In its most recent effort to mitigate adverse effects of the COVID-19 pandemic on U.S. securities markets and to ease issuers’ access to capital, the NASDAQ Stock Market implemented a temporary exception from its shareholder approval requirements through June 30, 2020, effective immediately. The temporary exception is a more expedient capital access measure[1] in the context of severely reduced economic activity and drastic decreases in revenue which, among other things, resulted in the unintended consequence of making such listed companies less attractive targets of new equity investments.

Ordinarily, the NASDAQ shareholder approval Listing Rule 5635 requires companies to obtain approval from shareholders prior to issuing securities in connection with: (i) certain acquisitions of the stock or assets of another company, (ii) equity-based compensation of officers, directors, employees, or consultants, (iii) a change of control, and (iv) a 20 percent issuance at a price less than the minimum price. In order to rely upon the temporary exception (Listing Rule 5636T, which would be available up to and including June 30, 2020), the company must: (i) execute a binding agreement governing the issuance of the securities, and (ii) submit notices to, and obtain necessary approvals, as applicable, from NASDAQ, no later than June 30, 2020. The issuance can take place after the June 30 deadline, provided that it is no later than 30 calendar days of the date of the binding agreement; otherwise, the temporary exception is not available.

A listed company intending to avail itself of the temporary exception from the foregoing shareholder approval requirement must show that securing shareholder approval would result in any of the following:

• having a material adverse impact on issuer’s ability to implement its pre-COVID-19 business plan,

• resulting in workforce personnel reductions,

• having a material adversely impact the issuer’s ability to undertake new initiatives in response to COVID-19, or

• seriously jeopardizing the issuer’s financial viability.

In addition, it would have to demonstrate that a contemplated transaction is being undertaken due to circumstances related to COVID-19 and that the company followed a process intended to ensure that the proposed transaction represents the best terms available to the company. Namely, the issuer’s Audit Committee (or a similar body of the Board of Directors consisting solely of independent, disinterested directors expressly approve reliance on the exception and determine that the proposed transaction would be in the best interest of the issuer’s shareholders.[2]

In effect, the temporary exception creates a safe harbor regime whereby no prior approval by Nasdaq is required if the maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction is less than 25 percent of the total shares outstanding and less than 25 percent of the voting power outstanding before the transaction, and the maximum discount to the minimum price at which shares could be issued is 15 percent (the “Temporary Threshold”). The temporary exception also removes the 15-calendar day waiting period following the Listing of Additional Shares submission; however, listed companies must give prompt notices of such transaction and at least two days before issuing shares. For transactions in excess of the Temporary Threshold, the NASDAQ Listing Qualifications staff must review issuer’s submissions (made through the NASDAQ listing portal) and approve issuer’s reliance on the exception before any securities in the transaction can be issued.

Finally, the terms of the temporary exception require that a company relying on it file a Current Report on Form 8-K or issue a press release (in case of a press release, no later than two business days before the issuance of the securities) disclosing: (i) the transaction terms, (ii) the company’s reliance on the temporary exception to the NASDAQ shareholder approval, which would be required but for the exception, and (iii) the review and determination by the company’s Audit Committee or another similar body of the Board that the proposed transaction is in the best interests of the company’s shareholders.

In addition to the foregoing relied directed at the listed companies, NASDAQ also adopted a temporary exception from shareholder approval requirements under Listing Rule 5635(c) with respect to affiliate participation. Listing Rule 5635(c) requires shareholder approval for sales to officers, directors, employees, or consultants to the extent such sales are “equity compensation.” In order to alleviate the regulatory burden on yet another capital-raising avenue for listed companies, NASDAQ also adopted a temporary exception that would allow investments by such person under limited circumstances, as articulated in Listing Rule 5636T(c), provided that such affiliate participation is specifically required by unaffiliated investors. Further, each affiliate’s participation must be less than 5 percent of the transaction value and together – cannot exceed 10 percent of the transaction value. Finally, no affiliate investor can participate in negotiating the terms of the transaction.

While NASDAQ has taken the position that the 15-day advance notification requirement as applied to the temporary exception under Listing Rule 5636T is not required, listed companies are still required to notify the NASDAQ staff, along with a supplement, certifying in writing that the company has met all requirements of Listing Rule 5636T(b) and (c), if applicable, which certification is due at the time of the public disclosures of the transaction and in no event later than June 30, 2020.

It is important to note that NASDAQ will aggregate issuances of securities in reliance on the exception with any subsequent issuances (other than a public offering under IM-5635-3) at a discount to the minimum price, if the binding agreement relating to the subsequent issuance is executed within 90 days of the prior issuance.

Finally, it bears reiterating that the temporary exception does not apply to shareholder approval requirements related to equity compensation (Listing Rule 5635(c), except as described above), acquisitions (Listing Rule 5635(a), and a change of control (Listing Rule 5635(b)).

A full copy of the rule can be found here.

[1] The financial viability exception set forth in Listing Rule 5635(f) appears to be neither conceptually nor practically suited for the significant challenges facing listed companies in the COVID-19 economic reality.

[2] This step is similar to that required under the exercise of the financial viability exception.