Editor's note: this post has been updated on May 18, 2020 to include new rule exceptions adopted late last week by the NYSE.
In continuation of the efforts by Nasdaq and the NYSE to provide companies, to some extent, with easier access to capital in light of the impact of the COVID-19 pandemic, on May 4, 2020 and May 14, 2020, respectively, the SEC approved changes to the Nasdaq listing rules (the “Listing Rules”) and the NYSE’s listed company manual (the “Manual”) to provide temporary and limited exceptions from the shareholder approval requirements for (i) private capital-raising transactions involving the issuance of securities representing 20% or more of a company’s voting securities and (ii) issuances of securities to officers, directors, employees or consultants in connection with those private capital-raising transactions. These exceptions take into account the potential need for discounted pricing for companies to incentivize investments and the accelerated timelines in which companies may need to raise capital.
The NYSE and Nasdaq exceptions are narrowly targeted at companies that require equity financing due to COVID-19 related concerns and the eligibility criteria could limit the issuers that may be able to take advantage of this relief. The exceptions are available until June 30, 2020 but unlike the broader temporary relief measures that the exchanges have adopted in connection with the pandemic – for example, with respect to the continued listing requirements and the NYSE’s 20% rule waiver for above-market issuances – the NYSE exception requires NYSE approval in all cases, the Nasdaq exception is not automatic in all cases and both exceptions come, both in form and substance, with significant requirements that companies will have to comply with, as set forth below. Neither the Nasdaq relief nor the NYSE relief extends to issuances in connection with acquisitions or issuances that will result in change of control transactions.
Nasdaq’s exceptions are reflected in a new temporary Listing Rule 5636T available here. The NYSE’s exceptions are reflected in a new temporary Manual Section 312.03T available here.
Shareholder Approval Requirements Impacted by the Temporary Relief
Nasdaq
Under Nasdaq Listing Rule 5635(d), shareholder approval is required prior to the sale, issuance or potential issuance of common stock or securities convertible into or exercisable for common stock, other than in a public offering, (i) which alone or together with sales by affiliates of the company equals 20% or more of the company’s common stock or voting power outstanding prior to the issuance (ii) at a price that is less than the Minimum Price, which is the lesser of the five day average closing price or the closing price immediately preceding execution of the binding agreement for the issuance.
Under Nasdaq Listing Rule 5635(c), shareholder approval is required for certain sales of securities to officers, directors, employees or consultants (“affiliates”) in connection with the establishment or material amendment of equity compensation plans. Notwithstanding its apparent technical limitation to formal compensation plans, Nasdaq has historically interpreted the rule to apply to any issuance that could be considered a form of “equity compensation.” This could as a practical matter prohibit these persons from participating in a private capital-raising transaction.
NYSE
Under NYSE Manual Section 312.03(c), subject to certain exceptions, shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions, other than in a public offering, (i) in an amount which equals 20% or more of the company’s common stock or voting power outstanding prior to the issuance (ii) at a price that is less than the Minimum Price.
Under NYSE Manual Section 303A.08, subject to certain exceptions, shareholder approval is required for certain sales of securities to affiliates in connection with the establishment or material amendment of equity compensation plans. Like Nasdaq, the NYSE requirement that an issuer obtain shareholder approval in connection with an equity compensation plan has historically been interpreted to apply to “any” issuance to these related parties, potentially prohibiting them from participating in capital-raising transactions, and the exception the NYSE is adopting is meant to permit those persons to participate in capital-raising transactions taking advantage of the temporary exception to the 20% rule.[1]
Prerequisites for Relief
In order to rely on the temporary relief offered by either exchange, the listed company must, prior to June 30, 2020, have submitted the required notices and certification (described below) to the relevant exchange, obtained exchange approval (if applicable), and executed a binding agreement governing the issuance of the securities. While Nasdaq has a safe harbor from the approval requirement (described below), any reliance on the NYSE’s temporary exceptions requires the NYSE’s prior approval.
The issuance of the securities under either rule may take place after June 30, 2020, but no later than 30 days after the date of the binding agreement.
