Explainer: Share Consolidations and Sub-Divisions
Share capital re-organisations, including consolidations and sub-divisions, can be a useful tool for companies seeking to improve the liquidity and marketability of their shares, whilst reducing administrative costs in the long term.
What are consolidations and sub-divisions?
Consolidations entail reducing the number of shares in issue by converting them on a ratio basis. For example, a company could convert its issued share capital (ISC) of 100 shares into just 20 shares by consolidating them on a 5:1 basis. This can result in fractional entitlements for some shareholders whose holdings are not roundly divisible by the ratio used; the procedures for dealing with fractional entitlements are discussed herein.
Sub-divisions (or ‘share splits’) are the opposite of consolidations and increase the number of shares in issue. These can be used in conjunction with other benefits to shareholders – for example, issuing five new shares plus one warrant for every one existing share.
What are the benefits of share consolidations and sub-divisions?
Primarily they occur where there is a desire for greater liquidity and marketability of the company’s shares and, generally, greater market certainty. Some examples of this include:
In August 2022, Tesla argued its 3:1 sub-division would enable more employees to buy shares and make trading more accessible to retail investors following a steep appreciation in share price.
AssetCo Plc proposed a sub-division of its shares in July 2022 in order to ‘improve the liquidity and marketability [of its shares] to a wider group of investors as well as reduce the bid/offer spread’ following feedback from investors.
SpaceandPeople Plc conducted a 10:1 consolidation for similar reasons to that of the two sub-divisions. It was argued that under its previous structure ‘the high number of shares in issue combined with the relatively low price per share is thought to result in excess volatility and reduced liquidity’. Reducing the number of shares being traded where there is volatility in trading may result in more market certainty. The consolidation was approved with over 99% support from its shareholders at their AGM in June 2022.
“Tidying up the Tail”
Consolidations can also result in a more simplified shareholder register, through a process known as “tidying up the tail”. The purpose is to reduce the overall number of shareholders on the register by essentially setting a minimum cut-off holding. If, for example, a company wished to eliminate the holdings of those holding fewer than 200 shares (for example because the company’s per share value was only 1 pence and the aggregate market value of those 200 shares was only £2.00), it would involve (i) consolidating shares on a 200:1 basis, (ii) buying back the fractional entitlements that arise from holdings that are not a round multiple of 200, including all holdings of sub-200 shareholders, and (iii) a sub-division on a 1:200 basis to return the company’s per share par value back to the same level as it was pre step (i).
In this scenario, any holder with less than 200 shares would no longer be a shareholder and would be compensated for their shares. This can provide a useful exit route for smaller holders with fewer means to sell their holdings. It might also benefit the company as a whole by reducing administrative costs related to maintaining a larger shareholder register. It can be particularly useful for de-listed private companies seeking to manage investor relations costs more efficiently. The pitfalls associated with this method and how to avoid them are outlined below.
How does it work and what are the requirements?
Pre-exercise checks
Firstly, the company must check the powers available in the articles of association. The model articles for private companies do not specify any procedures. In the model articles for public companies, article 69 stipulates what must occur in the case of fractional entitlements and any proceeds from the disposal of the fractions. Bespoke articles may give greater flexibility over the process.
In the case of a consolidation, for convenience, the company may wish to issue sufficient shares to ensure the ISC is divisible by the ratio number, as fractional shares are not permitted under the Companies Act 2006 or stock exchange rules. If the company does not issue shares and the final ISC ends up with a fraction, the company must then repurchase or cancel the fraction. It does not matter if individual shareholdings are not an exact multiple, as there are certain measures that can be taken to address this.
Seek shareholder approval
Consolidations or sub-divisions will typically require an ordinary resolution, which can be passed via a General Meeting for a public company or a written resolution for a private company. The exact process for seeking shareholder consent will be set out in the articles and the Companies Act. However, companies should be mindful that any amendment required to be made to the company’s articles of association in this respect, for example to allow to the board to deal with fractional entitlements, will require an additional special resolution.
It is important to outline the reasoning for the exercise in the circular to shareholders and, if necessary, canvass support from significant holders in advance.
Once approval is given
The share registrars should be advised in advance of any such share capital re-organisation, as they are crucial in giving effect to the consolidation or sub-division. Certain actions would also need to be taken with the relevant stock exchange where appropriate to ensure the new shares are admitted to trading in a smooth manner.
Where individual shareholders have fractional entitlements following a consolidation, these can either be (i) repurchased by the company, requiring a separate share buyback authority in the circular or (ii) aggregated to sell on the market, the proceeds from which should be returned to effected shareholders on a pro rata basis. Under the public company model articles, any amount exceeding £5 must be returned to the shareholder, however any amount below can be retained for company’s benefit or donated to charity. There are also certain filing requirements that must be completed within one month of the share capital reorganisation.
What are the pitfalls and how can we avoid them?
There are certain nuances to navigate for any share structure change which can be unique to the individual company. Some of the key challenges are outlined below.
Share options
Most plan rules will contain provisions in the event of a consolidation or sub-division, as the share price will inevitably either increase or decrease, but they should be amended if that is not the case.
Fractional entitlements
It can be difficult in some specific instances for nominee account managers to manage fractional entitlements amongst multiple underlying holders. For a quoted company, most nominees can manage this by buying or selling shares in the market to ensure an equitable overall outcome. For private companies with no trading facility, it can be more challenging as nominee accounts cannot easily trade shares; although there is no obligation on the company, it may be advisable to obtain a limited buyback authority to help nominee holders.
Concert parties
Where a concert party’s collective holdings might teeter on the edge of the 30% threshold set by the Takeover Panel, a consolidation could result in the concert party members exceeding the threshold. Where a concert party exists, ensure rigorous outcome modelling is undertaken to avoid triggering a Rule 9 mandatory bid by accident.
How ONE Advisory can help…
ONE Advisory’s Governance, Company Secretarial & Compliance team has a wealth of experience in project managing the end-to-end process for share capital re-organisations, undertaking the regulatory requirements in conjunction with your legal advisors and share registrars. Our expertise and knowledge of best practise in small and mid-cap growth companies can ensure that your Board receives the advice and support it needs. Get in touch with us here.
Jacob Pitt, October 2022