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Nasdaq Provides Temporary Relief From Shareholder Approval Rules for Certain Securities Issuances

The SEC has approved Nasdaq’s proposal to temporarily modify certain of its rules in an effort to streamline listed companies’ access to capital.  The rule proposal is immediately effective.

New Listing Rule 5636T provides a limited temporary exception to the shareholder approval requirements:

  • for transactions other than a public offering in Listing Rule 5635(d); and
  • in certain narrow circumstances, a limited attendant exception to shareholder approval rules for equity compensation plans in Listing Rule 5635(c).

The temporary exception also provides that a company that relies on the exception is not subject to the 15 day prior notification requirement described in Rule 5250(e)(2).

The exception is not  available for the shareholder approval requirements related to equity compensation in Listing Rule 5635(c) except for the limited circumstances described below, certain acquisitions of the stock or assets of another company described in Listing Rule 5635(a) and a change of control in Listing Rule 5635(b).

The temporary exception is available until and including June 30, 2020.

Transactions Other than a Public Offering

The proposed exception to the shareholder approval requirements for transactions other than a public offering in Listing Rule 5635(d) is limited to circumstances where the delay in securing 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.

In addition to demonstrating that the transaction meets one of the foregoing requirements, the company would also have to demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company. Nasdaq also requires that the company’s audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors expressly approve reliance on this exception and determine that the transaction is in the best interest of shareholders.

Under what Nasdaq refers to as the Safe Harbor Provision, no prior approval of the exception by Nasdaq would be required if:

  • the maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction 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, as defined in the Nasdaq rules, at which shares could be issued is 15%.

For transactions that do not fall within the Safe Harbor Provision, the Nasdaq Listing Qualifications Department must approve the company’s reliance on the exception before the company can issue any securities in the transaction. This approval will be based on a review of whether the company has established that it complies with the applicable requirements of the temporary exception.

The temporary rule also requires the company make a public announcement by filing a Form 8-K, where required by SEC rules, or by issuing a press release disclosing, among other things, the terms of the transaction and that shareholder approval would ordinarily be required under Nasdaq rules but for the fact that the Company is relying on an exception to the shareholder approval rules.

Equity Compensation

Nasdaq has long interpreted Listing Rule 5635(c) to require shareholder approval for certain sales to officers, directors, employees, or consultants when such issuances could be considered a form of “equity compensation.” Nasdaq has heard from market participants that investors often require a company’s senior management to put their personal capital at risk and participate in a capital raising transaction alongside the unaffiliated investors. Nasdaq believes that as a result of uncertainty related to the ongoing spread of the COVID-19 virus, listed companies seeking to raise capital may face such requests. Accordingly, Nasdaq proposes that the temporary exception allow such investments under limited circumstances.

The temporary rule provides for an exception from shareholder approval under Listing Rule 5635(c) for an affiliate’s participation in a transaction described above under “Transactions Other than a Public Offering” provided the affiliate’s participation in the transaction was specifically required by unaffiliated investors. In addition, to further protect against self-dealing, the temporary rule would limit such participation to a de-minimis level – each affiliate’s participation must be less than 5% of the transaction and all affiliates’ participation collectively must be less than 10% of the transaction. Finally, any affiliate investing in the transaction must not have participated in negotiating the economic terms of the transaction.

Advance Notification

The temporary exception also provides that a company that relies on the exception is not subject to the 15 day prior notification requirement described in Rule 5250(e)(2) but must still provide notification required by that rule to Nasdaq, along with a supplement, certifying in writing that the company complied with all requirements of the temporary exception.  Such submissions must be made, as promptly as possible, but no later than the time of the public announcement required by the temporary exception and in no event, later than June 30, 2020. In such certification, Nasdaq expects the company to describe with specificity how it complied with the temporary exception.

For transactions described in the temporary exception that require approval of the Nasdaq Listing Qualifications Department before the company can issue any securities in reliance on the temporary exception, Nasdaq expects companies to submit the required notification, and a supplement certifying compliance with the requirements of the temporary exception, with enough time to allow Nasdaq to complete its review of the submissions.

Contact Steve Quinlivan, Bryan Pitko or Ashlee Germany for more information.