On May 4, 2020, the SEC approved Nasdaq's new Listing Rule 5636T (Temporary Exception) to provide a limited temporary exception to the shareholder approval requirements in Listing Rule 5635(d) (Transactions other than Public Offerings) and a related limited exception to Listing Rule 5635(c) (Equity Compensation) through and including June 30, 2020.
Under Listing Rule 5635(d), shareholder approval is required prior to a 20% Issuance at a price less than the Minimum Price. A "20% Issuance" is a transaction, other than a public offering, involving the sale, issuance or potential issuance by a 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 of such company, equals 20% or more of the common stock or voting power outstanding before the issuance. The "Minimum Price" is the lower of: (i) the Nasdaq Official Closing Price of the common stock (NOCP); or (ii) the average NOCP for the five trading days, in either case immediately preceding the signing of the binding agreement. Under Listing Rule 5635(c), shareholder approval is also required, with certain 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. While an exception to these requirements is currently available for companies in financial distress, where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company (Viability Provision), Nasdaq had determined that the Viability Provision does not adequately address most situations arising from COVID-19.
The Temporary Exception eliminates the requirement for shareholder approval under Listing Rule 5635(d) if the delay required to secure it 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. In addition, the company would have to demonstrate that the transaction is needed due to circumstances related to COVID-19, and that it undertook a process designed to ensure that the proposed transaction represents the best terms available to the company. The company's audit committee (or a comparable body of the board of directors comprised solely of independent, disinterested directors) must expressly approve reliance on the Temporary Exception, and determine that the transaction is in the best interest of shareholders.
Unlike the Viability Provision, no prior approval by Nasdaq is required to utilize the Temporary Exception if 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 before the transaction, and the discount to the Minimum Price does not exceed 15% (Safe Harbor). The issuance of warrants exercisable for common stock are not eligible for the Safe Harbor. Reliance on the Temporary Exception for transactions that do not qualify for the Safe Harbor must be approved by the Nasdaq Listing Qualifications Department before securities can be issued.
A company relying on the Temporary Exception must also make a public announcement by filing a Form 8-K, where required by SEC rules, or by issuing a press release 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 Nasdaq rules but for the fact that the company is relying on an exception to the shareholder approval rules; and (iii) 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.
As investors in the foregoing transactions often require a company's senior management to participate, transactions relying on the Temporary Exception are also exempt from the shareholder approval requirements of Listing Rule 5635(c) for an affiliate's participation, provided that: (i) the affiliate's participation was specifically required by unaffiliated investors; (ii) each affiliate's participation must be less than 5% of the transaction and all affiliates' participation collectively must be less than 10% of the transaction; and (iii) any investing affiliate must not have participated in negotiating the economic terms of the transaction.
Under current Listing Rule 5250(e)(2), companies must notify Nasdaq at least 15 calendar days prior to certain events, including transactions that may result in the potential issuance of common stock (or securities convertible into common stock) greater than 10% of either the total shares or voting power outstanding on a pre-transaction basis. Although a company relying on the Temporary Exception will not be subject to the 15-day prior notification requirement, it must still provide notification to Nasdaq under Rule 5250(e)(2), along with a supplement certifying that the company has complied with all applicable requirements of the Temporary Exception. Such submissions must be made as promptly as possible, but no later than the time of the required public announcement, and in no event later than June 30, 2020. In such certification, the company must describe with specificity how it complies with the Temporary Exception. For transactions that require the prior approval of the Nasdaq Listing Qualifications Department, the notification and supplement must be submitted with enough time to allow Nasdaq to complete its review (which may take more than two days). In addition, the Nasdaq Staff will review transactions covered by the Temporary Exception for compliance with all other Nasdaq listing requirements.
The Temporary Exception is not available for the shareholder approval requirements related to equity compensation under Listing Rule 5635(c) (except for the limited circumstances described above), acquisitions under Listing Rule 5635(a), or a change of control under Listing Rule 5635(b).
To rely on the Temporary Exception, the listed company must execute a binding agreement governing the issuance of the securities, submit the required notices, and obtain Nasdaq approval (if required), no later than June 30, 2020. The issuance of the securities may occur after June 30, 2020, provided it takes place no later than 30 calendar days following the date of the binding agreement. If the company does not issue securities within the 30 calendar days, it may no longer rely on the Temporary Exception.
Nasdaq will aggregate issuances of securities in reliance on the Temporary Exception with any subsequent issuance by the company, 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. Accordingly, if following the subsequent issuance, the aggregate issuance (including shares issued in reliance on the Temporary Exception) equals or exceeds 20% of the total shares or the voting power outstanding before the initial issuance, then shareholder approval will be required under Rule 5635(d) prior to the subsequent issuance.
Article originally published on 7 May 2020
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
