On May 4, 2020, the SEC announced (available here) that it has immediately approved proposed rule changes by The Nasdaq Stock Market LLC (“Nasdaq") that provide listed companies with a temporary exception from certain shareholder approval requirements under the Nasdaq Rules (the “Rules") through and including June 30, 2020 (available here).
By way of background, Nasdaq Listing Rule 5635(d) requires shareholder approval prior to issuance of shares of common stock (or securities convertible into or exercisable for common stock ) representing 20% or more of the outstanding common stock or voting power in a transaction other than a public offering (a “20% Issuance") at a price that is less than the Minimum Price (which is the lower of (i) the Nasdaq Official Closing Price reflected on Nasdaq.com immediately before the signing of the applicable binding agreement; and (ii) the average Nasdaq Official Closing Price of the common stock reflected on Nasdaq.com for the five trading days immediately before the signing of the applicable binding agreement). In addition, Nasdaq Listing Rule 5635(c) requires shareholder approval prior to the issuance of securities when a stock option or purchase plan pursuant to which stock may be acquired by officers, directors, employees, or consultants is to be established or amended. Nasdaq has historically 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.
Under the temporary rule changes (covering certain transactions where a binding agreement is entered into on or before June 30 as described below), the requirement for shareholder approval of a 20% Issuance and the requirement for shareholder approval if officers, directors, employees or consultants participate in a 20% Issuance are temporarily lifted under the rule changes, subject to certain conditions. Nasdaq proposed these changes to exempt companies from the above requirements in response to the unprecedented economic uncertainty and resulting market declines related to the COVID-19 pandemic in order to streamline listed companies' access to capital. The exemption from the application of the equity compensation rules is intended to accommodate investor requests that a company's senior management put their personal capital at risk along with outside investors.
The exemptions are available only in situations where the need for the transaction is due to circumstances related to COVID-19 and where a delay caused by securing shareholder approval would (i) have a material adverse impact on the company's ability to maintain operations under its pre-COVID-19 business plan; (ii) result in workforce reductions; (iii) adversely impact the company's ability to undertake new initiatives in response to COVID-19; or (iv) seriously jeopardize the financial viability of the enterprise. The company must demonstrate that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company and that the transaction was approved in accordance with the temporary rule by the company's audit committee or other committee of independent disinterested directors. Participation by officers, directors, employees and consultants in a transaction must be limited to 5% of the transaction per individual and 10% of the transaction in the aggregate, must be specifically required by unaffiliated investors and the applicable affiliates must not have participated in negotiating the transaction.
Companies taking advantage of the temporary exemption must file a notification of listing of additional shares with Nasdaq no later than two business days prior to the issuance of securities. Reliance on the temporary exemption requires approval from Nasdaq except for transactions in which the maximum issuance of common stock (or securities convertible into common stock) is less than 25% of the outstanding common stock and voting power, and for which the maximum discount to the Minimum Price at which shares could be issued is 15%. The adopting release clarifies that this exemption from the requirement to obtain prior approval of Nasdaq is not available for issuances of warrants.
Nasdaq requires companies relying on the exemption to file a Form 8-K or issue a press release no later than two business days before the issuance of securities disclosing (i) the transaction terms; (ii) the company's reliance on the temporary exemption from the shareholder approval requirement; and (iii) that the company's Audit Committee or another committee of independent, disinterested directors has approved reliance on the exemption and determined that the proposed transaction is in the shareholders' best interests.
So long as a company has taken specified steps on or prior to June 30th, the exemptions will apply to securities issued for up to 30 calendar days following the date of a binding agreement for the transaction (including after June 30th). The steps that must be taken on or prior to June 30, 2020 include the company's entry into a binding agreement for the transaction, submission of the required notices to Nasdaq and obtaining of prior approval from Nasdaq if required.
The temporary exemptions do not apply to other transactions requiring shareholder approval under the Nasdaq rules including issuances representing more than 20% of a company's outstanding common stock or voting power in connection with acquisitions and issuances that are deemed to result in a change of control by Nasdaq. The exemption from the requirement for shareholder approval for equity compensation plans is limited to situations in which affiliates are participating in an issuance of securities exempted by the rule, and not to equity compensation arrangements generally.
We have previously covered temporary waivers of certain shareholder approval requirements for private placements in the New York Stock Exchange here, and changes to Nasdaq and New York Stock Exchange listing standards here.
We would like to thank Rodrigo Surcan, David Sterngold, and Jocelyn Shih in our New York office and Harrison Tucker in our Houston office for their work on this article.