On March 16, 2010, several dozen NASDAQ listed companies will face delisting because their stocks have traded below $1.00 per share for a significant period of time. For these companies, history tells us that a compliance plan based solely on favorable market reaction will be rejected by NASDAQ no matter how compelling the argument. NASDAQ has been clear that companies in this situation must commit to implement a reverse stock split by a date certain sufficient to achieve and sustain compliance with the $1.00 bid price requirement, or the securities will be delisted.
In July 2009, FTI Consulting, Inc. published a white paper entitled, "Down But Not Out; Properly Implementing a Reverse Stock Split and Leveraging the Opportunity it Creates".1 This white paper was published in anticipation of both NASDAQ and the New York Stock Exchange lifting moratoria associated with the requirement that listed companies maintain a minimum share price of at least $1.00 per share, effective on August 3, 2009. This article focuses on two critical aspects of the appeal process for companies in this difficult position. First, we highlight what executives and their advisors should expect once NASDAQ's grace period expires and the appeals process begins, in particular one area in which companies may find some latitude from NASDAQ to dictate the timeline to achieving compliance. Second, we assess the companies with share prices below $1.00 that have recently implemented reverse stock splits, examining those that were successful (which we define as maintaining or increasing market capitalization since the stock split date.)
BID PRICE DEFICIENCIES – THE PROCESS
NASDAQ listed companies that demonstrate a closing bid price of less than $1.00 per share for 30 consecutive trading days receive a deficiency notice from the exchange. The companies must then either cure the deficiency within a 180-day grace period provided by NASDAQ rule, or one of two results will occur. Companies listed on The NASDAQ Capital Market may be eligible for an additional 180-day grace period if they satisfy all other initial inclusion requirements for the Capital Market on the last day of the grace period. NASDAQ Global Select and Global Market companies may transfer to the Capital Market to take advantage of the same grace period provided they satisfy all initial inclusion requirements for the Capital Market, but for the $1.00 bid price requirement. Those companies that do not satisfy this requirement can expect to receive a delisting letter on March 16th. Executives and/or the board of directors of the recipient company must then decide whether to appeal the notice to a NASDAQ Hearings Panel within seven calendar days, or to otherwise accept suspension and delisting of the securities soon thereafter.
For those companies that elect to appeal, a hearing is typically held within 30 to 45 days from the date of the hearing request, with recent practice tending to fall on the earlier side of that date range. Company representatives attend a hearing before a Hearings Panel of two independent businesspersons who are appointed by the NASDAQ Board of Directors to make a decision on the exchange's behalf. A written decision is communicated by NASDAQ to the company approximately 30 days later either granting the company additional time—up to 180 days from the date of the deficiency notice (as measured from March 16, 2010 in the scenario discussed within)—or not, in which case the securities are delisted in two business days.
A company must commit to implement a reverse stock split by no later than the end of the 180-day discretionary period available to the Hearings Panel if the Panel is to even consider granting the company additional time to comply. In addition to committing to implement a reverse stock split within the Hearings Panel's discretionary period, company representative must also be prepared to discuss the company's compliance with all other continued listing requirements, including those that may be in jeopardy in the near term, such as the minimum stockholders' equity requirement.
The underlying business and the foreseeable path forward will also be discussed to assist the Hearings Panel in understanding the basis for the change in fortune. The goal for company representatives is to convince the Hearings Panel that, if necessary, they are prepared to pull the trigger on a reverse stock split sufficient to achieve and sustain compliance with the $1.00 bid price requirement, but to do so on its own terms, as more fully discussed below. They must also show that no other NASDAQ compliance issues will occur along the way, and that the underlying symptoms that caused the low share price have been obviated, or will be obviated in the very near future, resulting in a healthy, viable company going forward.
As a warning, blaming difficult economic factors for a company's plight is not likely to be met with much sympathy. Hearings Panelists generally view the bid price moratorium in late-2008 through mid-2009 plus the grace periods provided to the company by the NASDAQ rule as a sufficient period to reset the sails in a macro-economic storm.
