The SEC has allowed Nasdaq to temporarily change its rules to provide listed companies a temporary exception to certain shareholder approval requirements for certain transactions. The transaction must be related to COVID-19 circumstances and the exception must meet conditions as specified. The temporary rule changes are effective immediately and exception is available through June 30, 2020.
Shareholder approval requirements. In general, Nasdaq Listing Rule 5635 requires companies to obtain approval from shareholders before issuing securities in connection with: (1) certain acquisitions of the stock or assets of another company; (2) equity-based compensation of officers, directors, employees or consultants; (3) a change of control; and (4) a 20 percent Issuance at a price less than the Minimum Price.
Nasdaq explained that in the current situation of the COVID-19 pandemic and responsive measures, many companies have seen severe decreases in revenue and may be forced to raise money through equity financings. Companies may also have sudden, unexpected cash needs as they undertake new or accelerated initiatives to address loss of business and supply shortages.
Existing Nasdaq rules provide an exception for companies in financial distress where the delay in securing approval would seriously jeopardize the financial viability of the company. However, Nasdaq noted that this exception is not helpful in most situations arising from the COVID-19 pandemic due to certain limitations. Further, the need for funds and curtailed operations may make it impractical to mail notice to all shareholders ten days before issuing securities.
COVID-19 exception. The Nasdaq temporary rule changes adopt Listing Rule 5636T to provide 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).
To rely on the exception, the company must: (1) execute a binding agreement governing the issuance of the securities; (2) submit required notices; and (3) obtain approval from Nasdaq (unless approval is excused as specified) no later than June 30, 2020. The issuance of the securities governed by the agreement may take place after June 30, 2020 but no later than 30 calendar days following the date of the binding agreement.
The exception is limited to circumstances where the delay in securing shareholder approval would:
- have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan;
- result in workforce reductions;
- adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
- seriously jeopardize the financial viability of the enterprise.
- the company must demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19;
- the company must undertake a process designed to ensure that the proposed transaction represents the best terms available to the company; and
- 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 the exception, and must determine that the transaction is in the best interest of shareholders.
To provide shareholders with advance notice of the transaction, companies must file a Form 8-K, where required by SEC rules, or issue a press release containing certain information as specified. The public announcement must take place at least two business days before the issuance of the securities.
The rule changes make further provisions for an affiliate’s participation in the transaction and aggregation of securities issuances.
Immediate effectiveness. The SEC waived the normal 30-day delay and designated the proposal operative upon filing. Accordingly, the temporary rule changes became effective immediately.
The public is invited to submit comments on the rule amendments to the SEC.