No fractional shares: Overview, definition, and example
What are no fractional shares?
"No fractional shares" is a provision commonly found in stock agreements or corporate charters that specifies that shares of stock cannot be issued or held in fractional amounts. This means that shareholders will only receive whole shares and, if a transaction results in a fraction of a share, that fraction is either rounded up or paid out in cash or another form of settlement. This provision is typically included in situations like stock splits, dividends, or in scenarios where shares are distributed but fractional ownership is not allowed.
For example, if a company declares a stock dividend and a shareholder is entitled to 2.5 shares, they would either receive 2 full shares, and the remaining fraction could be paid in cash, or the company might issue 3 whole shares and round up.
Why is no fractional shares important?
The "no fractional shares" rule is important because it simplifies the administrative process for managing share ownership, particularly for publicly traded companies. It helps prevent complications associated with fractional ownership, such as difficulties in voting rights, dividend distribution, or the trading of shares in fractional amounts.
For businesses, avoiding fractional shares can also streamline shareholder records, reduce the need for complex calculations, and eliminate confusion or disputes that might arise from fractional ownership interests.
Understanding no fractional shares through an example
Imagine a company with a shareholder who owns 50.25 shares of stock after a stock dividend. According to the "no fractional shares" provision, the company could either round up to 51 whole shares or pay the shareholder in cash for the fraction (0.25 shares), eliminating the fractional amount from the shareholder’s records.
In another example, a company performs a stock split where each shareholder is entitled to 2.5 new shares for every 1 share they already own. A shareholder with 3 shares would be entitled to 7.5 shares under the split. The company, adhering to the "no fractional shares" rule, might round up to 8 shares and distribute a cash equivalent for the 0.5 share.
An example of a no fractional shares clause
Here’s how a no fractional shares clause might look in a contract:
“In the event of any stock dividend, stock split, or similar corporate action, the Corporation shall not issue fractional shares. Any fractional shares resulting from such actions will either be rounded up to the nearest whole share or compensated in cash at the current market value of the fractional share.”
Conclusion
The "no fractional shares" provision helps simplify the process of share management by ensuring that shares are only issued or held in whole units, avoiding complications with fractional ownership. This provision is especially useful in corporate actions like stock splits or dividends, where fractional shares might otherwise arise.
By including a "no fractional shares" clause in corporate documents, businesses can maintain clear, efficient shareholder records and avoid administrative complexities related to fractional stock ownership.
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.