To deal with the fractional share caused by a reverse split, companies have four options:
- pay cash for this fractional share,
- round it down to zero,
- round it up to one whole share, or
- round it to whichever is closer.
The retail investor’s winning scenario is that they’ll round up. Luckily, companies almost always mention which option they’ll take in their press release announcing their reverse split, and more often than not, they plan on rounding up. However, the language they use to signal this is not immediately obvious, and it also varies from press release to press release—to the ire of bot users.
With that said, I’ve documented these signals, and I can provide a couple pointers to reading these press releases for what the company will do, including a couple smoking-gun phrases. Let’s go one option at a time.
Cash for fractional shares, or “cash in lieu”
The definition of “in lieu” is “instead”, so “cash in lieu” simply means “cash instead”. That’s for cash instead of a fractional share. “Cash” is often the keyword that signals that this option is being taken, not “in lieu”. In fact, “in lieu” may be in reference to the other options! Altogether though, “cash in lieu” is a smoking-gun phrase for it. Another one is “cash payment”, as in cash payment for the fractional share.
Besides these exact phrases, the option may ocassionally be phrased in other ways that have to be read by a person to be caught. For example, cash for fractional shares may also be written as a third party “aggregating” fractional shares into whole shares to be sold off, the proceeds of this going back to the holders of those fractions.
Rounding down to zero, or also “no compensation” or “cancellation”
This option is usually written quite simply. There’s one big smoking-gun phrase: “rounded down to the nearest whole share”. Slight variations of this phrase also appear. Besides this, the other ways it can be expressed typically involve the fractional share being “cancelled” or a warning to investors that there will be no “compensation” of any kind.
Rounding up to one whole share
This option has a smoking-gun phrase, “rounded up to the nearest whole share”, but also many, many variations of that phrase—along with a small range of language that again needs a person to be caught. Two other general patterns that also suggest the round-up are (1) a whole share being provided “in lieu” of a fractional share (see!?) or (2) additional fractions being issued to investors such that their number of shares is whole again.
Rounding to whichever is nearer
Unfortunately, the language that describes this option is incredibly similar to the languages of rounding down and rounding up. Luckily, in all cases of this option that I’ve seen, press releases had mentioned a requirement that the fraction is greater than 0.50, so that’s one thing to look for.
Finally, there are two gotchas to look out for:
- To emphasize which option they’ll take, a press release may mention cash-in-lieu in the context of ruling it out. A signal of this, for example, is “no shareholder shall receive cash payment for fractional shares”.
- Once in a while, the press release doesn’t mention the treatment of fractional shares at all. In this case, the answer can probably be found in the company’s latest filings with the SEC. (And if it’s not among the latest filings, then perhaps in the latest DEF 14A filed—that is the list of matters to be called for a vote, which can include reverse splits. But that’s getting quite into the weeds now!)
With those caveats said, identifying reverse split round-ups in press releases can be incredibly simple. This fact can be applied on the feed of reverse split press releases that revRSS provides. Doing this myself, I can trade on reverse split opportunities on the day that they’re announced, taking no more than ten minutes or so out of my time, every time.