On May 4, 2020, the Nasdaq Stock Market LLC (“Nasdaq”) issued a temporary exception to shareholder approval requirements for issuances of 20% or more outstanding shares and for certain capital-raising transactions that could be considered equity compensation. The temporary exception will not be available for change of control transactions or in connection with acquisitions. The full text of the temporary exception is available on the Nasdaq’s website. This temporary exception is available through June 30, 20201 and is intended to streamline certain listed companies’ access to capital during the ongoing COVID-19 pandemic.
Transactions Other than a Public Offering
Under Listing Rule 5635(d), shareholder approval is required for a 20% issuance at less than the Minimum Price2 in a transaction not involving a public offering. For purposes of the rule, a 20% issuance is one that involves the sale, issuance or potential issuance of common stock or related convertible or exercisable securities, alone or together with sales by officers, directors or substantial shareholders, that equals 20% or more of either the total shares of common stock outstanding or the voting power outstanding before the issuance, on an aggregated basis if the company has multiple classes of common stock.
The new Listing Rule 5636T will grant a temporary exception to the shareholder approval requirements for 20% issuances where the delay required to secure shareholder approval would:
- have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan;
- result in workforce reductions;
- adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
- seriously jeopardize the financial viability of the enterprise.
A company that satisfies one of the four criteria above and intends to rely on the temporary exception must obtain the prior approval of Nasdaq’s Listing Qualifications Department to rely on the exception, unless the company’s proposed transaction would qualify for the “Safe Harbor Provision” described below. In any case, a company that intends to rely on the temporary exception must submit a Listing of Additional Shares form and a written supplement to Nasdaq certifying the satisfaction of each of the four conditions below:
- the need for the transaction is due to circumstances related to COVID-19;
- the company conducted a process to ensure that the proposed transaction represents the best terms available;
- the company’s audit committee or a board committee comprised of independent, disinterested directors expressly approve reliance on the exception; and
- that the transaction is in the best interest of the company’s shareholders.
This temporary exception shares many characteristics with current Nasdaq Listing Rule 5635(f), known as the financial viability exception. Under Rule 5635(f), Nasdaq may grant relief from the shareholder approval requirement if the delay in securing approval would seriously jeopardize the financial viability of the enterprise and reliance on the exception is expressly approved by the audit committee or a board committee comprised of independent, disinterested directors. The financial viability exception, which remains in effect, also requires companies to mail a notice to shareholders, as well as issue a public announcement (by press release, a Form 8-K or website posting), of the transaction no later than 10 days prior to the issuance of the security. Given some companies’ need for accelerated access to funding in the current environment, the 10-day advance notice requirement of the financial viability exception may be impractical.
In adopting the temporary exception, Nasdaq distinguished the current relief from the existing financial viability exception, in part, by including a “Safe Harbor Provision” where no prior approval of the transaction is required by Nasdaq, notwithstanding the conditions described above, if:
- the maximum issuance of common stock (including securities convertible into common stock) issuable in the transaction is less than 25% of each of the total shares outstanding and the voting power outstanding before the transaction; and
- the maximum discount to the Minimum Price at which shares could be issued is 15%.
However, a company relying on the Safe Harbor Provision still must submit a Listing of Additional Shares form and a written supplement.
Transactions that involve warrants exercisable for shares of common stock are not eligible for the Safe Harbor Provision.
Under Listing Rule 5635(c), Nasdaq requires shareholder approval for certain sales to officers, directors, employees or consultants when such issuances could be considered a form of “equity compensation.”
From time to time, investors may require a company’s senior management to put their personal capital at risk to participate in a capital raising transaction alongside unaffiliated investors. The new Listing Rule 5636T(c) provides a temporary exception from shareholder approval under Listing Rule 5635(c) for affiliates, including senior management, to participate in such transactions, subject to the conditions below, which are intended to safeguard against self-dealing and limit such participation to a de minimis level:
- the affiliate’s participation was specifically required by the unaffiliated investors;
- any affiliate’s participation must be less than 5% of the transaction;
- all affiliates’ participation combined must be less than 10% of the transaction; and
- any affiliate who participates in the transaction must not have participated in negotiating the economic terms of the transaction.
Public Announcement of Reliance on Exception
Similar to the existing financial viability exception, a company relying on any of the temporary exceptions described above must publicly announce such reliance by filing a Form 8-K or issuing a press release, disclosing:
- the terms of the transaction;
- that shareholder approval would be required under normal circumstances by the Nasdaq rules but for the fact that the company is relying on an exception to the shareholder approval rules; and
- the audit committee or a board committee comprised solely of independent, disinterested directors expressly approved reliance on the exception and determined the transaction is in the best interest of shareholders.
The company’s public announcement is due no later than two business days before the issuance of securities.
Under normal circumstances, Listing Rule 5250(e)(2) requires a company to submit a Listing of Additional Shares form to Nasdaq at least fifteen calendar days prior to issuances of common stock, or any security convertible into common stock, greater than 10% of either the total shares or voting power outstanding before the issuance, on an aggregated basis if the company has multiple classes of common stock.
Under new Listing Rule 5636T(e), companies relying on the temporary exceptions described above are exempt from the 15-calendar day notice requirement. However, they must still submit the Listing of Additional Shares form and the written supplement described above to Nasdaq as promptly as possible, but no later than the time of the public announcement of its reliance on a temporary exception, and in no event later than June 30, 2020. If a transaction requires approval of the Nasdaq Listing Qualifications Department, Nasdaq expects that companies will submit the Listing of Additional Shares form and the written supplement with enough time to complete a full review of the submissions.3
COVID-19, and the resulting actions taken to stop the spread of the virus, have greatly reduced many companies’ revenues and prospects. As a result of the related market uncertainty, many large investors are reluctant to enter into new equity transactions without appropriate compensation for their risk through discounts of the trading price of the securities. Nasdaq’s new Listing Rule 5636T is intended to provide temporary help to listed companies who need to raise capital quickly in response to the current unusual market conditions without the delays attendant to seeking shareholder approval. Nasdaq’s temporary exceptions are similar to the temporary waivers previously issued by the New York Stock Exchange (“NYSE”), and are just one of many tools intended to preserve functioning capital markets during the ongoing COVID-19 pandemic.
1To rely on the exception, a company must execute a binding agreement governing the securities, submit the requisite notices and obtain the required approvals from Nasdaq, as discussed below, no later than June 30, 2020. The issuance of securities governed by such agreement in reliance on the temporary exception 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.
2“Minimum Price” is defined in Listing Rule 5635(d)(1)(A) as the lower of: (i) the Nasdaq Official Closing Price immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Closing Price of the common stock for the five trading days immediately preceding the signing of the binding agreement.
3Nasdaq notes that a company may not issue any securities until it receives approval from the Nasdaq Listing Qualifications Department, which may take more than two days. If no approval is obtained from the exchange and the Safe Harbor Provision is not available, any issuance of securities must comply with the shareholder approval requirements in Listing Rule 5635.
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