The Securities and Exchange Commission (SEC) recently approved rule changes proposed by The Nasdaq Stock Market LLC that impact companies utilizing reverse stock splits to regain compliance with Nasdaq’s minimum bid-price requirement for continued listings.
The new rules modify the application of the minimum bid-price compliance periods where a listed company takes a corporate action to achieve compliance with the $1.00 minimum bid price requirement for continued listings (the Bid Price Requirement), such as a reverse stock split, and such corporate action causes noncompliance with another listing requirement. Further, the new rules restrict the ability of listed companies to utilize reverse stock splits to cure their noncompliance with the minimum bid price rule if they have engaged in other recent reverse stock splits.
Background
Under Nasdaq Rule 5550(a)(2) (for the Nasdaq Capital Market) and Rule 5450(a)(1) (for the Nasdaq Global or Global Select Markets), Nasdaq-listed issuers are required to maintain a minimum bid price of $1.00 per share. Prior to the recent rule changes, if the trading price of a primary equity security closed under $1.00 per share for 30 consecutive business days, the company would have automatically had 180 days to regain compliance with the minimum bid price requirement. At the end of the 180-day compliance period, the company had the opportunity to be granted an additional 180-day compliance period by notifying Nasdaq of its intent to cure the deficiency and the process by which it intended to do so, with one option being the effecting of a reverse stock split. If the company had not cured the minimum bid price deficiency by the end of the second compliance period, it could appeal delisting of its stock by requesting a review by a hearings panel. Such a request would stay any suspension or delisting action up to an additional 180 days, pending the hearing and the expiration of any additional compliance period granted by the hearings panel following the hearing. Under the prior Nasdaq rules, it was possible for a company to be out of compliance with the bid price requirement for a maximum of 540 days if all the possible compliance periods were exhausted.
Historically, many companies have utilized reverse stock splits to regain compliance with the Bid Price Requirement. However, reverse stock splits decrease (i) the number of publicly held shares and (ii) the number of public stockholders, in each case potentially leading to noncompliance with other Nasdaq listing standards, such as the requirement to maintain at least 500,000 publicly held shares and 300 public stockholders. Before the new rules, companies had a 45-calendar-day period to submit a compliance plan to Nasdaq staff, and up to 180 additional calendar days to address the secondary deficiency, thus extending the compliance process beyond the initial bid-price deficiency period.
New Nasdaq Rules
Under the new rules, a listed company will not regain compliance with the Bid Price Requirement if the company takes a corporate action, such as a reverse stock split, to achieve compliance with the Bid Price Requirement and that action results in noncompliance with another Nasdaq listing requirement. In such cases, the company will continue to be considered noncompliant until it (i) has cured the additional deficiency created by the initial corporate action and (ii) thereafter, meets the Bid Price Requirement for a minimum of 10 consecutive business days (unless Nasdaq staff, at their discretion and within the framework of the new requirements, extends this period). Additional compliance periods are no longer available as they otherwise would have been for secondary deficiencies prior to the rule change. If the company does not regain compliance with the Bid Price Requirement and the additional deficiency during the initial compliance period applicable to the Bid Price Requirement noncompliance, Nasdaq will issue a Staff Delisting Determination Letter.
In the proposal, Nasdaq indicated that the automatic 180-day period to achieve compliance with the bid price requirement was “designed to allow adequate time for a company facing temporary business issues, a temporary decrease in the market value of its securities, or temporary market conditions to regain compliance with the Bid Price Requirement.” However, Nasdaq noted that many companies, typically those in financial distress or experiencing a prolonged operational downturn, “engage in a pattern of repeated reverse stock splits,” which Nasdaq stated indicates deep financial or operational distress within such companies. Nasdaq indicated that, for investor protection purposes, it is inappropriate to have these companies trade on Nasdaq, as the challenges are not temporary and these companies likely will continue to waver between compliance and non-compliance. In addition, “a pattern of recurring bid price non-compliance can be a leading indicator of other listing compliance concerns.”
Nasdaq has observed a pattern of companies effecting consecutive reverse stock splits, which are often accompanied by dilutive issuances of securities. To address this issue, Nasdaq revised its listing rules to provide that if a company fails to meet the bid price requirement and the company has effected a reverse stock split over the prior one-year period, the company would not be eligible for any compliance period and the Listing Qualifications Department will issue a Delisting Determination under Rule 5810 with respect to that company’s securities. This change will apply to a company even if the company was in compliance with the bid price requirement at the time of its prior reverse stock split.
In addition, Nasdaq rules will not provide for any compliance period in the event the listed company has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to one.
Impact on Nasdaq-Listed Companies
The implications of these recently proposed changes will, among other consequences, eliminate reverse stock splits as a viable option in many situations for regaining compliance with Nasdaq and NYSE listing requirements for any company that has had another recent reverse stock split. Companies should carefully consider the broader impact of such actions on their overall compliance status and ensure they have alternate channels for compliance if their Company’s security’s bid price drops to near $1.00 while being careful with the timing of the use of reverse stock splits to maintain compliance.
