In this post published yesterday, John Jenkins discussed a proposed Nasdaq rule regarding notification and disclosure of reverse stock splits. In light of John's post, I thought a brief refresher on California's treatment of reverse stock splits would be helpful.
The California General Corporation Law defines a "reverse stock split" as "the pro rata combination of all the outstanding shares of a class into a smaller number of shares of the same class by an amendment to the articles stating the effect on outstanding shares". Cal. Corp. Code § 182. An amendment of the articles to effect a reverse stock split must be approved by the outstanding shares (as defined in Section 152) of a class, whether or not that class is entitled to vote on the amendment pursuant to the articles. Cal. Corp. Code § 903(a)(2).
A reverse stock split must also be qualified for sale by permit under the California Corporate Securities Law of 1968, unless the security or transaction is exempted or not subject to qualification. Cal. Corp. Code §§ 25120 & 25121. A reverse stock split will be exempt, however, unless the corporation has more than one class of shares outstanding and the split would have a material effect on the proportionate interests of the respective classes as to voting, dividends or distributions or the corporation has the option of paying cash for any fractional shares created by the reverse split and as a result of that action the proportionate interests of the shares would be substantially altered. Cal. Corp. Code § 25103(f). Of course, an issuer's securities will not be subject to California's qualification requirement if those securities are "covered securities" as defined in Section 18(b)(1) of the Securities Act of 1933. Cal. Corp. Code § 25100.1(a).