Temporary Relief
Temporary Exception to Nasdaq Listing Rule 5635(d) and NYSE Manual Section 312.03(c)
No approval of shareholders will be required for issuances of securities that would otherwise be subject to shareholder approval under Nasdaq Listing Rule 5635(d) or NYSE Manual Section 312.03(c) if the following eligibility requirements are met:
- the need for the transaction is due to circumstances related to COVID-19;
- the delay in obtaining 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; (c) 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;
- the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company; and
- the company’s audit committee or a comparable body of the board composed solely of independent and disinterested directors (a) approved reliance on this exception and (b) determined that the transaction is in the best interest of shareholders.
In addition, the NYSE exception imposes the following eligibility requirements not required by Nasdaq:
- the funds will not be used to fund any acquisition transaction; and
- the NYSE must approve the transaction in all cases (in contrast, Nasdaq offers an automatic safe harbor for transactions below specified size and price thresholds, described below).
Approval Requirements
Nasdaq
No prior approval by Nasdaq is required to rely on the exception (other than delivery of notice as described below) so long as the transaction involves the issuance of less than 25% of the total shares and voting power outstanding before the issuance and the shares are issued or could be issued at a discount of no more than 15% to the Minimum Price. Transactions that do not meet these two requirements must be approved by Nasdaq prior to issuance of securities by the company in reliance on this exception and approval will be based on Nasdaq’s review of whether the company has established compliance with the eligibility criteria described above. Transactions involving the issuance of warrants exercisable for shares of common stock are not eligible for this exception.
Issuances made in reliance on Nasdaq’s exception are also exempt from the requirement to notify Nasdaq at least 15 calendar days prior to an issuance above 10% of the stock or voting power outstanding prior to the issuance. Instead, where Nasdaq approval is not necessary due to the safe harbor discussed above, Nasdaq will require notification, along with certification that the conditions described above have been met, no later than two business days prior to the issuance of securities.
NYSE
All transactions that would rely on the NYSE’s temporary exceptions require submission of a supplemental listing application and a certification which describes with specificity how the transaction complies with the applicable requirements. The NYSE must approve eligible transactions prior to any issuance, and the NYSE is therefore advising companies to provide the required documentation as far in advance of the proposed transaction as possible.
Notice to Shareholders
Companies relying on the NYSE and Nasdaq exceptions must also provide shareholders with advance notice of the transaction at least two business days prior to the issuance in the form of a report on Form 8-K (if required) or a press release with details of the terms of the transaction, disclosure regarding reliance on this exception and confirmation that the audit committee or a comparable body of the board has approved reliance on the exception and determined that the transaction is in the best interests of shareholders.
Temporary Exceptions for Participation by Affiliates
As mentioned above, both Nasdaq and the NYSE require shareholder approval for most issuances of equity securities to officers, directors, employees and consultants, and the NYSE requires shareholder approval for certain issuances to directors, officers and 5% shareholders.[2] Pursuant to the temporary exceptions, no approval of shareholders will be required in connection with the participation by such affiliates in transactions consummated pursuant to the NYSE and Nasdaq exceptions described above so long as:
- the affiliate’s participation is specifically required by unaffiliated investors;
- each affiliate’s participation is limited to less than 5% of the transaction;
- aggregate participation of all affiliates is limited to less than 10% of the transaction; and
- no participating affiliate has been involved in negotiating the economic terms of the transaction.
Relief Not Applicable to Acquisitions and Change of Control Transactions
The Nasdaq temporary exception does not provide relief from the shareholder approval requirements in connection with the issuance of shares (i) for the acquisition of assets or shares of a company (Nasdaq Listing Rule 5635(a)), (ii) in transactions that will result in a change of control (Nasdaq Listing Rule 5635(b)) or (iii) as equity compensation (other than pursuant to participation by affiliates permitted under the temporary exception as described above) (Nasdaq Listing Rule 5635(c)).
