NASDAQ Provides Additional Relief To Shareholder Approval Requirements For Companies Affected By Covid-19
Nasdaq has provided additional relief to listed companies through temporary rule 5636T easing shareholder approval requirements for the issuance of shares in a capital raise. The rule was effective May 4, 2020 and will continue through and including June 30, 2020. The purpose of the rule change is to give listed companies affected by Covid-19 quicker access to much-needed capital.
Temporary Rule 5636T is limited to the transactions and shareholder approval requirements specifically stated in the rule. If shareholder approval is required based on another rule, such as a change of control, or another Nasdaq rule is implicated, those other rules will need to be complied with prior to an issuance of securities.
The Nasdaq shareholder approval rules generally require companies to obtain approval from shareholders prior to issuing securities in connection with: (i) certain acquisitions of the stock or assets of another company (see HERE); (ii) equity-based compensation of officers, directors, employees or consultants (see HERE); (iii) a change of control (see HERE); and (iv) certain private placements at a price less than the minimum price as defined in Listing Rule 5635(d) (see HERE.)
An exception is available for companies in financial distress where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company. To request a financial viability exception, the company must complete a written request including a letter addressing how a delay resulting from seeking shareholder approval would seriously jeopardize its financial viability and how the proposed transaction would benefit the company. The standard is usually difficult to meet.
Earlier in the Covid-19 crisis, Nasdaq indicated that it will consider the impact of disruptions caused by the pandemic in its review of any pending or new requests for a financial viability exception. Nasdaq required that reliance by the company on a financial viability exception be expressly approved by the company’s audit committee and that the company obtain Nasdaq’s approval prior to proceeding with the transaction. Under the rule, companies also have to provide notice to shareholders at least ten days prior to issuing securities in the exempted transaction.
Exception to Private Placement 20% Rule
Nasdaq now has enacted temporary rule 5636T formalizing an exception to the shareholder approval requirement in Rule 5635(d) (the private placement 20% Rule) through June 30, 2020. Nasdaq Rule 5635(d) requires shareholder approval prior to a 20% issuance of securities at a price that is less than the Minimum Price in a transaction other than a public offering. 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 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. “Minimum Price” means a price that is the lower of: (i) the closing price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.
The exception is limited to circumstances where the delay in obtaining shareholder approval 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; and (iv) seriously jeopardize the financial viability of the company. In addition, in order to rely on the exception, the company has to 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.
No prior approval of the exception by Nasdaq is required if the maximum amount 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 at which shares could be issued is 15%. Although prior approval is not necessary, companies must notify Nasdaq about such transactions as promptly as possible, and file a listing of additional shares (LAS) notification at least two days before issuing shares. An LAS notification is required where a transaction may result in the potential issuance of common stock, or securities convertible into common stock, of greater than 10% of either the total shares outstanding or the voting power outstanding on a pre-transaction basis and therefore would always be required where the shareholder approval requirements under Rule 5635(d) are invoked. The LAS must normally be filed 15 calendar days prior to issuing the additional shares.
For transactions where greater than 25% of the shares or voting power will be issued or where the discount is in excess of 15% of the Minimum Price, a company must get Nasdaq’s approval prior to the share issuance. Companies can seek approval by filing the LAS notification and the required supplement. Once approval is received, the company can proceed with the transaction (i.e., it does not have to wait 15 days).
The LAS Supplement must include a cover letter addressing the following factors:
(i) The need for the transaction is due to Covid-19 circumstances. This section should provide specific details of the facts and circumstances including the impact of Covid-19 on the company’s operations, workforce, new initiatives and financial viability.
(ii) The delay in securing shareholder approval would have a material impact on the company’s ability to maintain operations under its Covid-19 business plan; would result in workforce reductions; would adversely impact the company ability to undertake new initiatives in response to Covid-19; or would seriously jeopardize the company financial viability. This section should provide specific details and address at least one of the following: (i) how long the company will be able to meet its current obligations such as payroll, lease payments and debt servicing if it does not complete the proposed transaction; (ii) what is the current and projected cash position and burn rate; (iii) would the company be required to file for bankruptcy if it had to wait for shareholder approval; and (iv) what would be the impact to the company’s operations if it had to wait for shareholder approval.
(iii) The company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company. This section should include an overview of all meetings, inquiries and communications conducted by the company and its outside advisors when structuring the transaction and any other factors considered in reaching the decision to proceed.
(iv) The audit committee or comparable body of the board of directors, comprised solely of independent, disinterested directors, expressly approved reliance on the temporary rule and the transaction itself and that it is in the best interest of shareholders. This section should include a copy of the operable executed resolution or minutes of the board committee approving the transaction and setting forth the required criteria.
Furthermore, in order to rely on the Rule the company must execute a binding agreement, receive Nasdaq approval, if necessary, and have filed its LAS notification if required, prior to the close of business on June 30, 2020. However, the shares can be issued after June 30, 2020 as long as the issuance is no more than 30 calendar days following the date of the binding agreement.
Nasdaq also requires that the company notify the public about the transaction and reliance on the temporary rule by filing a Form 8-K if required by SEC rules or by issuing a press release no later than two business days before issuing the securities. The 8-K or press release must disclose: (i) the terms of the transaction, including the number of shares of common stock that could be issued; (ii) that shareholder approval would ordinarily be required under Nasdaq rules; (iii) that the company is relying on the temporary rule excepting shareholder approval; and (iv) that the audit committee or comparable body of the board of directors, comprised solely of independent, disinterested directors, expressly approved reliance on the temporary rule and the transaction itself and that it is in the best interest of shareholders.
Nasdaq will aggregate issuances of securities in reliance on the exception in Rule 5636T 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.
Exception to Equity Compensation Rule
Temporary Rule 5636T can also be relied upon where Rule 5635(c) would trigger a shareholder approval requirement as part of the transaction. Nasdaq Rule 5635(c) requires shareholder approval 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, except for: (1) warrants or rights issued generally to all security holders of the company or stock purchase plans available on equal terms to all security holders of the company (such as a typical dividend reinvestment plan); (2) tax qualified, non-discriminatory employee benefit plans (e.g., plans that meet the requirements of Section 401(a) or 423 of the Internal Revenue Code) or parallel nonqualified plans (including foreign plans complying with applicable foreign tax law), provided such plans are approved by the company’s independent compensation committee or a majority of the company’s Independent Directors; or plans that merely provide a convenient way to purchase shares on the open market or from the company at market value; (3) plans or arrangements relating to an acquisition or merger as permitted under IM-5635-1; or (4) issuances to a person not previously an employee or director of the company, or following a bona fide period of non-employment, as an inducement material to the individual’s entering into employment with the company, provided such issuances are approved by either the company’s independent compensation committee or a majority of the company’s Independent Directors.
Unaffiliated investors often require a company’s senior management to put their personal capital at risk and participate in a capital raising transaction alongside the unaffiliated investors. This request is likely to increase where a company affected by Covid-19 seeks to raise capital. Temporary Rule 5636T provides for an exception from shareholder approval under Rule 5635(c) for an affiliate’s participation in the transaction provided the affiliate’s participation in the transaction was specifically required by unaffiliated investors. The temporary rule limits each affiliate’s participation to no more than 5% of the transaction and all affiliates’ participation collectively must be less than 10% of the transaction total. Any affiliate investing in the transaction must not have participated in negotiating the economic terms of the transaction…