Gevo (GEVO)

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Warrants and Reverse Splits

Your company has just consummated a one-for-five reverse stock split. As a result, the market price per share of the stock has increased five-fold with each stockholder now owning one-fifth of his original number of shares. A warrant holder then comes out of the woodwork seeking to purchase the number of shares set forth in his pre-split issued warrant at the lower pre-split strike price. The warrant has no adjustment provision in the event of a reverse split. Clearly, though, common sense would dictate that your company would be entitled to adjust the strike price proportionately upward and the number of shares purchasable proportionately downward. Right?

Wrong. At least according to a recent decision on this issue by the highest court in New York State. On December 18, 2001, the New York Court of Appeals held in favor of a warrant holder by refusing to imply an adjustment provision that could have been, but was not, written into the warrant. The decision underscores the importance of skillful preparation of warrant agreements and careful due diligence investigation of a company’s outstanding options, warrants and other securities prior to effecting a reverse split or similar transaction