The NYSE’s temporary exception does not provide relief from the shareholder approval requirements in connection with (i) issuances other than sales of securities for cash (Sections 312.03(b) and (c)), (ii) transactions that will result in a change of control (Section 312.03(d)) or (iii) the equity compensation requirements (other than pursuant to the limited exceptions set forth therein and in the narrow circumstances discussed above) (Sections 312.03(a) and 303A.08). In addition, funds raised from the issuance of securities pursuant to the NYSE’s temporary exception may not be used to fund acquisition transactions.
Takeaways – Will the Exception Substantially Reduce Burdens on Issuers?
Both the NYSE and Nasdaq have existing exceptions to the shareholder approval requirements which are based on the notion that the delay to obtain shareholder approval would jeopardize the financial viability of a company.[3] In each case, however, both exchanges have determined, in nearly identical paragraphs contained in their respective rule proposals, that the financial viability exceptions may not always be helpful to companies facing COVID-19-related challenges. For example, both the NYSE and Nasdaq rule proposals describe a company that might need additional cash to pay employees during a period of reduced or no revenue where its viability may not otherwise be in jeopardy. Further, the financial viability exceptions of both exchanges require notice to be mailed to shareholders not less than 10 business days prior to issuing securities, and both the NYSE and Nasdaq cite this time-frame as potentially impractical given the possible urgency of funding requirements and curtailed business operations. On the other hand, however, the requirements of the new Nasdaq and NYSE exceptions may lead the independent committee of the board approving the transaction to feel it needs to conduct some form of a market check before proceeding, which may delay the capital raising, and the NYSE requires NYSE approval of the issuance in all cases, which also may impose delay.
Ultimately, both the NYSE and Nasdaq exceptions seem designed primarily for companies aiming to prevent workforce reductions resulting from COVID-19 or to maintain other aspects of their operations (e.g., continue to be able to pay rent) during the temporary period while social distancing measures are in place rather than for companies that are likely to face long-term economic damage due to COVID-19, which may be able to rely on the existing “financial viability” exception.
In addition, in considering whether the accommodations to include affiliate participation in capital raising will be helpful to companies, we note that the NYSE and Nasdaq rules do not specify how a company can or should prove that each affiliate’s participation was “specifically required by unaffiliated investors.” Would the unaffiliated investor need to certify that they would not participate in the transaction but for the affiliate’s participation and must this come from more than one unaffiliated investor? The rules also require that the participating affiliate not have been involved in negotiating the economic terms of the investment, which may tend to prohibit a number of key affiliates from participation (for example, the CEO and CFO).
Given that the NYSE and Nasdaq exceptions apply only through June 30, there is only a very limited timeframe for companies to utilize these exceptions. It remains to be seen whether the exchanges will extend these and other accommodations beyond June 30.
[1] Under Manual Section 312.03(b), the NYSE also requires shareholder approval for an equity issuance to a director, officer or 5% shareholder or an affiliate thereof if the number of shares of common stock to be issued, or the number of shares of common stock into which the securities are convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance. (There is an exception for cash sales of up to 5% of the outstanding shares to 5% holders at a price equal to or above the Minimum Price.) However, under a NYSE exception adopted in April in connection with the COVID-19 pandemic, subject to certain qualifications, a company can sell equity securities through June 30 to a director, officer or 5% shareholder or an affiliate thereof without obtaining shareholder approval whether or not the amount of securities issued exceeds the 1% or 5% thresholds.
[2] This NYSE shareholder approval requirement is in NYSE Manual Section 312.03(b) and Sections 312.03(a) and 303A.08, and this Nasdaq shareholder approval requirement is in Nasdaq Listing Rule 5635(c).
[3] Nasdaq Listing Rule 5635(f) and NYSE Listed Company Manual Section 312.05.
If you would like to discuss this post, please feel free to reach out to any of the authors or other US securities partners and counsel.
New York
- Valerie Jacob – valerie.jacob@freshfields.com
- Michael Levitt – michael.levitt@freshfields.com
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London
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Frankfurt
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Hong Kong
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Singapore
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