The Nasdaq Stock Market has adopted a new rule, Rule 5635T, intended to provide limited, temporary relief from the requirement to obtain stockholder approval for certain capital-raising transactions during the COVID-19 pandemic. Although the rule will be effective only until June 30, 2020, it should provide welcome relief to Nasdaq-listed companies eager to raise funds as quickly as possible to maintain operations during the pandemic.
Ordinarily, a public company seeking to issue more than 20% of its outstanding shares at a below-market price (other than in an underwritten public offering for cash) would have to obtain stockholder approval for the issuance. Under the new rule, a Nasdaq-listed company can avoid this stockholder approval requirement if:
- the delay in obtaining stockholder approval would either (a) materially impact the company’s ability to execute its pre-COVID-19 business plan, (b) result in layoffs, (c) adversely impact its ability to undertake new initiatives in response to COVID-19 or (d) seriously jeopardize its financial viability;
- the company executes a binding agreement for the issuance on or before June 30, 2020;
- the company completes the issuance within 30 days after the binding agreement (even if the issuance occurs after June 30, 2020);
- a committee of disinterested, independent directors approves reliance on the rule for the issuance and determines that the transaction is in the best interests of stockholders;
- before public announcement of the transaction (and no later than June 30, 2020), the company certifies to Nasdaq that it is in compliance with the rule, including certification that the transaction was necessitated by COVID-19 and represents the best terms available to the company;
- the company discloses the transaction in a Form 8-K or press release at least two business days before the issuance; and
- Nasdaq pre-approves reliance on the rule by June 30, 2020, except that companies do not need to obtain Nasdaq’s pre-approval for a transaction in which the issuance does not exceed 25% of the company’s outstanding shares, the price represents no more than a 15% discount and the transaction does not include warrants.
The new rule also clarifies that if new investors require directors, officers, employees or consultants to “put skin in the game” by investing alongside the new investors, the insiders may do so on a limited basis without stockholder approval, even though the discount would ordinarily be regarded as a form of compensation that could require such approval. Participation by insiders is limited to 5% individually and 10% in the aggregate; exceeding these limits would trigger the requirement for stockholder approval. Importantly, no insider participating in the financing may have been involved in negotiating the economic terms of the investment. (Alternatively, companies sometimes avoid Nasdaq’s separate requirement for stockholder approval of these types of compensatory transactions by having insiders purchase shares at market price, rather than at a discount.)
Companies relying on Rule 5635T are exempted from the normal requirement (under Rule 5250(e)(2)) to give Nasdaq 15 days’ advance notice of such a transaction but must instead certify to Nasdaq that they have complied with Rule 5635T. The certification must be made before public announcement of the transaction and in any event before June 30, 2020.
The rule does not provide relief from other Nasdaq stockholder approval requirements, such as for issuances of shares in connection with acquisitions or transactions involving a change of control.
Finally, Nasdaq imposed a “tail” period of 90 days after the closing of the Rule 5635T transaction. During the tail period, subsequent issuances (including those made under binding agreements executed during the tail period) will be aggregated with the Rule 5635T transaction for purposes of determining whether the subsequent issuance requires stockholder approval under Nasdaq’s normal rules.