& Securities

Nasdaq recently amended the price tests under Nasdaq Rule 5635(d) –– the shareholder approval rule often applied in PIPE (private investments in public equity) transactions and certain other private offerings (including private offerings of securities convertible into or exercisable for common stock). The amended Rule, according to Nasdaq, will provide greater flexibility and certainty for Nasdaq-listed companies entering into such transactions without the need to obtain shareholder approval.

Generally, Rule 5635(d) requires Nasdaq-listed companies to obtain shareholder approval in private placement transactions involving the issuance of 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. Prior to the recent amendment, Rule 5635(d) exempted from the shareholder approval requirement offerings priced at or above the greater of book or market value per share. The rule amendment eliminates book value, and revises the market value measure to incorporate a five-day average and to use the last closing price, instead of the consolidating closing bid price. As a result, under the amended Rule, a private offering involving the issuance of 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance will not require shareholder approval if the offer price is greater than or equal to the lesser of: (i) the last closing price immediately preceding the signing of a binding agreement and (ii) the average closing price of the common stock on Nasdaq for the five trading days immediately preceding the signing of the binding agreement (the “Minimum Price”).

Nasdaq’s impetus for amending the rule was to strike a balance between the protection of investors via the shareholder approval rule and a company’s flexibility to efficiently negotiate a deal to raise money quickly with a price that accurately reflects the market value of its security. Nasdaq noted that book value is based on historic values and, therefore, is not an appropriate measure of whether a transaction is dilutive or should otherwise require shareholder approval. Moreover, according to Nasdaq, book value is but one of several financial data points and is already incorporated into the market value of a security.

According to Nasdaq, the Minimum Price test strikes the balance they were seeking. Using the last closing price, rather than the last closing bid price, reflects sale prices at one of the more liquid times of the day and, therefore, is more transparent to investors. Nasdaq believes that the inclusion of the five-day average closing price provides more flexibility and certainty for companies in their transactions. For example, prior to the amended Rule, a company could not offer a five-day average price because of the risk that such price will ultimately be below or above market.

It is important to note, however, that the Rule 5635(d) amendment does not affect the requirement to obtain shareholder approval with respect to other transactions under Rule 5635, such as issuances involving an acquisition of stock or assets of another company, a change of control, and equity compensation.

The SEC release approving the rule change can be found here. The text of the amended rule can be found here.

Andrew Holt is not yet admitted in New York.