What it means
In a reverse split, a company merges its shares into a smaller number, for example swapping 100 old shares for 1 new share. Shareholders with fewer than 100 shares end up with a fraction of a share.
Many companies pay cash for those fractions instead of issuing them, which removes the smallest holders from the register. A forward split then does the opposite, dividing each share into more shares, for example 100 new shares for each one held.
After this second step, shareholders who held enough shares in the first place are restored to the same number of shares, apart from any fraction that was cashed out. The share price returns to roughly its original level, so it looks as though nothing has changed to those who remain.
The reason for the exercise is cost and administration. Every shareholder on the register needs statements, voting materials and annual reports, and thousands of holders with tiny amounts can cost more to serve than they are worth.
Cashing them out simplifies the register and reduces printing, postage and agent fees. For the small shareholder, the effect is forced sale at a price set by the company, usually the market price around the date of the transaction.
They lose the right to remain an owner, and they may face a tax bill on any gain. Rules require companies to give notice, and in some places the deal needs shareholder approval and must be fair to those cashed out.
This transaction should not be confused with an ordinary reverse split, which is typically used to lift a falling share price, or with a stock split, which lowers the price to make shares more accessible. A reverse forward split is aimed at the register itself, not the price.
In practice
Real-world examples.
Example
A small listed company has 6,000 shareholders, of whom 4,000 hold fewer than 100 shares each. Management proposes a reverse forward split to cash them out and save $90,000 a year in administration fees.
Example
A shareholder who bought 60 shares as a gift for $5 each learns that the company will cash out all holdings under 100 shares at $4. She receives $240 and can reinvest it elsewhere, though she loses her ownership stake.
Example
A company with a long list of dormant accounts, many from inherited shares, uses the transaction to clean up its register. The remaining holders keep their shares unchanged, and the company can reach them more easily.
Formula
Calculation
Cash paid for fraction = Fractional share after reverse split x Reverse split ratio x Old share price
Suppose a company's shares trade at $2 and it does a 1-for-100 reverse split followed by a 100-for-1 forward split. A holder with 80 shares gets 80 / 100 = 0.8 of a new share, which is cashed out for 80 x $2 = $160. Another holder with 1,250 shares gets 12.5 new shares, and the half share is cashed out for 50 x $2 = $100, leaving 12 new shares that become 12 x 100 = 1,200 old-style shares after the forward split.Case study
Seen in the real world.
Wexford Industrial is an illustrative, fictional listed manufacturer with 12,000 shareholders on its register, though nearly 7,000 of them held fewer than 100 shares. The cost of statements, notices and meeting packs for them came to $140,000 a year.
The board proposed a 1-for-100 reverse split followed by a 100-for-1 forward split, with cash paid at the closing share price for the day before. Shareholders approved it after a fair-price opinion from an independent adviser, and most small holders received a few hundred dollars each.
In this fictional case the register shrank to about 5,000 holders and annual costs fell by more than half. The illustrative lesson is that the transaction can save real money, but it must be handled fairly and with clear notice to those who lose their shares.
Watch out
Common mistakes.
- Confusing a reverse forward split with an ordinary reverse split, which is aimed at raising the share price.
- Assuming that small shareholders keep their stake, when those below the threshold are usually cashed out.
- Overlooking the tax effect on shareholders who receive cash for their shares.
Questions
People also ask.
Why would a company do a reverse forward split?
To cut the cost of servicing very small shareholders by cashing them out while leaving the remaining holders with the same number of shares.
What price do cashed-out shareholders receive?
Usually a price based on the market price around the date of the transaction, though the exact method is set out in the company's notice and in the applicable rules.
Does the share price change after the two splits?
The forward split reverses the effect of the first, so the price should be roughly where it started, apart from normal market movements.
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