United States: Nasdaq Tolls Compliance Period For Certain Continued Listing Requirements

The SEC has declared immediately effective a Nasdaq rule proposal providing relief to listed companies that, in light of market conditions resulting from the impact of COVID-19, have fallen out of compliance with two of the Nasdaq continued listing standards. The relief will provide companies with a longer period to regain compliance with the bid price and "market value of publicly held shares" continued listing requirements by tolling the compliance periods through June 30, 2020. Nasdaq believes that this temporary tolling will permit companies to focus on their business operations and the health and safety of their employees, customers and communities, rather than on Nasdaq listing requirements. In addition, Nasdaq believes that temporary tolling will allow investments in these shares without concern for near-term delisting.

Currently, for primary equity listed on the Nasdaq Global Market, the continued listing standards require that companies maintain a minimum $1 bid price and market value of publicly held shares of at least $5 million or $15 million, depending on the standard. For the Nasdaq Capital Market, the minimum bid price is still $1, but the market value of publicly held shares is at least $1 million. In the event of a failure to meet the continued listing requirements for minimum bid price or market value of publicly held shares for a period of 30 consecutive business days, the Nasdaq Listing Qualifications Department is supposed to promptly notify the company of the failure. The company will then have a period of 180 calendar days from the notification to achieve compliance by meeting the applicable standard for a minimum of 10 consecutive business days during the applicable compliance period (unless Staff exercises its discretion to extend this 10-day period).

Nasdaq advises that it is seeing an increase in non-compliance amid the current market uncertainty and that, under current volatile market conditions, it is difficult for non-compliant companies to regain compliance through typical measures such as a reverse stock split or sale of additional equity. Accordingly, Nasdaq proposes to give companies additional time to regain compliance with these two requirements by tolling the compliance periods through June 30, 2020. Nevertheless, throughout the tolling period, Nasdaq will continue to monitor the requirements and to notify companies about new instances of non-compliance with either of these two requirements in accordance with existing Nasdaq rules. As set forth in Rule 5810(b), notification by Nasdaq will trigger a Nasdaq requirement to make a public announcement disclosing receipt of the notification by filing a Form 8-K, where required by SEC rules (see Item 3.01), or by issuing a press release. During the tolling period, Nasdaq will also continue to maintain and add to its list of non-compliant companies.

Starting on July 1, 2020, when the tolling period is over, companies will still have available the balance of any pending compliance period that remained at the start of the tolling period to come back into compliance with the applicable requirement. Here is the example provided by Nasdaq:

Companies that are initially identified as non-compliant during the tolling period will have 180 days to regain compliance after the end of the tolling period, beginning on July 1, 2020. Nasdaq will continue to monitor securities to determine if they regain compliance with the two requirements during the tolling period.

For companies that are in the hearings process, at the end of the tolling period, they will return to that process at the same stage they were in when the tolling period began. If the company had received a temporary exception from the Hearings Panel before the tolling began, the company would receive the balance of the exception period beginning on July 1, 2020. However, if a company is in the hearings process, has had an oral or written hearing before a Hearings Panel and the Panel has reached a determination to delist, even if the Hearings Panel has not issued the written decision required by Rule 5815(d)(1) and Rule 5840(c) prior to the proposed rule change taking effect, the company would still be delisted and not receive the benefit of the tolling period.

Although not discussed in this post, the relief will also apply to preferred stock, secondary classes of common stock, shares or certificates of beneficial interest
of trusts, limited partnership interests, ADRs, subscription receipts and their equivalents.

In addition to the temporary relief described above, Nasdaq has issued some guidance regarding the impact of disruptions caused by COVID-19. In particular, in the guidance, Nasdaq addressed the application of the financial viability exception to the shareholder approval rules in the context of the COVID-19 pandemic. In general, Nasdaq requires shareholder approval prior to issuances of 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) certain private placements at a price less than the Minimum Price as defined in Listing Rule 5635(d).

However, companies that are in financial distress, "where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company," may apply for the financial viability exception by submitting a Rule Interpretation Request form electronically through the Listing Center. The company must obtain Nasdaq's approval to rely on the exception prior to proceeding with the transaction. The request should include a letter describing the proposed transaction in detail, identifying the investors and addressing how a delay resulting from seeking shareholder approval would seriously jeopardize the company's financial viability and how the proposed transaction would benefit the company. The company's audit committee must also expressly approve reliance by the company on the exception. Under the rule, companies must also provide notice to shareholders at least ten days prior to issuing securities in the exempted transaction. Most importantly, in the guidance, Nasdaq observed that "[a]lthough generally this is a difficult standard to meet, Nasdaq will consider the impact of disruptions caused by COVID-19 in its review of any pending or new requests for a financial viability exception."

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