Existing Nasdaq Shareholder Approval Rules
Under the Nasdaq shareholder approval rules (the Shareholder Approval Rules),1 listed companies must obtain shareholder approval prior to issuing securities in connection with: (i) certain acquisitions of the stock or assets of another company; (ii) equity-based compensation of officers, directors, employees, or consultants; (iii) a change of control; and (iv) a 20% Issuance2 at a price less than the Minimum Price.3 A listed company’s failure to comply with the Shareholder Approval Rules could result in the delisting of the issuer’s securities on Nasdaq.
Nasdaq Rule 5635T provides a temporary exception to the Shareholder Approval Rules
In light of COVID-19 and listed companies’ increased need for additional funding, Nasdaq adopted Listing Rule 5635T (Rule 5635T), which provides a temporary, limited exception to the Shareholder Approval Rules for companies impacted by the global pandemic.
To rely on Rule 5635T, a listed company needs to: (1) execute a binding agreement governing the issuance of securities; (2) provide their shareholders with at least two business days’ notice before the consummation of the proposed transaction, either through the filing of a Current Report on Form 8-K (if required under SEC rules) or the issuance of a press release that contains certain information (the Shareholder Notice),4 and (3) if applicable, obtain approval from Nasdaq if the transaction falls outside of the Safe Harbor Provision (described below). Notably, a company may issue securities in reliance on Rule 5635T after June 30, 2020, so long as the issuance occurs no later than 30 calendar days following the date of the binding agreement.
Requirements of Rule 5635T
Rule 5635T applies only to limited circumstances where the delay caused by obtaining shareholder approval of the proposed securities issuance 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 issuer’s ability to undertake new initiatives in response to COVID-19; or
- seriously jeopardize the financial viability of the enterprise.
In addition, a company relying on Rule 5635T must demonstrate to Nasdaq that (1) COVID-19-related circumstances created the need for the proposed securities offering, (2) the issuer took steps to ensure the proposed transaction represents the best terms available to the company, (3) the company’s audit committee or similar body of the board of directors, which is comprised of only independent directors (Approving Committee), expressly approved reliance on Rule 5635T and determined that the transaction is in the best interest of the company’s shareholders.
No later than two business days prior to the issuance of the subject securities in reliance on Rule 5635T, a listed company must submit a Listing of Additional Shares notification form to Nasdaq (Listing Notice). In the Listing Notice, the issuer must certify to Nasdaq that it has complied with all the requirements of Rule 5635T and describe such compliance.
Safe Harbor Provision under Rule 5635T
Importantly, if a proposed issuance falls under the safe harbor provision of Rule 5635T (the Safe Harbor Provision), the issuer need not obtain prior approval from Nasdaq to rely on Rule 5635T. The Safe Harbor Provision applies to transactions in which:
- the maximum issuance of common stock (or securities convertible into common stock) of a company issuable in the proposed transaction is less than 25 percent of the total shares outstanding and less than 25 percent of the voting power outstanding before the transaction;
- the maximum discount to the Minimum Price at which shares are issued is 15 percent; and
- the securities issued are not warrants exercisable for shares of common stock.
However, Nasdaq’s Listing Qualifications Department would need to approve a company’s reliance on Rule 5635T for any transaction that does not satisfy the requirements of the Safe Harbor Provision before the company can consummate such transaction. Nasdaq approval will be based on a review of whether the issuer has established that it complies with Rule 5635T’s requirements.
Limited exemption for investments by affiliates
Rule 5635T also provides issuers with an exception from the Shareholder Approval Rules for certain sales to affiliates that would otherwise be subject to the Shareholder Approval Rules as “equity compensation.”5 Under subsection (c) of Rule 5635T, a listed company need not obtain shareholder approval for a securities issuance involving affiliates constituting “equity compensation” if:
- the affiliate’s participation in the proposed transaction was specifically required by unaffiliated investors;
- each affiliate’s participation is less than 5 percent of the transaction, and collectively, all affiliates’ participation is less than 10 percent of the transaction; and
- no affiliate investing in the transaction negotiated the economic terms of the transaction.
Exception from listing of additional shares advance notice requirement
In addition to the relief from the Shareholder Approval Rules, Rule 5635T also provides companies relief from the 15-day prior notification requirement6 for certain events, including when a company issues any common stock or any security convertible into common stock in a transaction that may result in the potential issuance of common stock (or securities convertible into common stock) greater than 10 percent of either the total shares outstanding or the voting power outstanding on a pre-transaction basis. While a transaction consummated by a company under Rule 5635T is not subject to the 15-day prior notification requirement, such company must still provide the Listing Notice to Nasdaq as promptly as possible, but no later than the deadline for the Shareholder Notice (i.e., two business day prior to the consummation of the transaction) and in no event later than June 30, 2020. The Listing Notice must also include a supplement certifying in writing that the company complied with all applicable requirements of Rule 5635T.
The new rule exceptions follow a memorandum issued by Nasdaq on March 26, 2020, entitled Information for Nasdaq Listed Companies About the Impact of Coronavirus (COVID-19),7 which provided guidance for its listed companies impacted by the COVID-19 pandemic, and a rule proposed by Nasdaq on, and effective as of, April 16, 2020,8 which provided temporary relief for certain listed companies from price-based continued listing requirements.
The full text of Proposed Rule 5636T is available at sec.gov, and the SEC’s notice regarding Rule 5635T is also available on sec.gov.
Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you may face related to COVID-19.
For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at COVID-19@reedsmith.com
- Nasdaq’s shareholder approval rules are set forth in Rule 5635(a)(Acquisition of Stock or Assets of Another Company), Rule 5635(b)(Equity Compensation), Rule 5635(c)(Change of Control), and Rule 5635(d)(Transactions other than Public Offerings).
- Nasdaq Rule 5635(d)(1)(B) defines a “20% Issuance” as “a transaction, other than a public offering as defined in IM-5635-3, involving the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or Substantial Shareholders (as defined by Rule 5635(e)(3)) of the Company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance.”
- Nasdaq Rule 5635(d) defines “Minimum Price” as “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.”
- The Shareholder Notice must include: (i) the terms of the transaction, including the number of shares of common stock to be issued and consideration received; (ii) a statement that the Shareholder Approval Rules would normally apply, but that the company is relying on Rule 5635T; and (iii) a statement that the company’s Approving Committee expressly approved reliance on Rule 5635T and determined the transaction was in the best interest of the company’s shareholders.
- Nasdaq Rule 5635(c) requires a company to obtain shareholder approval prior to certain issuances of securities constituting “equity compensation,” which includes the issuance of common stock (or equivalents) or securities convertible into or exercisable for common stock to officers, directors, employees, or consultants at a price less than the market value of the stock unless the issuance is part of a public offering (as described in IM-5635-3).
- See Nasdaq Listing Rule 5250(e)(2) (Listing of Additional Shares).
- Information for Nasdaq listed companies about the impact of Coronavirus (COVID-19) (as of May 5, 2020).
- Issuer Alert 2020-2 – Nasdaq Relief for Certain Listed Companies.
Client Alert 2020-313
