Nasdaq Notes That, as a Result of Other Investor Protection Mechanisms Over the Past 25 Years, Some Rules May No Longer Make Sense or Serve Original Purpose

SUMMARY

Last Wednesday, The Nasdaq Stock Market requested public comments on whether and how to improve its rules requiring shareholder approval before a Nasdaq-listed company issues securities in connection with certain acquisitions, changes of control, and certain private placements. The request for comments is being made in light of changes that have occurred in the capital markets, securities laws, and the nature and type of share issuances since the rules were adopted 25 years ago.

The comment period will run until February 15, 2016.     The request for comment is available here: https://listingcenter.nasdaq.com/assets/Shareholder%20Approval%20Comment%20Solicitation.pdf.

BACKGROUND

Currently, Nasdaq rules require listed companies to obtain shareholder approval prior to issuing securities in connection with, among other things:

  • The acquisition of the stock or assets of another company, if the potential issuance is equal to 20% or more of the number of shares of common stock or voting power outstanding, or 5% or more of the number of shares of common stock or voting power outstanding if insiders have certain interests in the target entity;
  • A change of control, which is determined under a facts-and-circumstances review rather than a bright-line test, although Nasdaq has stated that it will generally conclude that a change of control occurs when, as a result of the issuance, an investor or a group of investors would own, or have the right to acquire, 20% or more of the outstanding shares of common stock or of the voting power and such ownership or voting power would be the largest position; and
  • Private placements at a price less than the greater of book or market value, if the potential issuance, or the potential issuance together with sales by insiders, is equal to 20% or more of the number of shares of common stock or voting power outstanding.1

The rules were adopted in 1990, which predates many of the enhanced corporate governance standards that currently apply to public companies. In its request for comment, Nasdaq notes in particular that, since the rules were first established, the listing standards now require listed companies to have a majority of independent directors. Nasdaq also notes that companies may face higher costs of capital by structuring transactions in sub-optimal ways in order to satisfy the shareholder approval rules, and the increased threat of shareholder litigation. As a result, Nasdaq is exploring whether certain provisions of the rules may no longer serve their original shareholder protection purpose and others may no longer make sense.

REQUEST FOR COMMENTS

Nasdaq is accepting general comments, and is also requesting comments on specific issues under each of the three areas summarized above. Some of the specific issues are presented below.

Acquisition of Stock or Assets of Another Company

  • Should Nasdaq consider changing the rule to allow companies to issue more than 20% of voting power or total shares outstanding without shareholder approval in connection with an acquisition?
  • Should Nasdaq consider changing the rule to allow companies to issue more than 5% of voting power or total shares outstanding without shareholder approval where insiders have an interest in the assets to be acquired?

Change of Control

  • Would a bright-line test or safe harbor be beneficial to investors and companies to define when a transaction will result in a change of control?
  • Is Nasdaq’s presumption—that a change of control would occur when, as a result of the issuance, an investor or group would own or have the right to acquire 20% or more of the outstanding shares of common stock or of the voting power, and such ownership or voting power would be the largest position—an appropriate threshold for purposes of the shareholder approval rules?
  • Would a higher threshold for shareholder approval be appropriate where an investor or group publicly discloses an intent, or covenants, to remain passive and not exert control of the listed company?

Private Placements

  • Should Nasdaq continue to use the company’s closing bid price to measure market value?
  • Should Nasdaq eliminate the book value measurement for purposes of determining if shareholder approval is required?
  • Should Nasdaq consider changing the rule to allow smaller companies to issue a higher percentage of voting power or total shares outstanding without shareholder approval?
  • Should Nasdaq introduce a sliding scale in its rules, under which the number of shares that could be issued without shareholder approval would be based on the size of the discount to market price?
  • Should Nasdaq change the factors it considers when determining if an issuance is a “public offering” and thus not subject to shareholder approval?

Procedures for Commenting

Until February 15, 2016, comments can be sent by email to comments@nasdaq.comor by hard copy to Nasdaq Listing Qualifications, in care of Stan Higgins, 805 King Farm Blvd., Rockville, MD 20850.