October 15, 2018

Nasdaq Amends Stockholder Approval Rule for Private Placements

The Securities and Exchange Commission has approved the amended Nasdaq proposal to amend Rule 5635(d), which requires Nasdaq-listed companies to obtain shareholder approval before issuing common stock or securities convertible into common stock if the shares to be issued will equal 20% or more of (1) the company’s outstanding shares or (2) the voting power of outstanding shares. The amendments, described in our earlier client alert, redefine “market value,” eliminate the book value test under Rule 5635(d), and will now generally require shareholder approval if a Nasdaq-listed company issues common stock equal to 20% or more of outstanding shares or voting power in transactions (other than a public offering) at a price lower than the lower of: (1) the closing price (as reflected on immediately preceding the signing of the binding agreement, or (2) the average closing price of the common stock (as reflected on for the five trading days immediately preceding the signing of the binding agreement. The amendments became effective on September 26, 2018.

Amended Minimum Stock Value Under Nasdaq Rules

The original Nasdaq amendment would have amended the definition of market value for purposes of the 20% shareholder approval requirement by deleting the reference to book value and replacing the closing bid price with the lower of: (1) the “closing price” (defined as the “Nasdaq Official Closing Price,” which means the closing price reported on and (2) the average closing price of the common stock (as reported on for the five trading days immediately preceding the signing of a binding agreement to issue the shares.

On August 16, 2018, Nasdaq filed Amendment No. 1 to its proposed rule change to make the following clarifications to the originally proposed amendments:

  • amend the definition of “Minimum Price,” to clarify that the closing price (as reflected on will be measured “immediately preceding the signing of the binding agreement,” and
  • expressly provide that, for purposes of Rule 5635(d) and related Nasdaq interpretive materials, references to “transactions other than public offerings” in the amended text of the Nasdaq rules, which replace the former references to “private placements,” continue to include private placements.

Reasons for the Nasdaq Amendments

Companies and market participants expressed dissatisfaction with “market value,” as previously defined, because the closing bid price is not necessarily clear, and does not always reflect actual trading prices. Nasdaq believes that the closing price is more transparent to investors and others, and better reflects the market price of a security than the closing bid price. Nasdaq also believes that the five-day average closing price can be a better indication of market value than the closing price on a single day. In some situations (for example, where market prices are declining or where material news has been announced during the five-day period), the use of the lower single-day closing price should protect the company’s existing shareholders. The Nasdaq proposal eliminates the prior book value test because it is an accounting measure based on historic asset costs, and does not reflect the current value of the company.

The original SEC release (February 13, 2018) soliciting public comment, and the original Nasdaq proposal (January 30, 2018), are available on their respective websites.