Define Reverse Stock Split
A reverse stock split converts shares of stocks into less shares of stock. A normal stock split will split one share of stock into multiple shares of stock. The reverse stock split accomplishes the opposite. Companies will perform a reduce stock split if they want to reduce the amount of outstanding stocks or if they want to increase the par value of their stock.
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Effect on Par Value
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As the number of shares decreases during a reverse stock split, the par value of the shares will decrease. For example, if there was a 1 for 2 reverse stock split at $10 par value, the new par value will be $20.
Effect on Outstanding Shares
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The number of outstanding shares will decrease during a reverse stock split. For example, during a 1 for 2 reverse stock split, if there are 1,000 outstanding shares, there will be 500 outstanding shares after the reverse stock split.
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Effect on Stockholders' Equity
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Stockholders' equity will stay the same after a reverse stock split. In our example, before the stock split, the stock account was worth $10,000, that is, $10 times 1,000 shares. After the reverse stock split, the stock account is worth $10,000, that is, $20 times 500 shares.
Notification Forms with the SEC
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If a company must file annual reports with the Securities and Exchange Commission (SEC), then the company must inform stockholders of a reverse stock split using Forms 8-K, 10-Q and 10-K. Companies filing with the SEC are usually public companies.
Law Governing Reverse Stock Splits
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The ability of a company to perform a reverse stock split depends on state law and the company's by-laws. Each state will have different rules on how permissible a reverse stock split is. The state in which a company is incorporated will normally be the controlling state. Federal law does not apply to reverse stock splits.
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References
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