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Reverse Stock SplitsVote FOR management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced. Vote FOR management proposals to implement a reverse stock split to avoid delisting. Votes on proposals to implement a reverse stock split that do not proportionately reduce the number of shares authorized for issue should be determined on a CASE-BY-CASE basis using a model developed by ISS. DiscussionMechanics of Reverse SplitsWhereas regular stock splits exchange each share outstanding for multiple shares in order to lower share price to an optimal trading range, reverse splits operate in the opposite fashion. Multiple shares are exchanged for a lesser amount of shares to increase their price. While management's objective in implementing a reverse split is the same as a regular split (i.e., obtaining an optimal trading range), there are other important objectives of a reverse split. First, many brokerage houses and some institutional investors have a policy of not monitoring or investing in stocks trading below $5 per share. Theoretically, a reverse split resulting in fewer shares would firm up a company's share price and possibly attract greater attention from the investment community. A related benefit may be a more liquid investment for existing shareholders. A critical objective of many reverse splits is to restore a company's share price to a level that will permit the stock to meet the listing requirements of national stock exchanges. Governance IssuesThese objectives are entirely supportable, but the corporate governance issues related to a reverse split should not be ignored. Many companies reduce the number of outstanding shares through a reverse split, but fail to proportionately reduce the number of shares authorized for issuance. The result is often an effective large increase in authorized shares that has the same potentially adverse consequences as a proposed direct increase in authorized shares. As a result, when the number of authorized common shares is not proportionately reduced in connection with a reverse stock split, ISS evaluates the proposal as if it were a request for additional authorized shares. (See page 9.4 for a discussion of ISS's methods for evaluating proposals that request an increase in authorized common stock.) If the reverse split would result in an excessive number of shares available for issuance, ISS opposes the proposal. In extraordinary cases, however, shareholders should approve an increase in authorized shares resulting from a reverse split that would create a number of available shares in excess of the threshold amount if delisting of the company's stock is imminent and would result in greater harm to shareholders than the excessive share authorization.
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