Nasdaq Provides Temporary Relief from Certain Shareholder Approval Requirements

SEC Division of Corporation Finance Issues COVID-19 Related FAQs

On May 4, 2020, the Securities and Exchange Commission (SEC) approved the immediate effectiveness of the proposal filed by The Nasdaq Stock Market LLC (Nasdaq) to provide a limited temporary exception to the shareholder approval requirement set forth in Listing Rule 5635(d), subject to certain conditions. In addition, on May 4 the SEC's Division of Corporation Finance (Division) issued a series of COVID-19 Related FAQs relating to the SEC's Order granting conditional relief from certain public company filing and proxy delivery obligations.

Nasdaq: Temporary Relief from Certain Shareholder Approval Requirements

Background

For transactions other than public offerings, Listing Rule 5635(d) requires shareholder approval prior to a 20 percent issuance at a price that is less than the minimum price.¹ Nasdaq provides an exception to this shareholder approval requirement where the delay in securing shareholder approval would "seriously jeopardize the financial viability of the enterprise."² In order to rely on this exception, 1) the company's audit committee or comparable body of the board comprised of independent, disinterested directors must expressly approve reliance on this exception, 2) the company must mail to all shareholders not later than 10 days before issuance of the securities a letter disclosing, among other things, certain terms of the transaction and that it is relying on this exception from the shareholder approval rules, and 3) the company must make a public announcement by filing a Form 8-K, where required by SEC rules, or by issuing a press release disclosing the same information not later than 10 days prior to the issuance of the securities.

In its proposal, Nasdaq stated that the financial viability exception "does not adequately address the capital raising needs of listed companies under current conditions." The rationale provided by Nasdaq is twofold. First, Nasdaq noted that this "exception is not helpful in most situations arising from the COVID-19 pandemic[,]" for example there may be companies that need additional cash to pay employees or for other purposes but whose overall financial viability may not be in jeopardy. Second, Nasdaq noted that in this current environment there may be an "accelerated need for funds," thus the requirement that companies mail a letter to shareholders and make a public announcement regarding the transaction at least 10 days prior to issuance may be "impractical."

Temporary Relief

In light of the foregoing, Nasdaq adopted Listing Rule 5636T providing temporary relief from the shareholder approval requirement set forth in Listing Rule 5635(d), as well as a limited exception from Listing Rule 5635(c). This temporary listing rule is operative through June 30, 2020 and permits a company to issue securities without shareholder approval upon application to Nasdaq's Listing Qualifications Department, subject to certain conditions.

In order to rely on the exception, the company must 1) execute a binding agreement governing the issuance of securities, 2) submit the Listing of Additional Shares notification form and related supplement (discussed below) to the Nasdaq Listing Qualifications Department, and 3) obtain approval from the Nasdaq Listing Qualifications Department, if applicable, no later than June 30, 2020. Notwithstanding the foregoing, the actual issuance of the securities may take place after June 30, 2020, provided that the issuance occurs no later than 30 calendar days after the date of the binding agreement.

Companies relying on this exception must submit a supplement to the Listing of Additional Shares notification form to the Nasdaq Listing Qualifications Department for approval, "as promptly as possible, but no later than the time of the public announcement required [by the exception] and in no event later than June 30, 2020,"³ certifying that it complies with the following requirements and describing how it complies:

• "the need for the transaction is due to circumstances related to COVID-19;
• the delay in securing shareholder approval would: (A) have a material adverse impact on the company's ability to maintain operations under its pre-COVID-19 business plan; (B) result in workforce reductions; (B) adversely impact the company's ability to undertake new initiatives in response to COVID-19; or (D) seriously jeopardize the financial viability of the enterprise; [Emphasis added.]
• the Company undertook a process designed to ensure that the proposed transaction represents the best terms available to the Company;
• the Company's audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors has: (A) expressly approved reliance on this exception; and (B) determined that the transaction is in the best interests of shareholders."

Notably, companies will not be required to obtain approval from the Nasdaq Listing Qualifications Department prior to issuing securities if 1) the maximum amount of common stock, or securities convertible into common stock, issuable in the transaction is less than 25 percent of the total shares outstanding and less than 25 percent of the voting power outstanding before the transaction and 2) the maximum discount to the minimum price is 15 percent. Notwithstanding the foregoing, companies must still submit the Listing of Additional Shares notification form and supplement to the Nasdaq Listing Qualifications Department for review prior to issuance even where approval is not required.

The exception does not require any mailing to shareholders, nor does it require a public announcement at least 10 days prior to the issuance of securities. However, the exception does require that companies "make a public announcement by filing a Form 8-K, where required by SEC rules, or by issuing a press release as promptly as possible, but no later than two business days before the issuance of the securities, disclosing: (1) the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received); (2) that shareholder approval would ordinarily be required under Nasdaq rules but for the fact that the Company is relying on this temporary exception to the shareholder approval rules; and (3) that the audit committee or a comparable body of the board of directors comprised of independent, disinterested directors expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders."

