A share consolidation, sometimes called 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 while their nominal value increases proportionally.
We explain how share consolidation works, why a company may decide to do this, and the procedure required to consolidate 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 while simultaneously increasing the per-share nominal value. Essentially, the company takes a set number of its existing shares and replaces them with fewer shares – like swapping ten £20 notes for four £50 notes.
This results in the company having fewer issued shares, but each 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
Companies can consolidate shares on a ratio basis of their choosing. For example, by turning 100 ordinary shares into 10 ordinary shares on a 10:1 basis. In this instance, each shareholder exchanges 10 existing shares for 1 new one.
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 £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
- The company carries out a consolidation of shares 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 increased proportionally. The same is true of the market value of those shares.
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. their dividend rights or voting rights).
Why would a company consolidate shares?
So, what is the point of doing all this if nothing changes? There are several reasons why some companies choose to consolidate shares, the most common of which are:
1. Simplification
For many companies, consolidation enables them to simplify their share capital or shareholder-related administration in a way that benefits 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.
A consolidation can simplify ownership in situations where an inordinate number of shares are held by only a few shareholders or where some shareholders have many very small shareholdings.
This can make it easier for directors to issue dividends, transfer shares, and manage the company’s register of members.
2. Listing on a stock exchange
Many stock exchanges impose a minimum share price requirement for listing. Consequently, public limited companies (PLCs) sometimes consolidate shares to increase their share prices.
Depending on the situation, this enables them to satisfy the listing requirements or avoid being involuntarily delisted if their share price falls below the threshold.
Share consolidation is a common strategy for companies at risk of bankruptcy, with the aim of making 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
When a company’s share price is too low or has fallen considerably, consolidating shares can improve credibility and boost investor confidence.
In such situations, a share consolidation is an effective way to temporarily mask or overcome these issues. While this strategy does not affect 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
Market considerations often drive the decision to consolidate shares. Reducing the number of issued shares can increase per-share value, creating 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. Furthermore, it may be beneficial when members with smaller shareholdings struggle to sell their shares.
That said, there is no guarantee that a share consolidation will have the desired effect. Many factors are 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. This can result 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, 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 aggregate the fractional entitlements to sell if there are multiple shareholders in this situation, distributing the proceeds to affected members on a pro-rata basis.
How to carry out a share consolidation
Depending on the number of shareholders, consolidating shares in a limited company may be quick and 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 company limited by shares 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 and any shareholders’ agreement to ensure there are no exclusions, restrictions, or special conditions relating to share consolidations.
Step 2 – Obtain approval from members
To authorise a share consolidation, the company’s members must pass an ordinary resolution, which means a majority (over 50%) of shareholders must formally agree to it.
Some companies may stipulate in their articles or shareholders’ agreements that a special resolution or unanimous agreement is required. You will need to confirm this before proposing the resolution.
Step 3 – Notify Companies House
After a share consolidation, you must notify 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 quantity and nominal value of shares before and after consolidation
- The company’s issued share capital following the changes set out on the form – currency, class, quantity, aggregate nominal value, and total aggregate amount unpaid (if any)
- Prescribed particulars of rights attached to the shares – these will be the same as those attached to the shares before consolidation
- Signature of the company director or other authorised person acting on behalf of the company
You can post the completed form to Companies House or submit a digital copy using the Upload a document to Companies House service online.
Step 4 – Issue new share certificates
Upon finalising the share consolidation, you should inform all members, cancel the existing share certificates of affected members, and issue new ones with their updated share information. The company should also retain copies of the old and new share certificates 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 various issues. The steps required are pretty simple, but the situation can be tricky when dealing with multiple shareholders or fractional entitlements.
If you’re considering consolidating shares, it would be worthwhile speaking to an accountant or a corporate financial advisor to ensure that it’s the right decision for the company.
Please comment below if you have any questions about this post. Check out the Rapid Formations Blog for more small business advice and limited company guidance.
