Shares of Canopy Growth (NASDAQ: CGC) plunged 35% this week, according to data provided by S&P Global Market Intelligence, after shareholders saw the structure of a pending 1-for-10 "share consolidation" announced by the cannabis producer.
The bulk of Canopy Growth's drop came on Wednesday, after the company announced it will implement a share consolidation -- typically known as a reverse stock split -- at a 1-for-10 ratio, effective prior to the market's opening bell on Dec. 20. This will essentially reduce the number of outstanding common shares by a factor of 10 while increasing the per-share price of Canopy's new common shares by the same multiple.
Canopy Growth's shareholder-unfriendly consolidation
Shares of Canopy Growth were already down more than 70% year to date leading up to the announcement, and closed Friday at $0.52 per share. And by the rules of the Nasdaq, the exchange on which it trades, a stock that closes below $1 per share for 30 consecutive days risks being delisted. But even after a stock falls out of compliance with that rule, it can get back into compliance -- and avoid being delisted -- by closing at or above $1 per share for 10 consecutive business days. The reverse stock split will let it accomplish that, and put Canopy Growth back into the good graces of the Nasdaq.
So this decision would have been understandable, even if we ignore the risk that -- absent significant progress in its underlying business -- Canopy Growth's consolidated shares could continue to decline in price, and might head back below the $1 minimum level.
But another part of the reverse split plan irked investors: Canopy Growth said that no fractional shares will be issued in connection with the consolidation. Instead, "any fractional common shares arising from the consolidation will be deemed to have been tendered by its registered owner to the company for no consideration."
What's next for Canopy growth shareholders?
Normally, the value of any fractional shares stemming from uneven split calculations is paid to investors in cash. For example, in a typical 1-for-10 reverse split, an investor who held 19 shares of a stock trading at $0.52 per share would be given a single share worth $5.20, as well as $4.68 in cash for their remaining nine shares at $0.52 apiece. But with Canopy Growth, such an investor would exchange 10 original shares for a single new share worth $5.20, and get nothing for their other nine original shares.
Of course, I'm being selective in my math here, as the value of nine pre-consolidation shares -- less than $5 in total -- is the most money any single investor can lose in this 1-for-10 consolidation. But with likely hundreds of thousands of individual retail investors among its shareholder base, those fractional shares could add up to millions of dollars that are essentially being taken back from investors at no cost to the company. If Canopy Growth's share price plunge this week is any indication, that choice raised the ire of more than a few of those shareholders. And it's hard to blame spurned investors for parting ways with the stock altogether.
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Steve Symington has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
