Reverse Split

A reverse split is announced when a company intends to reduce the number of its outstanding shares. This can be done for various reasons, for example, to nominally raise the share price and keep it above $1.00/share, which is the level required to stay listed on NYSE and NASDAQ. Reverse splits include a split ratio (e.g. 1 for 100, so if you previously owed 1000 shares, only 10 will remain post-split), while the odd-lot or fractional shares usually get cashed out at a premium to the market value.

Sometimes, the goal is not to reduce the number of shares but rather to decrease the number of total shareholders. For example, a company wants to dark and stop reporting to the SEC (stock exchange commission), for which it has to lower the number of its shareholders below 300. To do this, a reverse split (which cashes out the odd-lot shareholders) is immediately followed by a forward split that restores the original number of outstanding shares.

The main point to check here is whether the transaction makes sense for the company from a financial standpoint and what is the real incentive here. For example, if a company expects to delist after the reverse/forward split, the important factor here will be whether the transaction costs are going to pay-off. However, if a pile up of odd-lot arbitrageurs elevates transaction costs to the extent that savings from cancellation of the public listing are no longer worth it, the chances are high that the splits might get canceled or amended.

Major risks are termination of the transaction, terms amendment (e.g. split ratio is lowered), or various delays.