The SEC has adopted a new Nasdaq Rule 5636T(b), which will provide a temporary limited exception from certain shareholder approval requirements (Nasdaq Rules 5635(d)). Nasdaq believes that this temporary suspension will permit companies to raise capital quickly to continue running their businesses and address the immediate health crisis caused by the COVID-19 pandemic. The new rule is effective immediately and will remain in place through June 30, 2020.
Rule 5635(d) provides that shareholder approval is required prior to issue 20% or more of the company’s common stock (a “20% Issuance”) at a price that is lower than the minimum price (“Minimum Price”). More specifically, a 20% Issuance is a transaction, other than a public offering, 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 company officers, directors or “substantial shareholders” (as defined in Rule 5635(d)(1)(B)), equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. The Minimum Price is the lower of: (i) the Nasdaq Official Closing Price immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Official Closing Price of the common stock for the five trading days immediately preceding the signing of the binding agreement.
In order to qualify for the exception under the temporary rule, a company must demonstrate to Nasdaq that:
1. the need for the transaction is due to circumstances related to COVID-19;
2. the delay in securing shareholder approval would either:
have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan;
result in workforce reductions;
adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
seriously jeopardize the financial viability of the enterprise
3. the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company; and
4. the company’s audit committee (or a comparable body of the board of directors comprised solely of independent, disinterested directors) has expressly approved reliance on this exception and has determined that the transaction is in the best interest of shareholders.