Reverse stock split is a common corporate action taken by public companies to improve market perception, maintain compliance with certain stock exchange listing requirements or help keep stock prices at levels where certain investors can buy shares. Indeed, Hunton has recently assisted a number of clients with reverse stock splits in light of the market turmoil. Companies that are contemplating reverse stock splits should be reminded of the recent regulatory updates involving the use of reverse stock splits by companies listed on NYSE or Nasdaq.
Limitations on the Use of Reverse Stock Splits
Nasdaq
In October 2024, the US Securities and Exchange Commission (“SEC”) approved the proposed amendment to Nasdaq Rule 5810(c)(3)(A), submitted by Nasdaq in July 2024, which modifies the compliance periods for companies seeking to regain compliance with Nasdaq listing requirements in connection with reverse stock splits. Nasdaq rules generally require that a listed security maintain a minimum bid price of $1.00 (the “Minimum Price Requirement”). Under the prior rules, if a Nasdaq-listed company’s stock price fails to meet the Minimum Price Requirement for 30 consecutive business days, the company would typically be granted an initial 180-day period to regain compliance (the “Initial Compliance Period”), often by doing a reverse stock split. However, a reverse stock split may cause the company to fall below the numeric threshold for another listing requirement (such as minimum number of publicly held shares) (a “Secondary Deficiency”). In the event of a Secondary Deficiency, under the prior rules, Nasdaq would notify the company about the new deficiency and the company could be granted an additional period of up to another 180 days to cure the deficiency and regain compliance (the “Additional Compliance Period”) if it satisfies certain conditions. Under the amended rules, however, companies will no longer be afforded the Additional Compliance Period. If a company effects a reverse stock split to regain compliance with the Minimum Price Requirement but the reverse stock split results in a Secondary Deficiency, the company will not be considered to have regained compliance with the Minimum Price Requirement. To avoid delisting, the company must, within the Initial Compliance Period, (i) cure the Secondary Deficiency and (ii) thereafter meet the Minimum Price Requirement for 10 consecutive business days.
In addition, the amended Nasdaq Rule 5810(3)(A) imposes limitations on how many times a company can effect reverse stock splits within a certain period of time. If a company’s stock fails to meet the Minimum Price Requirement but such company has (i) effected a reverse stock split over the prior one-year period or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to 1, then the company will not be eligible for any compliance period (including the Initial Compliance Period) to cure the price deficiency, but will be issued a listing determination instead.
NYSE
In January 2025, the SEC approved the proposed amendment to Section 802.01C of the NYSE Listed Company Manual, submitted by the NYSE in September 2024 with subsequent amendments, which, similar to the amended Nasdaq rules, limits the circumstances under which NYSE-listed companies could use reverse stock splits to regain compliance with the price requirements for continued listings. The NYSE requires listed companies to maintain an average closing price of at least $1.00 over any consecutive 30-trading-day period (the “Price Criteria”). Under the prior rules, if a company’s stock fails to meet the Price Criteria, the NYSE will notify the company of its noncompliance; the company must, within 10 business days of receipt of the notification, notify the NYSE of its intent to cure the deficiency or be subject to suspension and delisting procedures. The company will then have a six-month period (the “Cure Period”) to regain compliance with the Price Criteria, typically by effecting a reverse stock split; the company will be deemed to have regained compliance if on the last trading day of any calendar month during the Cure Period, the company has a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30-trading-day period ending on the last trading day of that month. Under the amended rules, however, if a company’s stock has failed to meet the Price Criteria and the company has (i) effected a reverse stock split over the prior one-year period or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to 1, then the company will not be eligible for the Cure Period; instead, the NYSE will immediately commence suspension and delisting procedures.
In addition, under the amended Section 802.01C, an NYSE-listed company who fails to comply with the Price Criteria will be prohibited from effecting any reverse stock split if doing so would result in the company falling below the continued listing requirements set forth under Section 802.01A, such as the number of publicly-held shares. If a company effects a reverse stock split notwithstanding the prohibition, the NYSE could immediately commence suspension and delisting procedures.
Halt of Trading in Stock Undergoing Reverse Stock Splits
In November 2023 and May 2024, the SEC approved the proposed amendments to Nasdaq and NYSE rules, respectively, which set forth specific requirements for halting and resuming trading in a security that is subject to a reverse stock split. The amended NYSE Rule 123D provides that the NYSE will halt trading in a security before the end of post-market trading on other markets (generally at 7:50 pm) on the day immediately before the market effective date of a reverse stock split. Trading in the security will resume with a Trading Halt Auction (as defined in NYSE Rule 7.35(a)(1)(B)) starting at 9:30 am, on the effective date of the reverse stock split. The NYSE believes that this halt and delayed opening “would give sufficient time for investors to review their orders and the quotes for the security and allow market participants to ensure that their systems have properly adjusted for the reverse stock split.”[1] Similarly, under the amended Nasdaq Rule 4120(a), Nasdaq generally expects to initiate the halt of trading at 7:50 pm,[2] prior to the close of post-market trading at 8 pm on the day immediately before the split in the security becomes effective, and resume trading at 9 am on the day the split is effective.
Other Considerations
Companies contemplating reverse stock splits should also note the advance notice requirements of NYSE and Nasdaq, currently requiring notification at least 10 calendar days in advance of the reverse stock split effectiveness date. The NYSE or Nasdaq may also request to review other documents (press release, amendment to the articles of incorporation, etc.) and companies should keep the representatives at the NYSE or Nasdaq engaged throughout the process so that their requests and questions will be addressed in a timely manner. We encourage companies to work closely with legal counsel to coordinate each step of a reverse stock split and ensure compliance with all applicable rules and regulations, which may be constantly changing.
[1] SEC Release No. 34-99974, April 17, 2024.
[2] SEC Release No. 34-98878, November 14, 2023.