What is Consolidation of Share? All you need to know

Ryan Patrick

Apr 11, 2024 • 6 min read

When a company reduces the outstanding shares by combining them to increase the face value, it is known as consolidation of shares or Reverse Stock split. Before the corporate strategy of consolidating shares, the company must notify the shareholders via email.

The concept can be confusing for investors, especially when understanding the complex world of the stock market.

Implementing the concept ensures that existing shares are exchanged proportionally but with fewer shares. For example, consolidating 1-for-5 means exchanging every five existing shares for one new share. Whilst the company’s market capital remains unchanged, a reverse stock split leads to a reduction of shares and a proportional raise in price per share.

A share is the unit of ownership in a company, representing the capital. Every share represents a part of the business; the owners can be individuals or corporate bodies. They become shareholders by investing money in the company, giving them rights like voting rights, attending shareholder meetings, and receiving dividends.

Outstanding shares are the number of units issued by a company minus any shares previously sold and reacquired. The current number of shares shareholders own

The current number of shares owned by shareholders is the outstanding shares. These shares mean a lot regarding vital business calculations like Earnings Per Share (EPS). For instance, 10 million outstanding shares in a company that earns £100 million would yield £10 per share and an EPS of £10.

So, what’s the point of consolidation of shares if nothing changes? Companies have different reasons for consolidation of shares, and here are the most popular:

1. Simplification

Consolidation helps companies simplify their share capital or shareholder-related management to benefit the business more.

A company could have an unusual quantity of issued shares and want to round them up to a proportional and easy-to-divide number, simplifying every member’s entitlement.

In cases where some shareholders hold an excessive number of shares or some have small shareholdings, a reverse split can simplify the ownership.

As a result of the consolidation of shares, directors have an easier time when paying dividends, managing the company’s member register, and transferring shares.

2. Stock Exchange Listing

To list in most stock exchanges, you need a minimum share price requirement. Hence, the reason for Public Limited Companies (PLCs) is sometimes to consolidate shares to raise share prices.

Regardless of the reason for consolidating shares, a company can satisfy a listing requirement and avoid deleting when share prices are below the threshold.

The share consolidation strategy is common when a company is on the brink of bankruptcy. Implementing the consolidation strategy helps the company appear more valuable to inventors.

While consolidation can paint a company as valuable, it sometimes is a warning sign for a troubled business.

3. Boost Credibility

When a company’s share prices fall too low, consolidating shares to a reasonable amount makes it more credible and boosts investor confidence.

In a scenario where company shares are falling, a share consolidation can temporarily mask and overcome the issues. Although the strategy doesn’t change the company’s value, it can influence investor perceptions.

However, if the share price falls due to underperformance or problems with the brand image, consolidating shares will not resolve the issue in the long term.

4. Marketability

Market considerations are what drive companies to consolidate shares. Reducing shares to increase the value per share can create higher market certainty.

By reducing the number of issued shares, an increase in per-share value can create greater market certainty when trading volatility occurs.

After consolidation, a company's liquidity improves, making the shares more appealing to new investors. As a result, the company’s financial performance is impacted positively, especially where small shareholders have a challenge selling their shares.

Since many are at play, it’s uncertain if consolidation will deliver the desired effect on business. However, the strategy is worthwhile for any company that wishes to impact investors and the market positively.

How Does Consolidation Work?

Consolidating shares can be easy, complicated, or time-consuming, depending on the number of shareholders in a limited company. Either way, this is how it works:

1. Refer to the Articles and Shareholders’ Agreement

Under Section 618 of the Companies Act 2006, any company limited by shares may “consolidate and divide all or part of its share capital to increase their prices than those existing.

However, before consolidation, you must check the company articles of association and shareholders’ agreement (where applicable) to know what they provide. WHY? You'll find out if there are restrictions, exclusions, and special conditions about share consolidations.

2. Get Members to Approve the Strategy

The members of a limited company must pass an ordinary resolution to authorise the consolidation of shares. In an ordinary resolution, more than 50% (simple majority) of the shareholders must approve the strategy.

Companies have varying articles and shareholders’ agreements. Some may state that a special resolution or majority vote is required to implement the strategy. Thus, confirming the provisions in both documents is necessary to ensure consolidation is done correctly.

