The Nasdaq Stock Market is temporarily providing an exception from shareholder approval requirements for certain common stock issuances, permitting companies to raise capital quickly to continue running their businesses. The exception is effective immediately and valid for transactions entered into through June 30, 2020. Further, for any transactions entered into by June 30th, the securities must be issued within 30 days after the entry into the binding agreement.
Listing Rule 5636T provides a limited temporary exception to the shareholder approval requirements in Listing Rule 5635(d) (Transactions other than Public Offerings) and, in certain narrow circumstances, a limited attendant exception to Listing Rule 5635(c) (Equity Compensation).
Exception from Listing Rule 5635(d) (Transactions other than Public Offerings)
The exception applies to transactions for the issuance of common stock (or securities convertible or exercisable into common stock) in connection with an issuance of 20% or more of pre-transaction shares outstanding at a price less than the minimum price, as defined by Nasdaq rules. The minimum price is the lower of (i) the closing price immediately preceding the signing of the binding agreement; or (ii) the average closing price of the common stock for the five trading days immediately preceding the signing of the binding agreement. For purposes of the Nasdaq rule, an issuance of 20% or more 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 officers, directors or substantial shareholders of the Company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. Nasdaq has various additional existing interpretations and rules regarding the 20% calculation.
A company relying on the exception must demonstrate to Nasdaq that the delay in securing shareholder approval has a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan, results in workforce reductions, adversely impacts the company’s ability to undertake new initiatives in response to COVID-19, or seriously jeopardizes the financial viability of their business. The company must also demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company. Further, 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 this exception and determine that the transaction is in the best interest of shareholders.
To rely on the exception, the company must notify and obtain the required approval, if applicable, from Nasdaq. No prior approval by Nasdaq is required if the maximum issuance 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 the maximum discount to the minimum price, as defined by Nasdaq rules, at which shares could be issued is 15% (the "Safe Harbor Provision"). If a transaction falls outside the Safe Harbor Provision, Nasdaq must approve the company’s reliance on the exception before the company can issue any securities in the transaction. Transactions that involve the issuance of warrants exercisable for shares of common stock are not eligible for the Safe Harbor Provision.
A company that relies on the exception must notify Nasdaq as promptly as possible, but no later than two business days before the issuance of securities and in no event later than June 30, 2020. In addition, within the same period, a company relying on the exception must make a public announcement by filing a Form 8-K, where required by SEC rules, or by issuing a press release disclosing:
- the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received);
- 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
- 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.
Limited Attendant Exception from Listing Rule 5635(c) (Equity Compensation)
Nasdaq is also providing an exception from shareholder approval for an affiliate’s participation in the transaction described above provided that the affiliate’s participation in a transaction is specifically required by unaffiliated investors. In addition, 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. Finally, any affiliate investing in the transaction must not have participated in negotiating the economic terms of the transaction.
