Nasdaq is proposing to modify the listing requirements in Rule 5635(d) to

  • (i) change the definition of market value for purposes of the shareholder approval rule and
  • (ii) eliminate the requirement for shareholder approval of issuances at a price less than book value but greater than market value.

Currently, in transactions other than public offerings, shareholder approval is required prior to

“(1) the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable for common stock) at a price less than the greater of book or market value which together with sales by officers, directors or Substantial Shareholders [holder of a 5% or more of the common stock or voting power outstanding] of the Company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or

(2) the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.” Rule 5005 defines “market value” as the closing bid price.”

But let’s be frank, the precise language of the current rule can be perplexing. To address the “readability” issue (as Nasdaq euphemistically describes it), the proposal combines the situations described in existing clauses (d)(1) and (d)(2), but makes no substantive change, except as described below.

Under the readability-enhanced proposal, instead of requiring a shareholder vote as described above, shareholder approval would be required “prior to a 20% Issuance at a price that is less than the Minimum Price.”

20% Issuance. A“20% Issuance” means a transaction that is not a public offering (as defined in IM-5635-3) “involving the sale, issuance or potential issuance by the 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.”

Minimum Price. One concern that has been expressed to Nasdaq is that the bid price may not be an actual price and may not be transparent. As a result, Nasdaq is proposing to change the concept of “market value” for purposes of Rule 5635(d) to “Minimum Price,” which will be defined as “a price that is the lower of: (i) the closing price (as reflected on Nasdaq.com); or (ii) the average closing price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement.”

The closing price reported on Nasdaq.com is the Nasdaq Official Closing Price, which is derived from the closing auction on Nasdaq and reflects actual sale prices at one of the most liquid times of the day. Nasdaq believes that, in comparison to the bid price, the closing price reported on Nasdaq.com is more transparent and is a better reflection of the market price of a security. Nasdaq observes that a trailing average price may not really reflect market prices if the market is rising or declining or there has been a material event; however, Nasdaq believes that these risks are already accepted in the market.

Nasdaq believes that the proposal offers more flexibility to issuers because “where two alternative measures of value exist that both reasonably approximate the value of listed securities, defining the Minimum Price as the lower of those values allows issuers the flexibility to use either measure because they can also sell securities at a price greater than the Minimum Price without needing shareholder approval.”

Book Value Test Eliminated. Nasdaq is also proposing to eliminate the “book value” measure from the existing rule because Nasdaq believes that it is not an appropriate measure of whether a transaction is dilutive or should otherwise require shareholder approval and, when market price is below book, can be a “trap for the unwary.” Nasdaq also believes that the book value test can seem arbitrary and have a disproportionate impact on companies in certain industries, for example, where companies make large infrastructure investments and the stock trades below book value of those assets. As a result, requiring shareholder approval for issuances at less than book value but greater than market value can be an unfair impediment to capital-raising in some cases.

Various conforming changes are also proposed.