Temporary Relief From Certain Shareholder Approval Requirements for NASDAQ-Listed Companies Affected by COVID-19 Pandemic

By Serge V. Pavluk

NASDAQ continues to propose and enact temporary rules to provide relief to the NASDAQ-listed companies affected by the COVID-19 pandemic and the resulting market uncertainty. To streamline such companies’ access to capital, on May 4, 2020, NASDAQ proposed a new temporary exception from certain shareholder approval requirements.  Such exception is effective immediately and will expire on June 30, 2020.

Generally, the NASDAQ Rules 5635(c) and (d) require NASDAQ-companies to obtain shareholders’ approval prior to issuing securities in connection with: (a) certain acquisitions of the stock or assets of another company; (b) equity-based compensation of officers, directors, employees or consultants (with certain exceptions); (c) a change of control; and (d) a “20% Issuance” at a price that is less than the lower of the NASDAQ Official Closing Price (as reflected on NASDAQ.com) immediately preceding the signing of the binding agreement and the average NASDAQ Official Closing Price of the common stock (as reflected on NASDAQ.com) for the five trading days immediately preceding the signing of the binding agreement. Per the NASDAQ rules, 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.

However, the pandemic has reduced or interrupted revenues for many listed companies, including those in restaurant, travel and entertainment industries. In its rule change proposal, NASDAQ stated that investors may be reluctant to enter into new equity transactions unless they are compensated for the risk through discounts to the trading price of a security, and companies may be forced by current circumstances to raise money through equity financings that require shareholder approval under NASDAQ’s rules.

New Listing Rule 5636T is now providing 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). The exception is limited to circumstances where the delay in securing shareholder approval would: (1) have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan; (2) result in workforce reductions; (3) adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or (4) seriously jeopardize the financial viability of the enterprise. 

Companies taking advantage of this temporary exception would also have to satisfy the following requirements: (a) demonstrate to NASDAQ that the need for the transaction is due to circumstances related to COVID-19 and that the company went through a process to ensure that the proposed transaction represents the best terms available to the company; (b) the company’s audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors expressly approve reliance on this exception; and (c) such committee or a comparable body of independent, disinterested directors to determine that the transaction is in the best interest of shareholders. 

Further, Listing Rule 5636T(d) requires a company relying on the new temporary exception to make a public announcement by filing a Form 8-K, where required by the Securities and Exchange Commission rules, or by issuing a press release disclosing as promptly as possible, but no later than two business days before the issuance of the securities: (a) the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received); (b) 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 (c) 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.

The temporary exception contains a “Safe Harbor Provision”:  if the maximum issuance of common stock or securities convertible into common stock in the transaction is less than 25% of the total outstanding shares and less than 25% of the voting power outstanding before such transaction; and the discount to the minimum price at which shares could be issued is not more than 15%, then such issuer does not need a prior approval of the exception by NASDAQ. NASDAQ notification about such transactions is still required as promptly as possible, but not later than two days before issuing securities, but such issuer does not need to wait the requisite 15 days after filing the listing of additional shares notification.

However, NASDAQ still has to approve the transactions not falling within the Safe Harbor Provision before the issuer can issue any securities in such transaction.

It is worth noting that the NASDAQ rules already had an exception for companies in financial distress where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company. Under Listing Rule 5635(f), a company’s reliance on a financial viability exception must be approved by the company’s audit committee or other board of directors committee comprised solely of independent, disinterested directors and the company must obtain NASDAQ's approval prior to proceeding with the transaction. Further, companies are required to mail a letter (rather than relying on a press release or Form 8-K, which are also required, or a website posting) at least ten days prior to issuing securities in the exempted transaction alerting shareholders to the company’s omission to seek the shareholder approval that would otherwise be required. NASDAQ stated in the temporary exception rulemaking release that such existing exception would not be helpful in many situations arising from the COVID-19 pandemic. NASDAQ’s examples included a situation when a company needs urgent funding in order to continue paying employees during a period of decreased or no revenue, even though such company’s viability may not otherwise be in jeopardy or a situation when the requirement to mail notice to all shareholders ten days prior to issuing securities is impractical.