As share prices have drifted lower during the COVID-19 crisis and some have reached or are near single digits, we want to remind clients and counsel that the Maryland General Corporation Law ("MGCL") specifically authorizes the board of directors of a Maryland corporation that has a class of equity securities registered under the Securities Exchange Act of 1934 ("Exchange Act") or that is registered as an open-end investment company under the Investment Company Act of 1940, unless prohibited by its charter, to amend the charter, without the need for a stockholder vote or other stockholder action, to reverse-split its stock at a ratio of not more than ten shares into one in any twelve-month period. The Maryland REIT Law contains a counterpart provision that applies to Maryland real estate investment trusts. We have assisted many clients over the years in taking advantage of these statutes, which we believe are unique among the states.
A reverse stock split does not, by itself, impact the market capitalization of a company nor the value of a stockholder's equity interests in a company. The combination of shares will, however, increase the aggregate amount of stated capital (except for elimination of fractional shares) and proportionately increase the pre-split par value per share. The MGCL and the Maryland REIT Law also permit the board to amend the charter or declaration of trust, respectively, to change the par value per share or the aggregate par value (stated capital) of the stock.
In order to effect a reverse stock split under the MGCL, articles of amendment setting forth the ratio of the reverse split and any desired resulting change in par value per share (typically, to return it to its pre-split par value per share) must be filed with and accepted for record by the State Department of Assessments and Taxation of Maryland. Within 20 days after the reverse stock split, the corporation must give written notice thereof to each stockholder of record of the combined shares as of the effective date.
Under the Exchange Act, a Current Report on Form 8-K (Item 5.03) must be filed with the Securities and Exchange Commission within four business days of the effective date of the articles of amendment.
Under Section 204.12 of the NYSE Listed Company Manual, at least ten-days' advance notice must be given to the NYSE before the effective date of the reverse split, in addition to immediate publicity of the ratio and effective date of the split. According to the NYSE, after the split is publicly announced, the company must file a supplemental listing application through the NYSE's Electronic Listing Manager portal. Documents required to authorize the listing application differ slightly for a forward split or a reverse split (the list is also visible to the company when the application is filed on the portal).
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As always, our colleagues and we are available to discuss these or other matters of Maryland law.