For both local and multinational corporations, nuanced legal regulations surrounding business practices and stock market behaviors can be challenging to navigate. A prime example of such a regulation surrounds the complexities of reverse stock splits in California, a subject that has garnered renewed attention in the market lately.
In a recent blog post, legal commentator John Jenkins discussed a proposed Nasdaq rule concerning the notification and disclosure of reverse stock splits. The key areas of this proposed rule primarily revolve around timely communications of plans to undergo a reverse stock split to shareholders, as well as certain disclosure requirements (JDSupra).
With respect to California’s nuanced legal position, it is important to bear in mind that California recognizes neither a theory of universal successor liability nor a theory of de facto merger. Therefore, these principles do not automatically bolster an implied consent to a reverse stock split that would be legally binding to the California Corporations Code.
While the Securities and Exchange Commission (SEC) has voiced its concerns over low-priced securities, a reverse stock split will not change a company’s fundamental value or address its underlying issues. What it ostensibly does is temporarily inflate per-share metrics, while masking any underlying concerns.
Notably, California’s regulatory perspective doesn’t differ too greatly from the federal stance. While reverse stock splits are subject to regulatory scrutiny, they are not inherently subject to qualification. However, public corporations must be wary of the minefield of disclosure and timing requirements that accompany such initiatives, especially as they can face litigation in the aftermath of announcing a reverse split.
Even though California’s regulations may be complex, it is crucial for legal professionals to diligently review them and ensure that their clients are in adherence to the rules to avoid potential legal implications. As regulations continue to evolve, legal professionals must remain vigilant and up-to-date with the changing legal landscape. John Jenkins’ recent commentary serves as a timely and essential reminder in this ever-changing climate.