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A share consolidation, sometimes referred to as a reverse stock split, is a process whereby a specified number of shares in a company are merged to form a single share. As a result of this procedure, the number of issued shares decreases and their nominal value increases proportionally.
We explain how share consolidation works, the reasons why a company may decide to do this, and the procedure required to carry out a consolidation of shares in a UK company.
What does it mean to consolidate shares?
Share consolidation occurs when a company reduces the number of shares in issue and simultaneously increases the per-share nominal value. Essentially, the company takes a set number of its existing shares and replaces them with fewer shares – a bit like swapping ten £20 notes for four £50 notes.
This results in the company having a smaller number of issued shares, but each of those shares has a proportionally higher value. Therefore, the company’s overall share capital and the aggregate value of each member’s shareholdings remain exactly the same.
Consolidation ratio
Shares are consolidated on a ratio basis of the company’s choosing, e.g. turning 100 ordinary shares into 10 ordinary shares on a 10:1 basis. So, in this instance, each shareholder exchanges 10 of their existing shares for 1 new share.
This is best understood by looking at a simple example:
- A company has 100 ordinary shares with a nominal value of £1 per share
- The company’s share capital is therefore £100, and each share represents 1% ownership
- These 100 shares are evenly split between the company’s five shareholders – each person has 20 shares, and thus holds a 20% ownership stake in the business
- A consolidation of shares is carried out on a 10:1 basis
- The company now has 10 ordinary shares with a nominal value of £20 per share, with each share equating to 20% ownership
- Each of the five shareholders now has 2 shares instead of 20, but they still have exactly the same ownership stake as before
- The company’s share capital is also still £100
As you can see, the company has fewer issued shares after the consolidation, but the nominal value of each share has proportionally increased. The same is true of their market value.
See also: A guide to limited company shares See also: Share capital – how can you change it? See also: How many shares do I need to issue?
There is no change to the company’s share capital or overall value, nor to the value of shareholders’ investments or their percentage of ownership. Moreover, the share consolidation has no bearing on the existing rights of members (e.g. dividend rights and voting rights).
Why would a company consolidate shares?
So, what is the point of doing all of this if nothing actually changes? There are several reasons why some companies choose to consolidate shares, the most common of which are:
1. Simplification
For many companies, a consolidation enables them to simplify their share capital or shareholder-related administration in a way that is more beneficial to the business.
Perhaps the company has an unusual quantity of issued shares and wishes to round this down to a number that is more appropriate and easily divisible, thus simplifying each member’s entitlement.
In situations where there are an inordinate number of shares held by only a few shareholders, or where some shareholders have lots of very small shareholdings, a consolidation can simplify ownership.
This can make it easier for directors when issuing dividends, transferring shares, and managing the company’s register of members.
2. Listing on the stock exchange
Many stock exchanges impose a minimum share price requirement for listing, so public limited companies (PLCs) sometimes consolidate shares to increase their share prices.
Depending on the situation, this enables them to satisfy the requirement for listing, or avoid being involuntarily delisted if their share price falls below the threshold.
Share consolidation is a common strategy where a company is at risk of bankruptcy, with the aim being to make the business appear more valuable to investors. Therefore, whilst not always the case, consolidation can sometimes be a warning sign that a business is in trouble.
3. Improving credibility
Some companies choose to consolidate shares to improve their credibility and boost investor confidence, if their share price it too low or has fallen by a considerable amount.
In these situations, a share consolidation is an effective way to temporarily mask or overcome these types of issues. While this strategy hasno bearing on the company’s value, it can change investor perception.
However, if a fall in share price is due to underperformance or a brand image issue, consolidating shares will not fix the root cause of the problem in the long term.
4. Marketability
The decision to consolidate shares is often driven by market considerations. By reducing the number of issued shares, an increase in per-share value can create greater market certainty during times of trading volatility.
It can also improve liquidity and make shares more marketable and appealing to new investors. This can have a positive impact on the company’s financial performance, and it may be especially beneficial where members with smaller shareholdings are struggling to sell their shares.
That being said, there is no guarantee that a share consolidation will have the desired effect. There are many factors at play, so it may not improve the company’s performance, market value, or viability in the long run.
Dealing with fractional entitlements
Depending on the number of existing shares and the consolidation ratio applied, some members’ shareholdings may not be roundly divisible, resulting in fractional entitlements. For example, if a shareholder has 13 shares and the consolidation ratio is 10:1, their entitlement would be 1.3 new shares.
In such instances, the members’ new shareholdings would normally be rounded down to the nearest whole number of new shares. In the above example, it would be rounded down to 1 new share.
Companies will typically repurchase any fractional entitlements from shareholders using the share buyback procedure. They can then either cancel the fraction or, if there are multiple shareholders in this situation, aggregate the fractional entitlements to sell, distributing the proceeds to affected members on a pro-rata basis.
How to carry out a share consolidation
Depending on how many shareholders there are, consolidating shares in a limited company may be straightforward, or complex and time-consuming. Either way, the key steps are as follows:
Step 1 – Check the articles and shareholders’ agreement
The Companies Act 2006 (section 618) prescribes that a limited by shares company may “consolidate and divide all or any of its share capital into shares of a larger nominal amount than its existing shares.”
However, you must refer to the company’s articles of association, as well as the shareholders’ agreement (if applicable), to ensure there are no exclusions, restrictions, or special conditions related to share consolidations.
Step 2 – Obtain approval from members
To authorise a consolidation of shares, the members of the company will need to pass an ordinary resolution. This means that a simple majority (over 50%) of shareholders must formally agree to it.
See also: Company meetings and resolutions – explained
Some companies may stipulate in their articles or shareholders’ agreement that a special resolution or higher majority is required, so you will need to confirm this before proposing the resolution.
Step 3 – Notify Companies House
After a share consolidation, you must send a notification to Companies House on form SH02. The following information is required:
- Company registration number
- Registered company name
- Date of the resolution
- Previous and new share structure – i.e. the number and nominal value of shares before and after consolidation
- The company’s issued share capital following the changes made on the form – currency, class, number, aggregate nominal value, and total aggregate amount unpaid (if any)
- Prescribed particulars of rights attached to shares
- Signature of company director
You can send the completed form by post, or you upload the document to Companies House online.
Step 4 – Issue new share certificates
When the share consolidation has been finalised, you should inform all of the members, cancel the existing shares certificates of affected members, and issue new ones with their updated share information. The company should also retain copies for its records.
Step 5 – Update the company’s statutory register of members
You should update the company’s register of members as soon as possible, to reflect the new quantity and higher nominal value of each member’s shareholdings following the consolidation.
Wrapping up
Share consolidation offers companies a practical solution to a number of issues. The steps required are quite simple, but it can be tricky when dealing with multiple shareholders or fractional entitlements.
If you are considering a consolidation of shares, it may be worthwhile speaking to an accountant or a corporate financial advisor to ensure that you make the right decision.
Please comment below if you have any questions about this post, and be sure to check out the Rapid Formations Blog for more small business advice and limited company guidance.
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