On May 4, 2020, in response to the tremendous economic uncertainty and ensuing securities market downturn resulting from COVID-19, the Securities and Exchange Commission approved effective immediately Nasdaq Listing Rule 5636T, providing a temporary exception from Nasdaq’s shareholder approval requirements.
What is the temporary exception to shareholder approval requirements?
Listing Rule 5635(d) requires shareholder approval prior to a 20% securities issuance, other than shares issued further to a public offering,1 at a price that is less than the Minimum Price.2 Furthermore, based on Nasdaq interpretation, the issuance of securities to officers, directors, employees or consultants at a price less than the market value of the stock is considered a form of “equity compensation,” which requires shareholder approval under Rule 5635(c).3
Nasdaq Rule 5636T provides a limited temporary exception to the shareholder approval requirements in Rule 5635(d) (Transactions other than Public Offerings) and, in certain narrow circumstances, a limited exception to Rule 5635(c) (Equity Compensation).
When does the temporary shareholder exception expire?
The shareholder approval exception is in effect until June 30, 2020, and notifications must be provided to Nasdaq no later than that date. However, an issuance of securities may occur after June 30, 2020, so long as the issuance occurs no later than 30 calendar days after the date of the binding agreement. If the company fails to issue securities within 30 calendar days, it can no longer rely on the exception.
Under what circumstances can a company rely on the temporary shareholder exception?
Nasdaq’s shareholder approval exceptions in Rule 5636T are not usable in every circumstance an issuer faces. Specifically, the exception is limited to situations where a delay in obtaining shareholder approval would do any of the following:
- 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
- Seriously jeopardize the financial viability of the enterprise
What are the requirements in order to rely on the exception?
A company relying on the exception must execute a binding agreement governing the issuance of the securities and provide Nasdaq the following information:
- The facts and circumstances related to COVD-19 that have impacted the company’s operations, workforce, new initiatives or financial viability, as applicable
- Specific details on how a delay resulting from seeking shareholder approval would impact the company in one of the four ways described above
- The process the company used to ensure that the proposed transaction represents the best terms available to the company, including an overview of all meetings, consultations and inquiries conducted by the company and its advisors, and other factors that were considered
- Resolutions of the audit committee or a similar board entity made up of independent, disinterested directors that expressly approved reliance on the exception and that the transaction is in the shareholders’ best interest
Is a company required to obtain prior approval from Nasdaq?
It depends. Every company is required to submit a supplement to the Listing of Additional Shares notification form. However, a company is not required to obtain prior approval from Nasdaq prior to the issuance of shares so long as the maximum issuance of common stock (or securities convertible into common stock) in the transaction is less than 25% of the total shares and voting power outstanding prior to the transaction, and the maximum discount to the Minimum Price at which shares can be issued is 15% (“Fast Track Notification”).
If a transaction includes warrants or falls outside of the terms of the Fast Track Notification, Nasdaq must approve the company’s reliance on the exception before the issuance of any securities in the transaction.
The notification must be provided to Nasdaq as promptly as possible but no later than two business days before issuance of shares; however, companies are not required to wait the otherwise required 15 calendar days after filing the notification of listing of additional shares.
Is a company required to publicly disclose reliance on the shareholder approval exception?
Yes, companies relying on the exception must either file a Form 8-K, where required by SEC rules, or issue a press release as promptly as possible but no later than two business days before the issuance of the securities.
A company relying on the shareholder approval exception must disclose the following:
- Terms of the transaction, including the number of shares that may be issued and the consideration
- 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
- That the audit committee or a comparable body 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 shareholders
Are there additional conditions if affiliates participate in a transaction?
Yes. Rule 5636T(c) permits an exception from shareholder approval requirements under Rule 5635(c), which, based on Nasdaq interpretation, requires shareholder approval for certain sales to officers, directors, employees or consultants when such issuances could be considered a form of equity compensation. If an affiliate participates in a transaction that under the rules would otherwise be considered a form of equity compensation, shareholder approval is not required as long as the following conditions are satisfied:
- Any affiliate’s participation must be specifically required by unaffiliated investors
- Any affiliate’s participation must be less than 5% of the transaction
- All affiliates’ participation collectively must be less than 10% of the transaction
- The affiliates must not have participated in negotiating the economic terms of the transaction
Will separate issuances of shares be aggregated?
Yes. Generally, Rule 5635(d) requires shareholder approval if the issuance of securities, other than shares issued in a public offering, represents 20% or more of the issuer’s common stock or voting power outstanding before the issuance at a price less than the Minimum Price. Securities issued in reliance on the exception in Rule 5636T will be aggregated with any subsequent issuance, other than a public offering, 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) equals or exceeds 20% of the total shares or the voting power outstanding before the initial issuance, shareholder approval will be required prior to the subsequent issuance.
Where can I obtain further information?
Nasdaq sets out in its SEC rule filing the full requirements a company wishing to rely on the new exception must follow. Companies contemplating making use of the new exception are advised to read the full text of the rule filing and related Nasdaq guidance listed below.
While it is early, observers and participants in the capital markets arena are optimistic about Nasdaq’s recent shareholder approval exception as a solid step toward helping public companies access capital more quickly and easily in these turbulent economic times.
1 “Public offering” is defined in IM 5635-3.
2 Rule 5635(d)(1)(A) 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.
3 See Nasdaq FAQs – Listing, Identification Number 275.