Home > Corporate Actions Toolbox > Events > Reverse Split

 

Reverse Split

 

A Company can decide to decrease the amount of its outstanding shares while at the same time increasing the nominal share price proportionally.

 

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: What Would you prefer?

 

 

1 share's worth after reverse split

 

OR

 

 

10 share's worth before reverse split

 

 

Reverse Split - Why companies reverse split their shares

 

A Company may try to

 

* Avoid becoming a so called "penny stock"

 

* Avoid being delisted due to stock exchange's minimum share price rules

 

* Make their stock look more valuable

 

* Avoid huge volatility in terms of percentage point share price change

 

* Make itself better comparable with its peergroup

 

 

Effects:

 

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).

 

Preconditions:

 

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.


 

Reverse Split - Transformations of Open Trades

 

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 acually fysically settle in their safekeeping account and the money is debited from their cash accounts. This phenomenon is also called a settlement cycle.

 

The most common forms of settlement cycles are:

T+2: The contractual settlement date is 2 days after the trade date

T+3: The contractual settlement date is 3 days after the trade date

 

DATES FOR REVERSE SLITS

 

When dealing with transformations on reverse splits, an investor needs to consider 2 dates: EXDATE and RECORD DATE.

 

The EXDATE is the date at which the shares are trading at post split prices.

The RECORD DATE is used by the custodian to establish whom to debit and credit the shares from and to.

 

Depending on the market (country) the dates will be set in different ways. There are two main principles:

  • Exdate driven markets
  • Record date driven markets

 

In Exdate driven markets, the exdate will be after the record date.

In Record date driven markets, the record date will be after the exdate.

 

When combining the settlement cycles with the different market principles there are several possible scenarios. Please see below the main ones.

 

Change of ISIN

 

On some occassions the ISIN will change along with the ratio being applied - it can also remain the same.

 

 

SCENARIO 1 Settlement cycle is T+3 and Market is RECORD DATE driven:

 

In this Scenario the Trader A buys the shares before the exdate of the reverse split event and will therefore purchase at pre reverse split quantities, ISIN and prices. The shares will settle into his account on the RECORD DATE. The custodian will look at who has the shares at close of business on the RECORD DATE and will affect the payments one day later accordingly (in this case to trader A). There is no trasforming of trades involved.

 

 

Example worked out:

Reverse split on ISIN NL00B10RZP78

NEW ISIN: NL0000488639

RATIO: 10:1

Nominal value per share pre-split: EUR 0.05

Nominal value per share post split: EUR 0.50

Market price per share Pre-split: EUR 0.30

Market price per share Post-split: EUR 3.00

Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the reverse split. The trades settle on the record date. On record date +1 the custodian will debit the 100 shares NL00B10RZP78 from Trader A's account and credit him with 1 new share NL0000488639. No transformations of the trades is required.

 

 

 

SCENARIO 2 Settlement cycle is T+3 and Market is EXDATE driven:

 

 

 

 

 

 

 

 

 

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split prices, quantities and ISIN (let's assume that there is a change of ISIN). Trader B, however, will hold the shares in his account at close of business of the RECORD DATE and the custodian will debit the pre-split ISIN, quantities and credit the post-split ISIN and quantities from and to Trader B. As a consequence, the pending trades that both traders have alledged against eachother on the old ISIN, quantities and prices must be cancelled and re-instructed on the post-split ISIN, quantities and prices. The process of cancelling old trades and re-instructing is called transforming trades.

 

Example worked out:

Reverse split on ISIN NL00B10RZP78

NEW ISIN: NL0000488639

RATIO: 10:1

Nominal value per share pre-split: EUR 0.05

Nominal value per share post split: EUR 0.50

Market price per share Pre-split: EUR 0.30

Market price per share Post-split: EUR 3.00

Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-2 of the reverse split.

Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30).

Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30).

The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares NL00B10RZP78 from Trader B's account and credit him with 1 new share NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied.

Trader A has to re-instruct a Receive versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00).

Trader B has to re-instruct a Delivery versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00).

 

SCENARIO 3 Settlement cycle is T+3 and Market is RECORD DATE driven - parent trade settles late

 

 

 

In this Scenario trader A buys the shares before the EXDATE and will therefore purchase the shares at pre-split ISIN, quantities and price. Since the shares on the parent line are settling late, the trades that the two traders had alledged against eachother need to be cancelled and re-instructed on the post-split ISIN quantities and price (since after the record date no trades on the pre-split ISIN will settle anymore).

 

 

Example worked out:

Reverse split on ISIN NL00B10RZP78

NEW ISIN: NL0000488639

RATIO: 10:1

Nominal value per share pre-split: EUR 0.05

Nominal value per share post split: EUR 0.50

Market price per share Pre-split: EUR 0.30

Market price per share Post-split: EUR 3.00

Trader A buys 100 shares NL00B10RZP78 from Trader B on Ex-1 of the reverse split.

Trader A instructs a Receive versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30).

Trader B instructs a Delivery versus Payment instruction --> 100 shares NL00B10RZP78 versus EUR 30 (100 x EUR 0.30).

The trades were supposed to settle on Ex + 1. However, on Exdate they will still be pending. On the exdate the custodian will debit the 100 shares NL00B10RZP78 from Trader B's account and credit him with 1 new share NL0000488639. After the exdate no trades will get settled anymore on the old ISIN NL00B100RZP78. The original trades that both traders had instructed need to be cancelled and replaced by a trade on the new ISIN NL0000488639 with the ratio applied:

Trader A has to re-instruct a Receive versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00).

Trader B has to re-instruct a Delivery versus Payment --> 10 shares NL0000488639 versus EUR 30 (10 x EUR 3.00).

 

 

Conclusion

 

Whenever shares are bought before exdate the buyer will buy the shares at pre-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.

 

 

 

 

 

Couldn't find what you were looking for?

 

 

 

 

 

Corporate-Actions.net  2010 Disclaimer

Your ad here? Contact us for a quote