Nasdaq Solicits Comments On Shareholder Approval Rules For Private Placements
Earlier this year, Nasdaq posted a notice that it was seeking comments (the “Comment Solicitation”) to a potential revision to Nasdaq Listing Rule 5635(d) (the “Private Placement Rules” and such proposed revision, the “Proposed Rule”). Currently these require listed companies to obtain shareholder approval when issuing common stock or securities convertible into common stock equal to 20% or more of the shares outstanding in a nonpublic offering (a “Qualified Financing”) at a price less than the greater of the book value or market value. In brief, the Proposed Rule would revise the Private Placement Rules to (i) eliminate the need to obtain shareholder approval for issuances of common stock at a price less than book value; (ii) change the definition of market value for purposes of the Private Placement Rules from the closing bid price to a five-day trailing average of the closing price as reflected on www.Nasdaq.com; and (iii) add a requirement that the proposed transaction be approved by either a majority of the issuer’s independent directors, or its shareholders.
The table below summarizes the applicable requirements under both the current version of the Private Placement Rules and those same rules as amended by the Proposed Rule.
The Comment Solicitation is a follow-up to the comment solicitation that Nasdaq, working with the Nasdaq Listing and Hearing Review Council (the “Listing Council”), launched on November 16, 2015 (the “Prior Comment Solicitation”). In contrast to the current Comment Solicitation, the Prior Comment Solicitation requested comments on potential updates to all of Nasdaq’s shareholder approval rules, and a total of 17 comment letters were received from Nasdaq-listed companies, investors and other market participants that expressed a wide range of views. While neither Nasdaq nor the Listing Council made any determination that change was necessary or appropriate, one theme that emerged from the comments is the need to focus on potential revisions to the Private Placement Rules.
II. OVERVIEW OF THE PROPOSED CHANGES
A. Elimination of the Book Value Requirement
The book value requirement was eliminated on the grounds that the metric (i) was generally not considered when pricing or seeking shareholder approval of financings; (ii) was not perceived as providing any substantive protection to shareholders; (iii) was not an appropriate measure of the market value of an issuer’s stock; and (iv) could have a disproportionate impact on certain issuers under certain circumstances. In particular, with respect to the first point, the comments received in response to the Prior Comment Solicitation indicated that book value is rarely, if ever, considered by either issuers or investors when pricing capitalraising transactions, or by shareholders when they are asked to vote to approve a proposed transaction. The remaining three points are interrelated in the sense that book value may not be an appropriate measure of the current value of an issuer’s stock since it is primarily an accounting measure based on the historic cost of an issuer’s assets, and as such may not provide the protection to existing shareholders that was contemplated when the Private Placement Rules were originally adopted in 1990. One of the consequences arising from this is that the existing book value test can also have a disproportionate impact on companies in certain industries and at certain times. For example, during the financial crisis in 2008 and 2009, many banks and finance related companies traded below book value. Similarly, companies that make large investments in infrastructure may trade below the accounting carrying value of those assets. Under the existing book value test, an issuer conducting a Qualified Financing in this situation at a discount to book value would be required to obtain shareholder approval even if the offering priced at a premium to the current market price on the theory that the offering would be dilutive to existing shareholders. The reality of the matter, however, is that the reason the issuer’s stock is trading below book value in these circumstances is that the market believes that the assets are overvalued. Viewed in this light, the existing book value test provides little protection to existing shareholders and, potentially, could prove counterproductive by impeding potential non-dilutive financings.
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