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Why is Mullen (MULN) stock down today?

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Kicking off January gates at breakneck pace, electric vehicle (EV) maker Mullen Automotive (NASDAQ:MULN) recently found itself struggling for traction. Entering choppy trade on Tuesday, MULN stock fell half a percent by late afternoon. Currently, investors must weigh the potential impact of both a reverse stock split approval and a critical court hearing.

First, according to a Form 8-K filed with the U.S. Securities and Exchange Commission (SEC), Mullen disclosed that its shareholders had voted to approve a reverse stock split. According to the 8-K document, the split will take place “for an amount of at least 1 for 2 shares and not exceeding 1 for 25 shares, the exact ratio to be fixed within this range at the discretion of our Board of Directors. ‘administration.”

On paper, a reverse split should be a positive catalyst for MULN stock. A few days ago, Bloomberg warned that Mullen had effectively drowned his stakeholders in stocks. It is true that the dramatic expansion of outstanding shares into the billions has made MULN one of the most active US-listed stocks by volume.

However, as Bloomberg’s Chris Bryant wrote, “Mullen is a case study in the dangers of creeping shareholder dilution and how, as the tech bubble bursts, retail investors can find themselves taken for a ride.” Once up more than 31% on an annual basis, MULN stock is now around 6% below parity.

Perhaps most tellingly, the Financial Industry Regulatory Authority (FINRA) has warned that low-priced, high-risk stocks tend to attract reverse splits. Typically, investors see through cynicism – usually to stay listed on a major exchange – leading to negative results.

MULN Stock Stuck at a Crossroads

Admittedly, not all cases of reverse stock splits lead to an erosion of equity in the long term. It is therefore not completely excluded that the MULN stock could benefit from the aforementioned proposal. However, this debate could become moot pending the results of two putative shareholder class action lawsuits.

Essentially, the lawsuits allege that MULN’s stock increase — supposedly approved at last year’s annual meeting of shareholders — should never have happened. The issue centers on a dispute over the number of eligible shares, with the allegation that a majority did not grant a share expansion.

Both plaintiffs filed suit in the Delaware Court of Chancery, which must side with plaintiffs or Mullen. Unfortunately, this is where the matter gets complicated.

If the Court of Chancery sided with the plaintiffs, Mullen would have effectively increased the number of MULN shares beyond the permitted limit. According to the Corporate Finance Institute, authorized shares represent the “maximum legally permitted number of shares that a company can issue to investors”.

Of course, companies can always increase this limit, but they must first receive permission to do so. If a majority of MULN shareholders did not vote for an expansion of the share pool last year, shares issued later will likely be cancelled.

At the time of writing, Mullen has not disclosed the results of the court hearing.

why is it important

After arousing strong interest earlier this month, reality may be setting in on MULN stocks. Additionally, the data from Fintel reveals a steady increase in short interest against Mullen stocks. On January 10, short interest reached 10.83% of MULN’s free float. Yesterday, this statistic reached 14.83%.

As of the date of publication, Josh Enomoto had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto helped negotiate major contracts with Fortune Global 500 companies. Over the past several years, he has provided critical and unique insights to investment markets, as well as various other industries including law, construction management and healthcare.


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