COVID-19 Response: NYSE and Nasdaq Provide Relief from Shareholder Approval Rules for Certain Capital Raising Transactions

To help enable rapid access to capital for public companies facing liquidity shortages in the COVID-19 pandemic, both the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) have instituted rule changes granting temporary relief from the application of shareholder approval requirements that would otherwise apply to listed companies engaging in certain private placement transactions.

In the absence of this temporary relief, a listed company’s access to capital would be limited in size and structure or would face delays while the company seeks shareholder approval.

The rule changes come as many businesses are expected to suffer reduced cash flows due to the COVID-19 pandemic. Both the NYSE and Nasdaq have advised companies that these rule changes are only effective until June 30, 2020. In instances where seeking the temporary relief remains subject to review by the relevant exchange, a listed company should provide advance notice to such exchange in order to provide for sufficient time to review the submission and make a determination.

Partial Waiver of NYSE Shareholder Approval Rules

Subject to certain conditions, the NYSE will temporarily waive the shareholder approval requirements applicable to issuances of securities to related parties (Section 312.03(b) of the NYSE Listed Company Manual) and private placements involving 20% or more of the company’s outstanding common stock or voting power before such issuance (Section 312.03(c) of the NYSE Listed Company Manual). Approval from the NYSE is not necessary in order to rely on the relief granted by the waiver. In adopting this waiver, the NYSE noted that such temporary emergency relief would simply provide NYSE-listed companies with the same flexibility provided to Nasdaq-listed companies, as Nasdaq listing requirements do not impose the same thresholds and limitations to such private placements.

Issuance to a Related Party

NYSE-listed companies are generally required to obtain shareholder approval prior to any issuance of stock to a director, officer or substantial security holder of the listed company (each a Related Party) or to an affiliate of a Related Party if the number of shares of common stock to be issued (or the number of shares into which the securities may be convertible or exercisable) exceeds 1% of either the company’s outstanding common stock or voting power before the issuance. The amount of shares that may be issued without shareholder approval increases to 5% of the company’s outstanding common stock or voting power prior to the issuance if (1) the issuance is a cash sale at a price not less than a “minimum price,” defined as the lower of the last closing price or the average closing prices over the five trading days immediately preceding the signing of the binding agreement, and (2) the counterparty is a Related Party solely because they are a substantial security holder.

With its COVID-19 relief, the NYSE has waived the numerical limitations on issuances to Related Parties, provided that the following conditions are met:

• The sale of securities is for cash at a price not less than the “minimum price;”
• The transaction is reviewed and approved by the company’s audit committee or a comparable committee of independent directors and
• The sale proceeds are not used to fund the purchase of another company if any Related Party has a 5% or greater interest in the other company, or if all such persons collectively have a 10% or greater interest in the other company.

Transactions Involving 20% or More of Outstanding Common Stock or Voting Power

The NYSE also requires that a listed company obtain shareholder approval prior to any transaction relating to a private placement involving 20% or more of the company’s outstanding common stock or voting power outstanding before such issuance (a 20% Issuance).

The NYSE has waived the shareholder approval requirement regardless of the amount of securities issued, provided that the transaction is a sale for cash at a price that is not less than the applicable “minimum price.” If any purchaser in such a transaction is a Related Party or an affiliate of a Related Party, such transaction would also need to meet the requirements applicable to issuances to Related Parties, taking into account the applicable waiver. A transaction will still be subject to shareholder approval if such approval is required by any other applicable NYSE rule, including requirements for equity compensation and issuances resulting in a change of control.

NYSE Adopts Section 312.03T of the NYSE Listed Company Manual

In addition to the partial waiver of its shareholder approval requirements, the NYSE has also adopted the new Section 312.03T of the NYSE Listed Company Manual, which allows listed companies to conduct a 20% Issuance after receiving approval from the NYSE in lieu of receiving shareholder approval. The new rule is intended to apply to a 20% Issuance that would not be eligible under the waiver, e.g., the securities are offered at a price that is not the applicable “minimum price.”

A NYSE-listed company seeking relief under Section 312.03T would have to demonstrate that the need for the transaction is due to circumstances related to COVID-19. Specifically, they would need to demonstrate that the delay in securing shareholder approval would:

1. Have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan,
2. Result in workforce reductions,
3. Adversely impact the company’s ability to undertake new initiatives in response to COVID-19 or
4. Seriously jeopardize the financial viability of the enterprise.

The NYSE-listed company would further need to demonstrate that it undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.

To rely on the Section 312.03T exception, the NYSE-listed company must:

1. Obtain the express approval of the company’s audit committee or a comparable committee comprised solely of independent, disinterested directors that the listed company is seeking to rely on this exception and that the transaction is in the best interest of shareholders;
2. Submit the related supplemental listing application and certification to the NYSE describing with specificity how it complies with the exception;
3. Obtain the NYSE’s approval of its utilization of the exception and
4. After receiving the NYSE’s approval, and no later than June 30, 2020, sign a binding agreement.

After receiving approval, the listed company may rely on the exemption to issue the securities, provided that if the issuance takes place after June 30, 2020, it must occur no later than 30 calendar days following the date of the binding agreement.

As promptly as possible, but no later than two business days before issuing securities in reliance on Section 312.03T, the listed company must make a public announcement by filing a Form 8-K (if required by SEC rules) or by issuing a press release, stating (1) the terms of the transaction, (2) that shareholder approval would ordinarily be required under NYSE shareholder approval rules and (3) that the audit committee or a comparable committee comprised solely of independent, disinterested directors expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.

