The US Securities and Exchange Commission (SEC) has approved an amendment to Nasdaq Rule 5635(d), also known as the “20% Rule,” to modify the situations in which a company must obtain shareholder approval before it can issue securities in private placements. The amended rule, which became effective on September 26, 2018, only applies to companies listed on The Nasdaq Stock Market LLC (Nasdaq).
The amended rule changed the definition of market value for purposes of the shareholder approval requirements and eliminated the requirement for shareholder approval for issuances at a price less than “book value” but greater than market value. Previously, the 20% Rule required shareholder approval prior to the issuance, in a private placement transaction, of 20% or more of a company’s common stock or 20% or more of its voting power outstanding before the issuance, if the issuance was at a price less than market value or book value. Nasdaq considered that book value may not be an appropriate measure for requiring shareholder approval for a number of reasons, including when determining whether a transaction is dilutive to shareholders, and proposed to simplify the 20% Rule.
Instead, under the modified 20% Rule, shareholder approval is “required prior to a 20% Issuance at a price that is less than the Minimum Price.” Under the modified 20% Rule, (i) shareholder approval is required prior to a 20% Issuance at a price that is less than the lower of the closing price or the five-day average closing price immediately preceding the signing of the binding agreement related to the issuance of securities (the “Minimum Price”); and (ii) shareholder approval is not required prior to a 20% Issuance at a price that is less than book value but greater than market value. Under the modified 20% Rule, a 20% Issuance is a transaction involving the sale, issuance or potential issuance by a company of common stock (or securities convertible into or exercisable for common stock), which, alone or together with sales by officers, directors or substantial shareholders of the company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance.
This change is, in part, intended to provide listed companies with additional flexibility in structuring their securities transactions, to help smooth out price fluctuations immediately prior to an offering, and to reflect that many companies and investors negotiate offering prices based on a trailing average price rather than a single recent closing price.
The SEC noted that companies will still be limited in issuing securities in private placements without shareholder approval under other existing Nasdaq rules, including any discounted issuance of stock to a company's officers, directors, employees or consultants; for any issuance that will result in a change of control; and for some issuances involving the acquisition of stock or assets of another company.