A reverse stock split reduces the number of shares that a company has and is intended to increase the per-share trading place. This can be used to increase the value that each share has, minimize the number of shares for various reasons and more. A stock split does the opposite where the number of stock increases and decreases the per-share trading price.
The following article is an example of how an option plan can be amended in response to a stock split. The reverse stock split is intended to increase the per-share trading price, in order to satisfy the $1 minimum bid price requirement for continued listing on the NASDAQ Capital Market. As a result of the reverse stock split, every 10 shares of the firm’s common stock issued and outstanding at the effective time will automatically be combined into one issued and outstanding share without any change in the par value of those shares. The maximum number of shares available for grant under the firm’s stock option plan and restricted stock plan will be adjusted proportionately.
Takeaway:
- A reverse stock split occurs when a company reduces the volume of stocks that it has and, as a result, the trading price per stock will increase.
- It would be prudent for drafters to ensure that in a stock option plan, in the case of a reverse or normal stock split, their client is protected by a provision which indicates that, if a stock split is to occur, their client will still own the same value of stock after the stock split.