After soaring above the January clouds, embattled but simultaneously exhilarating electric vehicle upstart Mullen Automotive (NASDAQ:MULN) unceremoniously plummeted on Tuesday following yesterday’s holiday break. Jitters surround an upcoming special meeting that will occur later this week on Jan. 19. At the center of the controversy stands Mullen’s proposal for a reverse stock split. MULN stock gapped down over 12%, slipping to below 15% at the time of writing.
As InvestorPlace contributor Dana Blankenhorn mentioned, Mullen attempted to secure approval for a reverse split on Dec. 23. However, this effort failed for lack of a quorum. “Most shares that were voted supported the proposal, but the vast majority abstained,” Blankenhorn wrote.
In particular, the upcoming attempt to reverse-split MULN stock carries enormous implications. Essentially, Mullen has — barring approval for a 180-day extension — until March 6 to get its share price above $1 or face delisting from the Nasdaq exchange. Obviously, a delisting carries multiple consequences, including visibility concerns and challenges associated with selling the impacted securities.
Moreover, as InvestorPlace writer William White stated, the meeting will also involve two putative stockholder class actions filed against the company in December. The complaints focus on the increase in outstanding shares that materialized during the July 26, 2022, annual shareholder meeting.
“According to these plaintiffs,” wrote White, “a majority of shareholders did not vote in favor of the share increase. This has it intending to ratify the 2022 Certificate Amendment with a Delaware Court of Chancery filing. The date for a hearing covering this is Jan. 23, 2023.”
MULN Stock Faces Big Risks With a Reverse Split
By itself, a security split doesn’t carry a moral trajectory: It’s neither good nor bad. At the end of the day, the total value held among individual stakeholders of MULN stock will remain the same. However, it’s the forward implications that may end up hurting Mullen.
If the market at large perceives Mullen is only engaging in a reverse split to cynically stay onboard the Nasdaq while simultaneously papering over its fiscal deficiencies, the end result could be unfavorable.
To be fair, the U.S. Securities and Exchange Commission (SEC) recognizes that companies engage in reverse splits to raise visibility or to comply with an exchange’s minimum price requirement. However, the Financial Industry Regulatory Authority (FINRA) also states that “[r]everse stock splits are less common among seasoned companies that trade on one of the major U.S. stock exchanges.”
Further, FINRA warns that “[i]f a reverse split is announced and actually occurs, proceed with caution. Reverse splits tend to go hand in hand with low-priced, high-risk stocks. This is especially true with reverse splits that result in a post-split share price that is many times the price of the stock’s current price.”
Frankly, FINRA’s description of low price and high risk aptly describes MULN stock, thus raising concerns among conservative investors.
Why It Matters
Although a potential reverse split seemingly bodes ominously for MULN stock, it may not be the end of the road. For instance, Financhill mentioned that in 2011, Citigroup (NYSE:C) initiated a reverse split to get its share price out of penny stock territory. Notably, C shares traded hands for around $80 prior to the coronavirus pandemic.
However, Blankenhorn also warned in another InvestorPlace article that Mullen “…is short on cash and big on promises.” Therefore, it’s imperative that investors remain vigilant regarding exposure to MULN stock.
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On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.