In addition to temporarily amending Listing Rule 5635(d), Listing Rule 5636T(c) temporarily amends Listing Rule 5635(c) to permit participation in the transaction by affiliates of the company, subject to certain limitations. Affiliates participating in the transaction may not participate in negotiating the economic terms of the transaction and must have been specifically required to participate by unaffiliated investors. Further, affiliate participation is limited to less than 5 percent of the transaction individually and less than 10 percent of the transaction collectively.

Going forward, companies that rely on this exception will need to be mindful of any subsequent issuances of securities made at a discount to the minimum price. If the binding purchase agreement governing the subsequent issuance(s) is executed within 90 days of the prior covered issuance, then the subsequent issuance(s) will be aggregated with the prior covered issuance. If the aggregate issuance "equals or exceeds 20% of the total shares or the voting power outstanding before the initial issuance, then shareholder approval will be required under Rule 5635(d) prior to the subsequent issuance."

In early April, the New York Stock Exchange provided temporary relief, through June 30, 2020, from certain of the shareholder approval requirements set forth in Section 312.03 of the NYSE Listed Company Manual, subject to certain conditions. For more information on this relief, please see our prior Alert.

Division of Corporation Finance Issues COVID-19 Related FAQs

On May 4, 2020, the Division issued a series of COVID-19 Related FAQs relating to the SEC's Order granting conditional relief from certain public company filing and proxy delivery obligations.

• The first FAQ reiterates and emphasizes the requirement that a company relying on the Order must furnish to the SEC a Current Report on Form 8-K (or a Form 6-K, if eligible) stating:
  • that it is relying on the Order;
  • a brief description of why it could not make the filing on a timely basis;
  • the estimated date by which the filing is expected to be made; and
  • a company specific risk factor(s) explaining the impact, if material, of COVID-19 on its business.
  In addition, "if the reason the subject report cannot be filed timely relates to the inability of any person, other than the registrant, to furnish any required opinion, report or certification, the Form 8-K or Form 6-K shall have attached as an exhibit a statement signed by such person stating the specific reasons why such person is unable to furnish the required opinion, report or certification on or before the date such report must be filed."
  
  The FAQ states that the foregoing disclosures "are necessary to appropriately rely on the COVID-19 Order[,]" and therefore, any company contemplating relying on this COVID-19 Order should carefully follow the requirements.
• The final three FAQs relate to the interplay between Form S-3 and the Order.
  • Conducting Shelf Takedowns. The Division highlights the fact that the Order "does not delay or exempt compliance with requirements for Securities Act registration statement." Thus, while companies may conduct takedowns using an already-effective registration statement while relying on the Order, including for a Form 10-K, they may do so only if they have determined "that the prospectus used complies with Section 10(a) of the Securities Act of 1933."⁴ While noting that the Order "may permit" companies "to conduct a takedown using a prospectus that contains information older than sixteen months" if information cannot be furnished without unreasonable effort or expense, the Division cautions that "registrants and their legal advisers will need to determine when it is appropriate to update the prospectus." The Division also reminds companies that they "are responsible for the accuracy and completeness of their disclosure."
  • Reassessing S-3 Eligibility. The Division reaffirms that properly relying on the Order extends the due date for the applicable filing. Thus, the Division states that, with respect to an effective Form S-3, a registrant that has properly relied on the Order to delay the filing of its Form 10-K is "required to reassess its Form S-3 eligibility when it files the Form 10-K that serves as a Section 10(a)(3) update." [Emphasis added.]
  • Filing a New Form S-3 and Accelerating Effectiveness. The Division provides that a registrant relying on the Order may file a new Form S-3 between the original due date of a filing and the extended due date of such filing, and confirms that the Division "staff will consider the registrant to be current and timely in its Exchange Act reporting if the Form 8-K disclosing reliance on the COVID-19 Order is properly furnished." However, importantly, the Division states that its "staff will be unlikely to accelerate the effective date of a Form S-3 until such time as any information required to be included in the Form S-3 is filed."

These FAQs follow a series of Compliance and Disclosure Interpretations (C&DIs) issued by the Division in March and April relating to the Order. For more information on these C&DIs, please see our prior Alert.

[1] Listing Rule 5635(d)(1)(B) defines “20% issuance” as 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 percent or more of the common stock or 20 percent or more of the voting power outstanding before the issuance. Listing Rule 5635(d)(1)(A) defines “minimum price” as a price that is the lower of: 1) the Nasdaq official closing price immediately preceding the signing of the binding agreement; or 2) the average Nasdaq official closing price of the common stock for the five trading days immediately preceding the signing of the binding agreement.

[2] Listing Rule 5635(f).

[3] Listing Rule 5636T(e) provides that companies relying on this exception are “not subject to the 15 day prior notification requirement described in Rule 5250(e)(2) (related to the listing of additional shares)[.]”

[4] Section 10(a)(3) of the Securities Act of 1933 provides that “when a prospectus is used more than nine months after the effective date of the registration statement, the information contained therein shall be as of a date not more than sixteen months prior to such use, so far as such information is known to the user of such prospectus or can be furnished by such user without unreasonable effort or expense.” 15 U.S.C. §77j(a)(3). In addition, the Division highlights the undertaking required in shelf offerings under Rule 415 to reflect any facts or events arising after the effective date of the registration statement which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Item 512(a)(1)(ii) of Regulation S-K.