Let us say for example that I have 27 shares of stock X (there really is an X but its identity is not relevant).
In this example, X does a 5:1 reverse split. How many shares do I end up with. If I have fractional shares, what can I do with them?
Usually five shares and some cash.
There are two reasons to do a reverse split.
Those partial shares will then be turned into cash and returned to the investors. For large institutional investors such as mutual funds or pension funds it results in only a small amount of cash because the fund has merged all the investors shares together.
If the company is trying to meet the minimum price level of the exchange they have little choice. If they don't do the reverse split they will be delisted.
If the goal is to reduce the number of investors they are using one of the methods of going private:
A publicly held company may deregister its equity securities when they are held by less than 300 shareholders of record or less than 500 shareholders of record, where the company does not have significant assets. Depending on the facts and circumstances, the company may no longer be required to file periodic reports with the SEC once the number of shareholders of record drops below the above thresholds.
A number of kinds of transactions can result in a company going private, including:
- Another company or individual makes a tender offer to buy all or most of the company’s publicly held shares;
- The company merges with or sells all or substantially all of the company’s assets to another company; or
- The company declares a reverse stock split that reduces the number of shareholders of record. In a reverse stock split, the company typically gives shareholders a single new share in exchange for a block—10, 100, or even 1,000 shares—of the old shares. If a shareholder does not have a sufficient number of old shares to exchange for new shares, the company will usually pay the shareholder cash instead of issuing a new share, thus eliminating some smaller shareholders of record and reducing the total number of shareholders.