Similar to the waiver, NYSE-listed companies relying on the relief provided by Section 312.03T must also comply with all other requirements imposed by the NYSE rules. Such requirements include the shareholder approval requirements in Sections 312.03(b) and (c) in relation to issuances other than sales of securities for cash, the change of control provision of Section 312.03(d) and the equity compensation requirements set forth in Sections 312.03(a) and 303A.08 of the NYSE Listed Company Manual, provided that Section 312.03T provides an additional exception to such rules with regard to Related Parties and affiliates participating in a transaction relying on Section 312.03T. This exception is subject to the following requirements:

• The Related Party’s or Related Party affiliate’s participation in the transaction was specifically required by unaffiliated investors;
• Each Related Party’s or Related Party affiliate’s participation in the transaction must be less than 5% of the transaction, and all Related Parties’ or Related Party affiliates’ participation collectively must be less than 10% of the transaction and
• Any Related Party or Related Party affiliate investing in the transaction must not have participated in negotiating the economic terms of the transaction.

After reliance on the exception in Section 312.03T, any subsequent issuance of securities by the listed company, other than a public offering for cash, at a discount to the minimum price will be aggregated with issuances of securities relying on the exception if the binding agreement governing the subsequent issuance is executed within 90 days of the prior issuance. If the aggregate number of securities issued (including shares issued in reliance on the exception) would constitute a 20% Issuance, then the listed company would be required to obtain shareholder approval prior to the subsequent issuance pursuant to Section 312.03(c) of the NYSE Listed Company Manual.

Nasdaq Adopts Listing Rule 5636T

Nasdaq Listing Rule 5636T includes requirements similar to the newly adopted Section 312.03T of the NYSE Listed Company Manual. Rule 5636T provides a limited temporary exception to the shareholder approval requirements applicable to issuances of stock in private placement transactions and, in certain narrow circumstances, a limited exception to shareholder approval for transactions that may otherwise be deemed executive compensation.

Transactions Involving 20% or More of Outstanding Common Stock or Voting Power

Nasdaq-listed companies are generally required to obtain approval from shareholders prior to issuing securities at a price less than the “Minimum Price” through 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 equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. The Minimum Price is defined as the lower of: (1) the Nasdaq closing price of the common stock immediately preceding the signing of the binding agreement for the sale of the applicable security or (2) the average Nasdaq closing price of the common stock for the five trading days immediately preceding the signing of the binding agreement.

Transactions with Directors and Officers

Listing Rule 5635(c) requires shareholder approval, with certain exceptions, prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees or consultants.

Nasdaq has long interpreted Listing Rule 5635(c) to require shareholder approval for certain sales to officers, directors, employees or consultants, even when part of a private placement with outside investors, because such issuances could be considered a form of “equity compensation.” Nasdaq has heard from market participants that investors often require a company’s senior management to put their personal capital at risk and participate in a capital raising transaction alongside the unaffiliated investors. Nasdaq believes that as a result of uncertainty related to the COVID-19 pandemic, listed companies seeking to raise capital may face such requests.

Requirements of Nasdaq Rule 5636T

To rely on Rule 5636T, a listed company must submit an application to Nasdaq’s Listing Qualifications Department demonstrating that the transaction satisfies the following requirements:

1. The need for the transaction is due to circumstances related to COVID-19;2. The delay in securing shareholder approval would:

• 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 or
• Seriously jeopardize the financial viability of the enterprise and

3. The company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.

Further, to rely on Rule 5636T, a listed company must:

1. Have the transaction and reliance on this exception approved by its audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors;
2. Have such committee determine that the transaction is in the best interest of shareholders;
3. Execute a binding agreement governing the issuance of securities;
4. Make a public announcement at least two business days prior to the consummation of the proposed transaction, either by filing a Form 8-K (if required by SEC rules) or by issuing a press release that contains certain statements (similar to the information that would be required by Section 312.03T of the NYSE Listed Company Manual);
5. No later than the time of the public announcement, submit a supplement to its Listing of Additional Shares notification form, certifying that the company has complied with the requirements of Rule 5636T (rather than provide the notification 15 calendar days prior to the issuance, as normally required under Nasdaq Listing Rule 5250(e)(2)) and
6. If applicable, obtain approval from Nasdaq prior to the issuance of any securities if the transaction falls outside of the “Safe Harbor Provision” described below.

Prior approval of a company’s reliance on the exception by the Nasdaq Listing Qualifications Department will not be required if the transaction meets the following criteria (the Safe Harbor Provision):

• The transaction does not involve the issuance of warrants exercisable for shares of common stock,
• The maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction and
• The maximum discount to the Minimum Price at which shares could be issued is 15%.

A company relying on Rule 5636T must execute its binding agreement to issue securities prior to June 30, 2020. If the issuance of securities under such agreement occurs after June 30, 2020, then the issuance must occur no later than 30 calendar days following the date of the binding agreement.

Rule 5636T also requires a company to comply with most other requirements imposed by the Nasdaq Listing Rules, including the shareholder approval requirements related to acquisitions (Listing Rule 5635(a)), a change of control (Listing Rule 5635(b)) and equity compensation (Listing Rule 5635(c)). However, similar to Section 312.03T of the NYSE Listed Company Manual, Rule 5636T provides an exception for sales to officers, directors, employees and consultants and their affiliates participating in a transaction relying on Rule 5636T. Such exception is also subject to the same size limitations and other requirements as provided in Section 312.03T of the NYSE Listed Company Manual. Nasdaq will also apply the same aggregation principles for any subsequent issuance of securities at a discount to the Minimum Price if the binding agreement governing the subsequent issuance is executed within 90 days of the issuance in reliance on Rule 5636T.