Dynasil (Nasdaq: DYSL) is a micro-cap company in the business of selling specialized optics. Their company fundamentals (or how they got to be on my radar) is not terribly relevant to this post.
Their market cap is US$19 million at present. Compliance costs for micro-cap companies are extremely expensive in relation to their capitalization, and hence they want to go private, which they announced on May 2nd (form 8-K). The terms and conditions were that they were going to do a 8000-for-1 reverse share split, and subsequently split the stock 1-for-8000 and this would cash out sufficient numbers of stockholders to less than 300, which is the number required in order to enable them to go through with their privatization.
The stock traded down to about $1.02-$1.03 after their announcement – nobody wants to hold an illiquid stock in a privately held firm. In addition, people holding more than 8,000 shares in non-multiples of 8,000 would have their residual portion taken away without compensation (which would prompt a bunch of people to sell to a division of 8,000 shares).
Specifically, the Board recommended and approved a transaction whereby the Company would effect a 1-for-8,000 reverse stock split of the Company’s common stock (the “Reverse Stock Split”), followed immediately by a 8,000-for-1 forward stock split of the Company’s common stock (the “Forward Stock Split,” and together with the Reverse Stock Split, the “Transaction”). Stockholders owning fewer than 8,000 shares of common stock at the effective time of the Transaction would receive $1.15 in cash, without interest, for each share of common stock held by them at the effective time of the Transaction
It would make sense to buy 7,900 shares of the company at $1.03 and then have them cashed out by the company at $1.15, correct? That sounds like a nearly risk-free $948 before commissions and taxes.
Not so fast… reading the fine print later on, we have the following passage:
If consummated, the Reverse Stock Split and Forward Stock Split would apply directly only to record holders of the Company’s common stock. Persons who hold shares of the Company’s common stock in “street name” are encouraged to contact their bank, broker or other nominee for information on how the Transaction may affect any shares of the Company’s common stock held for their account.
Almost all investors that do their transactions through brokerage platforms have their shares held in street name. The registered owner is typically the brokerage firm, while the beneficial owner is the account holder. So if a brokerage firm has three customers, and each customer has 7,900 shares of DYSL, there might be a hidden consequence – the brokerage will receive 2 shares of the company after the reverse split, and has to figure out how to divide that among their 3 customers. Each customer would subsequently be beneficial owner of 5,333 shares of an illiquid private company and not receive any anticipated returns of a cash-out!
It sometimes pays (or avoids unintended consequences) to read the fine print.