United States: Nasdaq Provides Temporary Exception To Certain Shareholder Approval Requirements

The SEC has declared immediately effective new Nasdaq Rule 5636T, which will provide a temporary exception,  through June 30, 2020, from the shareholder approval requirements for certain issuances of 20% or more of the outstanding shares (Rule 5635(d)) and for a narrow subset of capital-raising issuances that could be considered equity compensation (Rule 5635(c)).  Given that stay-at-home orders in effect in many communities have wreaked havoc on the revenue streams of many businesses, companies may have urgent needs to raise capital.  Nasdaq believes that this temporary exception "will permit companies to raise capital quickly to continue running their businesses and address the immediate health crisis caused by the COVID-19 pandemic, including its impact on their employees, customers, and communities."

Rule 5636T(b)

Rule 5635(d) requires shareholder approval prior to a "20% Issuance" at a price that is less than the "Minimum Price." A "20% Issuance" is a transaction, other than a public offering, 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 company officers, directors or "substantial shareholders" (as defined in the rule), equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. The "Minimum Price" is the lower of: (i) the Nasdaq Official Closing Price immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Official Closing Price of the common stock for the five trading days immediately preceding the signing of the binding agreement.

To address the potential need for companies to raise capital rapidly, Nasdaq has crafted  Rule 5636T(b), a temporary exception that will be available only where the company can demonstrate to Nasdaq's Listing Qualifications Department that:

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) has "expressly approved reliance on this exception; and ... determined that the transaction is in the best interest of shareholders."

Rule 5636T(c)

Rule 5635(c) requires shareholder approval for certain issuances under an equity compensation plan or arrangement (or material amendments to same) under which stock may be acquired by officers, directors, employees or consultants. Nasdaq has long interpreted the rule to apply to certain capital-raising transactions, requiring "shareholder approval for certain sales to officers, directors, employees, or consultants when such issuances could be considered a form of 'equity compensation.'"  The example provided by Nasdaq is a capital-raising transaction where senior management may be required by investors to participate.

Rule 5636T(c) provides an exception from the  shareholder approval requirements of Rule 5635(c) for an affiliate's participation in a transaction described in 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."

Nasdaq approval; safe harbor

Except for transactions within the safe harbor 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 reliance on the exception was approved. However, there is 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 before 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. Nasdaq notes that transactions that involve issuance of warrants exercisable for shares of common stock are not eligible for the safe harbor.

Required submissions 

To take advantage of the temporary exception under Rule 5636T, in addition to submitting a standard Listing of Additional Shares notification form, the company must also submit a supplement certifying to Nasdaq that it complies with all requirements of Rule 5636T(b)  (and Rule 5636T(c) if applicable), describing with specificity how it complies.  For example, according to the supplemental instructions, if the delay would jeopardize financial viability,  the submission should address at least the following issues:

Notably, companies will not be required to comply with the 15-day advance notification requirement of Rule 5250(e)(2). Instead, the submission must be made as promptly as possible, but no later than the time of the public announcement required by Rule 5636T(d) (described below) and in no event later than June 30, 2020.  If Nasdaq approval is required, the company must submit the notification and the supplement "with enough time to allow Nasdaq to complete its review of the submissions," which could take more than two business days.

Notice to shareholders

Rule 5636T(d) requires the company to make a public announcement of its reliance on the temporary exception 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:

Aggregation

If the company executes a binding agreement governing a subsequent issuance of securities within 90 days of a prior issuance that relied on the temporary exception, Nasdaq will aggregate any issuances under the temporary exception with the subsequent issuance by the company, other than a public offering, at a discount to the Minimum Price.  As a result, "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, then shareholder approval will be required under Rule 5635(d) prior to the subsequent issuance."

Timing

To rely on the temporary exception, the company must execute a binding agreement governing the issuance of the securities, submit to Nasdaq the notice and supplement described above 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, provided the issuance occurs no later than 30 calendar days following the date of the binding agreement. If the company does not issue securities within 30 calendar days, it may no longer rely on the temporary exception in Rule 5636T.

Caution

Nasdaq cautions that "a transaction that violates other Nasdaq rules could subject the company to delisting and Nasdaq Staff would review transactions covered by proposed Listing Rule 5636T for compliance with all other Nasdaq listing requirements." Note that the temporary exception is not available to eliminate the shareholder approval requirements related to equity compensation under Rule 5635(c) (except for the limited circumstances described above), acquisitions under Rule 5635(a) or change-of-control transactions under Rule 5635(b).

Originally published 6 May 2020

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