Given declining equity valuations, many companies are considering reverse stock splits. Reverse stock splits are often done in order to meet the minimum bid price requirement in stock exchange rules so that a company can maintain its listing. Given the importance of the vote to the company and the fact that the vote required at an annual or special meeting is likely to be a majority of the shares outstanding, it is important to understand ISS and Glass Lewis policies on reverse splits.
ISS generally recommends voting for management proposals to implement a reverse stock split if the number of authorized shares will be proportionately reduced, or the effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy. ISS will recommend voting on a case-by-case basis if the proposal does not align with either of the two criteria above, taking into consideration, among other factors, a stock exchange notification of potential delisting. Glass Lewis notes that it may recommend voting against a proposal to conduct a reverse stock split if the Board does not state that it will reduce the number of authorized common shares in a ratio proportionate to the split.