NASDAQ Amends 5635- Part 2

Posted by on February 13, 2019

NASDAQ Amends 5635 Part 2- . Today is the second of a LawCast series talking about the recent amendments to part of Nasdaq’s 20% rule.
Effective September 26, 2018, Nasdaq amended Rule 5635(d) to provide greater flexibility and certainty for companies to determine when a shareholder vote is necessary to approve a transaction that would result in the issuance of 20% or more of the outstanding common stock or 20% or more of outstanding voting power in a PIPE or similar private placement financing transaction. The amendment did not change the remainder of Rule 5635, which requires shareholder approval for transactions such as issuances involving an acquisition of stock or assets of another company, a change of control, or equity compensation that result in a 20% or greater dilution.

Nasdaq’s impetus for amending the rule was to strike a balance between the protection of investors via the shareholder approval rule and a company’s flexibility to efficiently negotiate a deal to raise money quickly with a price that accurately reflects the market value of its security. In the Rule change release, Nasdaq noted that book value is based on historic values and, therefore, is not an appropriate measure of whether a transaction is dilutive or should otherwise require shareholder approval. Moreover, book value is one of several financial data points that is already incorporated into the market value of a security.

Using the last closing price, rather than the last closing bid price, reflects sale prices at one of the more liquid times of the day and, therefore, is believed to be more transparent to investors. Adding the option of choosing between the closing bid price and the five-day average closing price provides more flexibility and certainty for companies in their transactions. For example, in a declining market, the five-day average closing price will be above the current market price, which could make it difficult for companies to close transactions because investors could buy shares at a lower price in the market. Likewise, in a rising market, the five-day average could result in a below-market transaction triggering shareholder approval requirements.

The Rule amendment also combines the existing two sections of 5635(d) into one such that a 20% issuance for purposes of the Rule would involve 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. This change does not make any substantive change but certainly makes the language more clear and concise.