The California General Corporation Law explicitly authorizes a corporation to issue fractional shares. Cal. Corp. Code § 407. A corporation, however, is not required to do so. Id. In lieu of issuing fractions, a corporation may in connection with the original issuance:
- arrange for the disposition of fractional interests by those entitled to receive them;
- pay in cash the fair value; or
- issue scrip or warrants in registered form as certificated securities or uncertificated securities.
If the corporation elects pay cash, the fair value is to be determined as of the time when those entitled to receive fractions is determined. In the absence of fraud, the board of directors’ determination of the fair value is conclusive. However, Section 407 prohibits the payment of cash for fractional shares if that would result in the cancellation of more than 10% of the outstanding shares of any class.
Scrip and Scrippage
A holder of scrip will be entitled to receive a certificate for a full share if he or she can collect scrips aggregating a full share. The board may also subject scrip to the condition that it will become void if not exchanged for full shares before a specified date or that the shares for which scrips are exchangeable may be sold and the proceeds distributed to the holders. The word “scrip” is derived from the Latin word scribere, meaning to write (in the perfect form, the “b” becomes a “p” as in “quod scripsi, scripsi” (“what I have written, I have written”). “Scrip” also can refer to a small bag, presumably because it could hold scraps of paper. William Shakespeare makes use of this meaning in Act III, scene 2 of As You Like It:
Come, shepherd, let us make an honourable retreat;
though not with bag and baggage, yet with scrip and scrippage.
What about rounding of fractions? That will be a subject of a future post.