Nasdaq has filed with the SEC a proposed rule change to “modify the application of the bid price compliance periods where a company takes action that causes non-compliance with another listing requirement.” Hmmm, how’s that again? This proposed rule change is designed to address instances where, to regain compliance with the minimum bid price required by Exchange listing rules, a listed company implements a reverse stock split; however, while the reverse split may bring the company into compliance with the minimum bid price requirement, it may also, at the same time, lead to non-compliance with another listing rule—particularly, the requirements for the number of public holders and number of publicly held shares (depending on treatment of fractional shares), triggering a new deficiency process with a new time period within which the company is permitted to seek to regain compliance. That’s excessive, Nasdaq says, and too confusing for investors, possibly adversely affecting investor confidence in the market. Because Nasdaq believes it is inappropriate for a company to receive additional time to cure non-compliance with the newly violated listing standard, it is seeking, with this proposed amendment, to eliminate the additional compliance period that would otherwise result from the newly created deficiency. Under the proposal, in the event a reverse split to achieve bid-price compliance leads to other non-compliance, the company would be deemed non-compliant with the bid price requirement until both the new deficiency (e.g., number of holders or number of publicly held shares) is cured and the company thereafter maintains a $1.00 bid price for a minimum of 10 consecutive business days. If the proposal is adopted, companies will need to carefully calculate the potential impact of a reverse split on other listing requirements to avoid these consequences where possible.
As the proposal indicates, each Nasdaq tier requires that specified securities maintain a $1.00 minimum bid price; if a listed company fails to satisfy the applicable bid price requirement, under Rule 5810(3)(A), the company must achieve compliance by meeting the applicable standard for a minimum of 10 consecutive business days during an automatic 180-calendar-day compliance period. In addition, each tier specifies minimum requirements for the number of public holders and the number of publicly held shares. If a company fails to satisfy either of those requirements, under Rule 5810(c)(2)(A), the company will have a period of 45 calendar days to provide to Nasdaq Staff a plan to regain compliance and, under Rule 5810(c)(2)(B), Nasdaq staff may grant an extension of the compliance period of up to 180 calendar days.
Under Nasdaq’s current rules, if a company effected a reverse split and, as a result, achieved compliance with the minimum bid price for 10 consecutive business days but also, as a result of the split, fell out of compliance with the minimum publicly held shares requirement, “Nasdaq would notify the company about this new deficiency and the company would be afforded 45 calendar days to submit a plan to regain compliance and could be afforded up to 180 calendar days to regain compliance.”
Under the proposal, Nasdaq would amend Rule 5810(c)(3)(A) to provide that “a Company will not be considered to have regained compliance with the bid price requirement if the Company takes an action [e.g., a reverse stock split] to achieve compliance and that action results in the Company’s security falling below the numeric threshold for another listing requirement without regard to any compliance periods otherwise available for that other listing requirement. In such event, the Company will continue to be considered non-compliant until both the other deficiency is cured and thereafter the Company meets the bid price standard for a minimum of 10 consecutive business days during the compliance period(s) applicable to the initial bid price requirement.”
Nasdaq “believes the proposed amendment will protect investors and provide additional clarity to companies and market participants by enhancing the quality of a compliance determination following a company’s deficiency for failure to comply with the Bid Price Requirement.” It’s worth observing here that Nasdaq notes that it is “considering other changes to the delisting process applicable to companies that are noncompliant with the Bid Price Requirement. Any such changes will be subject to a separate rule filing.”
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