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.