What is an Equity Restructuring?

An equity restructuring is a transaction between a corporation and its shareholders that alters the fair value of the shares associated with an option or similar reward. Examples of the equity instruments that may be altered in a restructuring are a rights offering, stock split, or stock dividend. Such a restructuring may be needed when shareholders feel that the terms of a stock issuance agreement are no longer fair to them, usually because the market price of the associated shares has declined so much that it is no longer realistic for them to exercise an option.

Example of an Equity Restructuring

An example of an equity restructuring is Apple Inc.'s 2014 stock split, in which it executed a 7-for-1 stock split, meaning each existing shareholder received seven shares for every one share they previously held. This restructuring was done to make Apple’s stock more accessible to a broader range of investors by lowering the share price without changing the company's overall market capitalization. Before the split, Apple's stock was trading at around $645 per share. After the split, the adjusted share price was around $92 per share. The total number of outstanding shares increased by a factor of seven, but each share's value was proportionally reduced.

This restructuring did not dilute shareholders' ownership percentages but made shares more affordable, improving liquidity and attracting retail investors. It also set the stage for Apple's continued growth and further stock splits, such as its 4-for-1 stock split in 2020.

Advantages of an Equity Restructuring

An equity restructuring is especially useful when the recipients of stock options are so underwater on these arrangements that the options are essentially useless to them. In this case, a business must engage in a restructuring in order to provide value to the option holders. Otherwise, it may find that its employees will leave the company in search of more lucrative employment arrangements.