A simplified Rule 5635(d) could facilitate capital formation by changing the definition of market value.

Takeaways

• Nasdaq is proposing to update and simplify Listing Rule 5635(d) by changing the definition of market value and eliminating the book value requirement for shareholder approval of issuances.
• If adopted, Nasdaq-listed companies will not be required to obtain shareholder approval in certain private placements and other transactions if the issuance price is not lower than either the closing price or the trailing five-day average closing price.

In an effort to update its shareholder approval rules to enhance capital formation, Nasdaq is proposing to simplify the Rule 5635(d) by changing the definition of market value from the closing bid price to the Nasdaq Official Closing Price and eliminating the requirement for shareholder approval of issuances at a price less than book value but greater than market value.

The new proposed rule states that “[s]hareholder approval is required prior to a 20 percent Issuance at a price that is less than the Minimum Price.” Under the new “Minimum Price” definition, references to book value and market value will be eliminated. Instead, the Minimum Price will be calculated as the lower of:

1. the closing price (as reflected on Nasdaq.com); or
2. the average closing price (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.

Nasdaq-listed companies will have the flexibility to use either the closing price or the trailing five-day average closing price, and shareholder approval will not be necessary for issuances at a price that is no lower than the lower of those two measures.

Nasdaq believes the closing price, as opposed to the closing bid price, represents actual sale prices at one of the most liquid times of the trading day and is a better reflection of the market price of a security. Nasdaq is proposing to add a new five trading day average of the closing prices as an alternative measure to market value.

Nasdaq is also proposing to eliminate the use of “book value” in the Rule 5635(d). As an accounting measure, book value is based on the historic cost of assets as opposed to current value. Nasdaq has concluded that book value is not an appropriate measure of whether a potential transaction is dilutive and should therefore be subject to shareholder approval. When the market price of a listed company is below book value, the current Rule 5635(d) may catch issuers unprepared and could have a disproportionate impact on issuers in certain industries or in certain situations.

These changes, if adopted, will provide greater certainty to Nasdaq-listed companies regarding the appropriate price to use in determining whether shareholder approval is required to issue 20% or more of their outstanding shares or voting power in a transaction other than a public offering.

The text of the proposed rule change is available on Nasdaq’s website.