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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?

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Usually five shares and some cash.

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  • Since companies doing reverse splits tend to be cash-poor I wonder where the cash comes from. – Joshua Aug 22 '15 at 23:48
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    The amount that is represented by odd lots is so small that the cash involved is trivial. In fact, a company will save money by "taking out" positions of less than five shares, because of reduction of administrative costs. – Tom Au Aug 23 '15 at 1:42
  • @Joshua - I'd bet that only the tiniest fraction of shares is not held as multiples of 100. And then even 50, 20, 10, etc will divide by 5. The cash to clean out the rest can come from the sofa cushions of the CEO's office. – JTP - Apologise to Monica Oct 4 '16 at 19:54
  • @JoeTaxpayer: In which case I am in the tiniest of tiniest of fractions for owning almost all odd lots. My last purchase I believe was for 61 shares of something. – Joshua Oct 6 '16 at 1:34
  • @Joshua - it would be interesting to find out what percent of the average companies shares are owned in odd lots, and also those that don't divide by 5. I am not betting on how tiny, but, yes, I'm thinking a very small number. – JTP - Apologise to Monica Oct 6 '16 at 1:38
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There are two reasons to do a reverse split.

  • Bring the price per share back above some minimum price to avoid being kicked off the exchange
  • Bring the number of investors to a small enough number that they can simply their reporting requirements.

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.

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