In the past few weeks, the Nasdaq Stock Market and the New York Stock Exchange, with the approval of the U.S. Securities and Exchange Commission, have approved rules easing certain requirements for listed companies in light of the COVID-19 pandemic.
Compliance with Minimum Price and Minimum Market Values
On April 17, 2020, Nasdaq adopted an interim rule, and on April 21, 2020, NYSE adopted rules regarding tolling the period for listed companies to regain compliance with their respective minimum price and minimum market cap listing rules. Per the new rules, companies that are out of compliance with such rules will have additional time to regain compliance by tolling the compliance periods between the adoption of the relevant exchange’s rules and June 30, 2020, and restarting the allowed period to regain compliance on July 1. Companies that are notified of their noncompliance must still disclose receipt of the notification by filing a Current Report on Form 8-K or by issuing a press release.
Easing Approval Requirements for Share Issuances
Under existing Nasdaq and NYSE rules, a listed company must secure shareholder approval for the issuance of shares exceeding 20% of its outstanding shares at a price that is less than the “Minimum Price" (as defined in their respective rules). On May 4, 2020, Nasdaq adopted a rule, and on May 14, 2020, NYSE adopted a similar rule, that provide listed companies with an exception through June 30, 2020, from the shareholder approval requirements. The exceptions are limited to circumstances where the delay in securing shareholder approval would satisfy one of the following conditions:
- 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
- Seriously jeopardize the financial viability of the business
NYSE’s rule further requires that the proceeds from the issuance not be used for any acquisition transaction. These rules also require, similar to the exchanges’ requirements for their existing financial viability exception to the shareholder approval rules, that the company’s audit committee or a comparable committee comprised solely of independent, disinterested directors expressly approves reliance on this exception and determines that the transaction is in the best interest of shareholders. Moreover, the company must be able to show that the transaction is necessary due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.
Nasdaq’s and NYSE’s existing financial viability exception to the shareholder approval rules allow financings outside the 20% and minimum price provisions to proceed without shareholder approval requirements if the delay in securing shareholder approval would “seriously jeopardize the financial viability” of the company, and a notice is mailed to shareholders no later than 10 days before the issuance of the securities alerting them to the omission to seek shareholder approval. The new rules expand the exception by allowing a company to issue shares exceeding 20% of its outstanding shares at a price below the minimum price if seeking shareholder approval would result in one of the impacts described above. Additionally, whereas approval by Nasdaq is required for companies utilizing the financial viability exemption, such approval is not required for Nasdaq-listed companies using the COVID-19 exemption (NYSE, however, requires approval prior to use of the exemption). Companies may also avail themselves of a shortened notice period, as both exchanges’ rules require that notice must be provided no later than two business days before the issuance of the securities by filing a Form 8-K, where required by SEC rules, or by issuing a press release.