No fractional shares or scrip: Overview, definition, and example
What are no fractional shares or scrip?
"No fractional shares or scrip" is a provision in a contract or corporate governance document that ensures shares issued by a company are whole, rather than being divided into smaller fractions. Fractional shares occur when the total amount of shares issued doesn’t divide evenly, or when shareholders are entitled to a partial share. The provision also ensures that no scrip (temporary certificates issued instead of physical shares) will be issued. In this context, the company may require that shares be rounded up or down to ensure that each shareholder receives only whole shares.
For example, if an investor is entitled to 10.5 shares in a company, instead of issuing half a share, the company might round up the amount to 11 whole shares or provide the equivalent cash value for the half share.
Why are no fractional shares or scrip important?
This provision is important because it simplifies share distribution and avoids the administrative burden of managing partial shares or scrip. It also ensures that shares are issued in a form that is easier to trade and hold, as fractional shares and scrip can be difficult to sell, transfer, or redeem. By avoiding fractional shares or scrip, companies can streamline shareholder management and maintain clarity in the ownership structure.
For businesses, implementing a "no fractional shares or scrip" clause helps keep the process of share issuance straightforward, reducing complexity in accounting and recordkeeping.
Understanding no fractional shares or scrip through an example
Imagine a company issuing shares in a 2-for-1 stock split. An investor holding 7 shares would be entitled to an additional 7 shares, but that totals 14 shares, with no need for fractional shares. In this case, the company would ensure that no fractional shares are issued. If a fractional share were to be issued by mistake, the company might round the share up or down or provide cash for the fraction.
In another example, a company conducting a dividend reinvestment plan (DRIP) may allow shareholders to reinvest their dividends into new shares. If a shareholder is entitled to receive, for example, 2.5 shares, the company would issue 2 whole shares and either round up or pay the shareholder the cash equivalent for the remaining 0.5 share.
An example of a no fractional shares or scrip clause
Here’s how a no fractional shares or scrip clause might look in a contract:
“In the event of any stock issuance, dividend reinvestment, or other allocation of shares, no fractional shares or scrip shall be issued. Any fractional shares resulting from the distribution shall be rounded up or down to the nearest whole share or compensated in cash at the fair market value of such fraction.”
Conclusion
The provision of "no fractional shares or scrip" helps streamline the process of issuing and managing shares, avoiding complications that arise from partial ownership or temporary certificates. It ensures that each shareholder has clear, whole ownership in the company and simplifies administrative tasks for the company.
By including this provision in corporate agreements, businesses can reduce the complexity of share issuance and improve shareholder management.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.