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
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.
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