CONTROLLING THE SCHEDULE
The most useful area of latitude in this process is centered around the timing of the stock split, if necessary, and therefore how much time to seek from the Hearings Panel. Many times, the knee-jerk reaction is for company representatives to request the full 180-day period of time that the Hearings Panel is permitted. This strategy, in most cases, is flawed.
Absent sufficient justification, such a request will be viewed as a "Hail Mary"—once all else has failed, the Hearings Panel and investors will hear the message as, "we think that implementing a reverse stock split is a bad idea so we're going to wait until the last possible minute on the remote chance that the stock takes off or the market runs up significantly and the tide pulls us above a buck." The public relations gaffe aside, this message is also often paradoxical, as under state law most companies are required to solicit and obtain stockholder approval in order to implement a reverse stock split. If, on one hand, management recommends that stockholders approve the proposal, but on the other management tries to sell the "Hail Mary" strategy to a Hearings Panel, one of two negative outcomes will likely result. The Panel may reject the plan and promptly move to delist the company's shares or the company's market capitalization may experience significant compression post-split if the Panel affords the company some time. Either way, the initiative is likely to fail, leaving a trail of unhappy investors in its wake.
If, however, management presents its plan to split the stock as part of a broader turn-around strategy, our research suggests that the stock split is much more likely to be successful. Several factors are helpful to companies here. First, as referenced above, in most cases, stockholder approval is required to implement a reverse stock split. Annual stockholder meetings for companies with December 31 year-ends are typically held in mid-May to mid-June, during which time a proposal for a reverse stock split can be included in the proxy statement—saving the company the time and expense of calling a special meeting of stockholders to consider the same proposal.
Second, it is critical that management strategically select the timing of the stock split to coincide with an anticipated favorable business development, strategic transaction and/or other corporate initiatives, as discussed in our prior 2009 white paper, "Down But Not Out; Properly Implementing a Reverse Stock Split and Leveraging the Opportunity it Creates." This not only gives the Hearings Panel evidence of a reasoned, strategic and identifiable rationale to delay the stock split, but it also enables the Panel to carefully craft terms for conditional listing in a manner that allows the company to maximize the likelihood of successful reverse stock split, which is in everyone's best interest.
REVERSE STOCK SPLITS – WHAT THE EMPIRICAL DATA TELLS US
Most individuals associated with public companies and within the securities industry have a negative view of reverse stock splits. But for a few well cited success stories, such as Priceline.com and AIG, the general perception of reverse stock splits is that it is a last ditch effort by companies grasping to keep a listing, which is likely to accomplish nothing more than further deterioration of market capitalization. Human nature tells us that the positive perception around forward stock splits and the negative one pertaining to reverse splits is simple. In one case the investor is happy to receive more shares and the opposite is true when shares are taken away.
Overlooking the fact that value is neither created nor destroyed in either event, academics who have studied and written about this phenomena tell us that perception is reality, or at least generally speaking.
In order to advise our clients properly, we prefer to work off of the most recent information available. To do so, we looked at the 22 companies that implemented a reverse stock split between January 1, 2009 and September 30, 2009 with a stock price below $1.00 per share on the day prior to the split. The chart below provides relevant detail about the 22 companies, including stocks' performance one month and three months after the stock split, as well as through the end of February 2010.
The data speaks for itself. Approximately 41% of the companies experienced positive post-split returns as of February 28, 2010, with a 31.4% average return for the group. While many factors impact why we believe the Sanmina-SCIs were more successful in their reverse stock splits than the Raptor Pharmaceuticals of the world, which is beyond the scope of this article, we are reminded that perception is not necessarily reality.
Companies facing NASDAQ delisting proceedings for failure to satisfy the $1.00 bid price requirement are often victims of a difficult confluence of negative business developments and/or protracted economic headwinds. As NASDAQ's grace periods near expiration, executives, board members and their advisors must think carefully about whether the company is able to communicate and execute on a long term plan that will result in maintaining the listing. This must include the ability to navigate NASDAQ's appeal process, as well as to implement a successful reverse stock split if one is necessary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.