Alert March 01, 2018

Nasdaq Proposes to Amend Stockholder Approval Rule for Private Placements


Nasdaq has proposed to amend Rule 5635(d), which generally requires shareholder approval before Nasdaq-listed companies issue common stock equal to 20% or more of outstanding shares or voting power in transactions (other than a public offering) if the issuance takes place at a price less than the greater of the book value or market value of the stock. If adopted, Rule 5635(d) as amended would redefine market value and eliminate the book value test.

Minimum Stock Value Under Current Nasdaq Rules

Nasdaq Rule 5635(d) currently 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, and will be issued at a price that is less than the greater of book value or market value of the stock. “Market value” means the closing bid price on Nasdaq. Companies and market participants have expressed dissatisfaction with “market value,” as defined, because the closing bid price is not necessarily clear, and does not always reflect actual trading prices.

Proposed Amendment

The Nasdaq proposal would modify the definition of market value for purposes of the Nasdaq 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.

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 book value test because it is an accounting measure based on historic asset costs, and does not reflect the current value of the company.

If adopted, the Nasdaq proposal would make conforming changes in other Nasdaq rules and interpretations.

The SEC release soliciting public comment and the Nasdaq proposal are available on their respective websites.