5 million stockholders’ equity requirement for continued listing on Nasdaq by no later than December 31, 2019, and as such may remain at risk for delisting notwithstanding the reverse stock split and/or timely satisfaction of the Bid Price Requirement.
The reverse stock split will impact all holders of Applied DNA’s common stock uniformly and will not impact any stockholder’s percentage ownership interest in the Company; however, no fractional shares will be issued in connection with the reverse stock split, and any fractional shares resulting from the reverse stock split will be rounded up to the nearest whole share. Furthermore, the reverse stock split will not affect any stockholder’s proportionate voting power, subject to the treatment of fractional shares.
At the effective time of the reverse stock split, every 40 shares of APDN common stock will convert into one newly issued share of APDN common stock, without any change in the par value of $0.001 per share. The reverse stock split will reduce the number of shares of Applied DNA’s outstanding common stock from 48,015,938 shares to approximately 1,200,399 shares. Proportional adjustments will be made to Applied DNA’s outstanding stock options and outstanding warrants (both publicly-traded and privately held).
“The reverse split has had very solid support from stockholders, and from the board of directors. We believe the change in capital structure can strongly benefit our stockholders,” stated Dr. James A. Hayward, Chairman, President and CEO of Applied DNA.
After the effective time of the reverse stock split, stockholders of shares of common stock held in book-entry form or through a bank, broker or other nominee do not need to take any action in connection with the reverse split and will see the impact of the reverse split automatically reflected in their accounts. Beneficial holders are encouraged to contact their bank, broker or nominee for more information. Stockholders of record with shares held in certificate form will receive instructions from Applied DNA’s exchange agent, American Stock Transfer & Trust Company, LLC, regarding how to exchange existing stock certificates for new book-entry statements reflecting the post-reverse split shares of common stock.
Additional information about the reverse stock split can be found in the Company’s definitive proxy statement filed with the Securities and Exchange Commission on October 8, 2019, a copy of which is available at http://www.sec.gov or at the Company’s website at https://adnas.com/molecular-based-security/investors/sec-filings/.
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