Capital Markets Alert
The SEC declared, effective immediately, as of May 4, 2020, a new Nasdaq rule proposal (“Listing Rule 5636T”), which provides a temporary exception, through June 30, 2020, from the shareholder approval requirements for certain issuances of 20% or more of the outstanding shares pursuant to Listing Rule 5635(d) and in certain instances, a limited exception for issuance related to equity compensation pursuant to Listing Rule 5635(c). Nasdaq expressed its belief that this temporary exception will permit companies to raise capital quickly in order to continue running their businesses and address the ongoing health crisis caused by the COVID-19 pandemic, including its impact on their employees, customers and communities.
Listing Rule 5635(d) requires shareholder approval prior to a “20% Issuance” at a price that is less than the “Minimum Price”. Under Nasdaq’s Listing Rules, (a) a “20% Issuance” is a transaction, other than a public offering as defined in Nasdaq 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.
Listing Rule 5635(c) requires shareholder approval, with certain limited 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.”
To address the potential need for companies to raise capital rapidly, Nasdaq has created Listing Rule 5636T(b), a temporary exception that will be available only where the company can demonstrate to Nasdaq’s Listing Qualifications Department that (i) the need for the transaction is due to circumstances related to COVID-19; and (ii) the delay in securing shareholder approval would (1) have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan; (2) result in workforce reductions; (3) adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or (4) seriously jeopardize the financial viability of the company as an enterprise. In addition, the company must also show that it undertook a process designed to ensure that the proposed transaction represents the best terms available to the company and that the company’s independent, disinterested audit committee (or comparable board committee) expressly approved reliance on the exception and determined that the transaction is in the best interest of the company’s stockholders.
Listing Rule 5636T(c) provides an exception from the shareholder approval requirements of Listing Rule 5635(c) for an affiliate’s participation in a transaction described in Listing Rule 5636T(b), provided the affiliate’s participation in the transaction was “specifically required by unaffiliated investors,” that each affiliate’s participation is less than 5% of the transaction, that all affiliates’ participation is collectively less than 10% of the transaction and that any affiliate investing in the transaction “must not have participated in negotiating the economic terms of the transaction.”
Other than transactions within the safe harbor (as described below), before the company can issue any securities in the transaction, the Nasdaq Listing Qualifications Department must approve the company’s reliance on the exception, based on a review of the company’s compliance. Nasdaq will notify the company in writing whether or not reliance on the exception was approved. There is, however, a safe harbor if (i) the maximum percentage 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 prior to the transaction, and (ii) the maximum discount to the Minimum Price at which shares could be issued is 15%, prior approval of the transaction by Nasdaq will not be required. Transactions that involve issuance of warrants exercisable for shares of common stock are not eligible for the safe harbor.
In addition to submitting a standard Listing of Additional Shares (“LAS”) notification form in order to benefit from the temporary exception under Listing Rule 5636T, the company must also submit a supplement certifying that it complies with all requirements of Listing Rule 5636T(b) (and, if applicable, Listing Rule 5636T(c)) and specifically describing how it complies. Companies will not be required to comply with the 15-day advance notification requirement of Listing Rule 5250(e)(2), but the submission must be made as promptly as possible, but no later than the time of the public announcement requirement of Listing Rule 5636T(d) (as described below) and in no event later than June 30, 2020. If Nasdaq approval is required, the company must submit the LAS and the supplement with enough time to allow Nasdaq to complete its review, which could take more than two business days.
To take advantage of Listing Rule 5636T(d), the company is also required to make a public announcement of its reliance on the temporary exception by issuing a press release or by filing a Form 8-K (where required by SEC rules) disclosing, as promptly as possible, but no later than two business days before the issuance of the securities (i) the terms of the transaction, including the number of shares of common stock that could be issued and the consideration received; (ii) that shareholder approval would ordinarily be required under applicable Nasdaq rules except for the company’s reliance on an exception to the shareholder approval rules; and (iii) that the audit committee or a committee with similar functions 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 the company’s shareholders.
Additionally, to rely on the temporary exception, the company must execute a binding agreement for the issuance of the securities, submit the LAS and supplement and obtain approval from Nasdaq (if required) no later than June 30, 2020. However, the company may issue the securities governed by the agreement in reliance on the exception after June 30, 2020, as long as the issuance occurs no later than 30 calendar days following the date of such binding agreement. If the company does not issue securities within 30 calendar days, it may no longer rely on the temporary exception in Listing Rule 5636T.
Securities issued in reliance on Listing Rule 5636T will be aggregated with any subsequent issuance, other than a public offering under Nasdaq 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 Listing Rule 5635(d) prior to the subsequent issuance.
Nasdaq reminds companies that a transaction that violates other applicable Nasdaq rules could subject the company to delisting and Nasdaq Staff 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 Listing Rule 5635(a) (Acquisition of Stock or Assets of Another Company) and under Listing Rule 5635(b) (Change in Control).
Additional COVID-19-related relief has been granted by Nasdaq with respect to continued listing requirements related to bid price and market value of publicly held shares (see our prior insights here).
Please contact any member of Orrick’s Capital Markets Group for further assistance regarding coronavirus implications for public companies and other legal impacts of the coronavirus on your company.