Nasdaq Temporarily Eases Certain Shareholder Approval Requirements as a Result of Coronavirus (COVID-19)
On May 4, 2020, the Securities and Exchange Commission (the “SEC”) approved changes to the Nasdaq Listing Rules to provide a temporary exception to the shareholder approval rules for certain capital raising transactions as a result of the coronavirus (“COVID-19”) pandemic.
Shareholder Approval under Listing Rule 5635(d) (Transactions other than a Public Offering) and Listing Rule 5635(c) (Equity Compensation)
Nasdaq Listing Rule 5635(d) requires shareholder approval prior to a 20% Issuance at a price that is less than the Minimum Price. Under the Nasdaq Listing Rules, (a) a “20% Issuance” is a transaction, other than a public offering as defined in Nasdaq’s IM-5635-3, involving the sale, issuance or potential issuance by the Nasdaq-listed company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or certain shareholders, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance and (b) the “Minimum Price” is the lower of: (i) the Nasdaq Official Closing Price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Official Closing Price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.
In addition, Nasdaq Listing Rule 5635(c) requires shareholder approval, with certain exceptions, prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants. Nasdaq has long interpreted this rule to require shareholder approval for certain sales to officers, directors, employees, or consultants when such issuances could be considered a form of “equity compensation.”
New Temporary Listing Rule 5636T (Temporary COVID-19 Exception)
In an effort to streamline Nasdaq-listed companies’ access to capital, the Nasdaq adopted Listing Rule 5636T to provide a limited temporary exception to the shareholder approval requirements in Nasdaq Listing Rule 5635(d) and, in certain narrow circumstances, a limited attendant exception to the shareholder approval requirements in Nasdaq Listing Rule 5635(c), which will be available until and including June 30, 2020.
In order to rely on Listing Rule 5636T, a Nasdaq-listed company must execute a binding agreement governing the issuance of the securities, submit the notices referenced below, and, if applicable, obtain Nasdaq’s approval of the issuance referenced below no later than June 30, 2020. Under the Listing Rule, the issuance of the securities may occur after June 30, 2020 so long as the issuance takes place no later than 30 calendar days following the date of the binding agreement.
Listing Rule 5636T provides an exception to the shareholder approval requirements under Listing Rule 5635(d) if a company can demonstrate:
- the need for the transaction is due to circumstances related to COVID-19;
- the delay in securing shareholder approval would (a) have a material adverse impact on the company's ability to maintain operations under its pre̵COVID-19 business plan, (b) result in workforce reductions, (c) adversely impact the company's ability to undertake new initiatives in response to COVID-19 or (d) seriously jeopardize the financial viability of the enterprise;
- the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company;
- the company’s audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors has (a) expressly approved reliance on the Listing Rule and (b) determined that the transaction is in the best interest of shareholders; and
- the company has submitted the supplement to its Listing of Additional Shares notification form (“LAS”) and, if applicable, obtained Nasdaq approval of the transaction as discussed below.
Listing Rule 5636T also provides a limited attendant exception to the shareholder approval requirements under Listing Rule 5635(c) for an affiliate's participation in the transaction, provided that the transaction satisfies the following requirements:
- any affiliate's participation must be less than 5% of the transaction;
- all affiliates' participation collectively must be less than 10% of the transaction;
- any affiliate's participation must have been specifically required by unaffiliated investors; and
- the affiliates must not have participated in negotiating the economic terms of the transaction.
The company relying on the Listing Rule must submit a supplement to its LAS certifying to Nasdaq that it complies with all of the applicable requirements discussed above and describing how it complies. Instead of the normal 15-day notice requirement, the LAS and supplement must be submitted as promptly as possible, but no later than the time of the public announcement discussed below and in no event later than June 30, 2020. Nasdaq, however, expects companies to submit the LAS and supplement with enough time to allow Nasdaq to complete its review of the submissions. A company does not need to obtain approval from Nasdaq prior to issuing shares in the transaction if the maximum issuance of common stock (or securities convertible into common stock) is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction, and the maximum discount to the Minimum Price at which shares could be issued is 15%. Otherwise, prior Nasdaq approval is required for the transaction.
Under the Listing Rule, the company must make a public announcement by filing a Form 8-K, where required by SEC rules, or by issuing a press release as promptly as possible, but no later than two business days before the issuance of the securities, disclosing:
- the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received);
- that shareholder approval would ordinarily be required under Nasdaq Listing Rules but for the fact that the company is relying on Listing Rule 5636T; and
- that the audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.
Securities issued in reliance on Listing Rule 5636T will be aggregated with any subsequent issuance, other than a public offering under Nasdaq’s IM-5635-3, at a discount to the Minimum Price if the binding agreement governing the subsequent issuance is executed within 90 days of the prior issuance. If following the subsequent issuance, the aggregate issuance (including shares issued in reliance on the exception in Listing Rule 5636T) equals or exceeds 20% of the total shares or the voting power outstanding before the initial issuance, then shareholder approval will be required under Rule 5635(d) prior to the subsequent issuance.
In addition, the Nasdaq reminded companies that a transaction that violates other Nasdaq Listing Rules could subject the company to delisting and the Nasdaq will review transactions covered by Listing Rule 5636T for compliance with all other Nasdaq listing requirements. Nasdaq-listed companies are still required to comply with the shareholder approval rules under Nasdaq Listing Rule 5635(a) (Acquisition of Stock or Assets of Another Company) and under Nasdaq Listing Rule 5635(b) (Change in Control).
This is in addition to the previous COVID-19 related relief granted by the Nasdaq with respect to its bid price and market value of publicly held shares continued listing requirements discussed in our recent Viewpoints advisory.
The Nasdaq has also stated that companies adversely impacted by COVID-19 or the resulting market conditions, or that have any questions regarding the application of the Nasdaq Listing Rules, may contact their Nasdaq Listing Analyst.