May 19, 2020

Nasdaq and NYSE Adopt Temporary COVID-19 Exceptions from Certain Shareholder Approval Rules

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NASDAQ AND NYSE ADOPT TEMPORARY COVID-19 EXCEPTIONS FROM CERTAIN SHAREHOLDER APPROVAL RULES

Nasdaq and NYSE both have recently adopted temporary relief from certain shareholder approval requirements for companies that need to raise capital due to the impact of COVID-19. The temporary relief will also allow limited insider participation in the capital raising where insider participation in the capital raise is demanded by unaffiliated investors for their investment. In the current environment, investors are often requiring participation by insiders to show insider support of and confidence in the company. Under existing Nasdaq and NYSE rules, shareholder approval is required for any issuance of common stock or securities convertible or exchangeable into common stock representing 20% or more of a company’s outstanding common stock or voting power on a pre-transaction basis at a discount to the market price, other than a public offering for cash. Shareholder approval is also required under the equity compensation rules for certain issuances of common stock or securities convertible or exchangeable into common stock to employees, officers, directors or consultants. NYSE further requires shareholder approval for certain issuances to insiders, such as directors, officers and 5% or greater shareholders and their respective affiliates, under the related party rule. We summarize the terms of the relief in a side-by-side comparison below.

For Nasdaq-listed companies, on May 4, the SEC designated immediately operative a temporary COVID-19 exception providing relief from the “20% rule” and limited relief from the executive compensation rule until June 30, 2020 subject to certain conditions. The full release is available at SEC Release No. 34-88805.

For NYSE-listed companies, on May 14, the SEC designated immediately operative a new temporary COVID-19 exception providing relief from the “20% rule” and limited relief from the executive compensation and related party rules until June 30, 2020, also subject to certain conditions. NYSE’s exception is substantially similar to the new Nasdaq exception. This new NYSE exception is available to companies in addition to the more limited prior NYSE temporary waiver of certain shareholder approval requirements through June 30, 2020, announced on April 6, 2020. The full release is available at SEC Release No. 34-88875.

 

Nasdaq

NYSE

Conditions Necessary for the Availability of the Exception

1. Limited to circumstances where the delay in obtaining 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.

2. Company must also show that:

  • the need for the transaction is due to COVID-19;
  • it undertook process to ensure best terms available to the company; and
  • (NYSE only) the proceeds will not be used to fund an acquisition.

Approval by Audit Committee

The company’s audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors has:

  • expressly approved reliance on the exception; and
  • determined that the transaction is in the best interests of shareholders.

Notification to the Exchange

The company must submit a supplement describing with specificity how it complies with the requirements of this exception as promptly as possible but before the earlier of two business days before the issuance of the securities and June 30, 2020.

Companies that rely on this exception are not subject to the 15-day prior notification requirement.

The company must submit a certification detailing with specificity how it complies with this exception along with the standard supplemental listing application.

Approval by the Exchange

Companies relying on this exception must obtain prior approval from Nasdaq unless:

  • the maximum issuance of common stock (or securities convertible into common stock) in the transaction is less than 25% of the total shares outstanding and voting power on a pre-transaction basis; and
  • the maximum discount to the Minimum Price is no more than 15%.

“Minimum Price” means the lower of (a) the last official closing price on the exchange or (b) the average official closing price on the exchange for the last five trading days, in each case, immediately preceding the signing of the binding agreement.

Issuances of warrants exercisable into common stock require prior approval.

Companies relying on this exception must obtain prior approval from NYSE.

Insider Participation

Exception from executive compensation (and for NYSE, related party) shareholder approval rule for insider’s participation in a transaction that meets the other requirements of the exception if:

  • the participation of insider(s) was specifically required by unaffiliated investors;
  • each insider’s participation represents less than 5% of the transaction;
  • all insiders’ collective participation represents less than 10% of the transaction; and
  • any participating insider has not participated in negotiating the economic terms of the transaction on behalf of the company.

Aggregation

The exchanges will aggregate issuances of securities in reliance on this new exception with any subsequent issuance by the company (other than in a public offering) at a discount to the Minimum Price if the binding agreement for the subsequent issuance is signed within 90 days of the prior issuance for determining if shareholder approval is required under the 20% rule for the subsequent issuance.

Public Announcement

Must file a Form 8-K or issue press release as promptly as possible but no later than two business days before the issuance disclosing the following:

  • terms of the transaction (including number of shares and consideration);
  • shareholder approval would have been required but for the operation of the temporary exception; and
  • 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.

Expiration of Relief

Must sign the binding agreement, submit the notice to Nasdaq or certification and supplemental listing application to NYSE, as applicable, and obtain exchange approval, if necessary, by June 30, 2020.

Issuance of securities may occur after June 30, 2020 as long as it occurs within 30 calendar days following the date of the binding agreement.

Other Shareholder Approval Rules Unaffected

Any transaction benefitting from this exception will still be subject to shareholder approval if required under any other applicable exchange rule, such as change of control, related party (NYSE only), equity compensation (except for the limited circumstances for insider participation in transactions covered by the new COVID-19 exceptions) and acquisitions (Nasdaq only).

Relevant Rule

Listing Rule 5636T

Section 312.03T of the NYSE Listed Company Manual

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