Fractions And Squeeze Outs

The last two posts have discussed what a corporation may do with fractions of shares.  I entitled the first of these posts "Breaking Up Is Not Hard To Do – Fractions, Scrip And Scrippage" in partial reference to the song by Neil Sedaka and Howard Greenfield.  The title was also a reference to the etymological roots of the word "fraction", which is derived from the passive perfect participle of the Latin word meaning to break - fractum.  A fraction then is the result of breaking a large unit into smaller units.  Who at some time or another has not asked a clerk or teller to "break" a large bill into smaller denominations?

As discussed in my earlier post, the California General Corporation Law permits a corporation to pay in cash the fair value of a fractional share.  Cal. Corp. Code § 407.  However, this cash out procedure could result in the elimination of shareholders altogether.  For example, a corporation may amend its articles to provide for a reverse split of 1 share for every 10 shares.  This would result in the elimination of all shareholders holding fewer than 10 shares.  Section 407 prevents this result by providing that a corporation may not pay cash for fractional shares if that action would result in the cancellation of more than 10% of the outstanding shares of any class.  The 10% threshold is intended to dovetail with the threshold for a short-form merger pursuant to Corporations Code Section 1110.