3. Send a Notification to Companies House

Once a share consolidation is complete, you must notify Companies House on form SH02. You must provide the following information:

Company Registration Number (CRN)
Company name
Resolution date
Previous and new share structure – Share value before and after consolidation
Issued share capital following the changes – class, currency, number, aggregate nominal value, and total aggregate amount unpaid (where applicable)
Any prescribed particulars of rights devoted to shares
Signature from the company director

You have two ways to send the notification to Companies House: via post or uploading the document online.

After the share consolidation process is complete and Companies House is notified, inform all members and revoke the existing share certificates of those affected. Issue new share certificates to affected members per the changes and keep copies in your company records.

5. Update the Company’s Statutory Register of Members

Ensure you update the company’s member register as soon as possible. It should reflect the new shares and the higher nominal value of each shareholder after the consolidation.

How to Deal with Decimal Shares

Depending on the number of consolidated shares and the ratio applied, some shares may need to be more roundly divisible. As a result, fractional entitlements or decimal shares are inevitable.

The new decimal shares are rounded to the nearest whole number in such instances. Alternatively, companies repurchase any fractional entitlements from shareholders through the share buyback method.

The decimal shares can also be cancelled, but if there are several shareholders, the fractional shares can be aggregated to sell and then distributed to concerned members pro-rata.

How to Identify Consolidated Shares

The three factors below will happen simultaneously and will help you identify consolidated shares:

The stock has definable and steady support and resistance levels, like a continuous pattern on a flag.
Trade carefully with stocks with a narrow trading range (relative trading ranges), bearing in mind that not all securities are volatile.
Look for a relatively low level of trading volume that doesn’t display central spikes.

A company might have various reasons for consolidating company shares, and here are the benefits:

1. Appeal to More Investors

Consolidating shares can boost its appeal to potential investors. After consolidation, a company decreases its total number of outstanding shares and increases its value per share. No investor wants to put their money in a company that isn’t financially healthy.

2. Meet Stock Listing Standards

The stock market has listing stock requirements, and any company that needs to list must meet them. To comply with the stock exchange listing requirements, some companies must consolidate shares to meet the minimum price for listed stocks. In this case, share consolidation is a practical concept for fulfilling requirements.

3. Prevent Major Exchange Actions

Failing to comply with the stock listing threshold, companies can face extreme actions like delisting, downgrading, or being subjected to a lower exchange. However, consolidation of shares can help companies steer clear of these exchange actions and soar high.

4. Safety Measures

Consolidating shares is a safety measure for any business that is underperforming. As a result, the number of outstanding shares decreases, their prices increase, and a company can mitigate some risks like a hostile takeover.

5. Raise Stock Price

Share consolidation is one way to enhance share value, which boosts the price per share on the stock market. When investor confidence is improved, it can result in a favourable influence on the company’s financial performance.

Frequently Asked Questions

Why do companies consolidate shares?

Companies consolidate shares to reduce per-share trading price and meet stock listing requirements. Consolidation also boosts a company’s image to potential investors and simplifies the shareholder structure.

Is there a way to identify consolidated shares?

To identify consolidation of shares in a chart, look for shares that trade in a narrow range; consolidation happens after an uptrend or downtrend of the stock market.

Consolidation is both a good and not a wrong move for a company independently. Sometimes, a consolidation happens after a healthy price movement. Traders who are careful about overselling may look to smooth the movements before another trend surfaces.

A stock split is divided into several parts, whereas reverse stock split, stock merge, stock consolidation, or share rollback mean the same thing and are the opposite of a stock split.

In summary

Consolidating shares is a strategy to decrease company shares while increasing their nominal value. The process consolidates multiple shares into one while the value of each goes up correspondingly to increase in value.

Companies implement the concept of share consolidation to boost their financial standing, enhance the market worth of shares, and appeal to potential investors. Although share consolidation is intended to boost a company's financial performance, investors must assess the motives behind consolidation. They can make wise investments in such companies once they determine the motives and related risks. Do you have any questions on consolidation of shares? Kindly contact Incorpuk for help today.

What is a Share?

What is an Outstanding Share?

Reasons for Share Consolidation