Meredith Ervine recently wrote about reverse stock splits and Nasdaq listed issuers.  A reverse stock split is the "go to" solution for many listed issuers whose share prices fall below the minimum continued stock exchange listing requirements.  Unlisted companies may also engage in reverse splits, albeit for different reasons.

If there is no federal preemption, issuers will have to consider whether a reverse stock split will be subject to state securities laws.  The California Corporate Securities Law of 1968 exempts reverse stock splits from California's qualification requirement with two exceptions.  Cal. Corp. Code § 25013(f).  First, a reverse stock split is not exempt if the corporation has more than one class of shares outstanding and the split would have a material effect on the proportionate interests of the respective classes as to voting, dividends, or distributions.  Second, a reverse stock split is not exempt if the corporation has the option of paying cash for any fractional shares created by the reverse split and as a result of that action the proportionate interests of the shareholders would be substantially altered.   

Many years ago, I was retained as an expert witness in a case in which a shareholder unhappy with a "down round" argued that a corporation had effected a reverse split without qualification.  I concluded that neither exception was applicable.  The case settled and thus there was no opinion.  

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