NYSE and NASDAQ Respond to COVID-19
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In response to the disruption of the equities markets stemming from the ongoing spread of COVID-19, the New York Stock Exchange (NYSE) has temporarily waived its listing requirement related to average global market capitalization, extended the period during which listed companies may avoid delisting by curing the failure to comply with other continued listing standards, and waived certain of its shareholder approval requirements for specified private placements. The Nasdaq Stock Market (Nasdaq) has extended the compliance period for its price-based listing requirements, and provided guidance in a number of areas, including its willingness to consider the impact of COVID-19 when reviewing requests for a financial viability exception to its shareholder approval requirements for specified securities issuances.
The SEC has approved the suspension by the NYSE, until June 30, 2020, of the application of its continued listing standard which requires listed companies to maintain an average global market capitalization over a consecutive 30 trading-day period of at least $15 million (Market Cap Requirement).
Under existing rules, if an NYSE-listed company is determined to have an average global market capitalization over a consecutive 30 trading-day period of less than $15 million, trading in its securities is immediately suspended and the company is subject to delisting. The company will not be eligible to submit a plan to regain compliance (but may appeal its delisting). The suspension of the Market Cap Requirement will not affect the status of any company that has already been formally notified of noncompliance with the Market Cap Requirement and is in the NYSE's delisting appeal process. The Market Cap Requirement will resume with the consecutive 30 trading-day period commencing on July 1, 2020.
In addition, NYSE-listed companies fall out of compliance with continued listing standards if they have both stockholders' equity of less than $50 million and an average global market capitalization over a consecutive 30 trading-day period of less than $50 million ($50MM Standard), or if the average closing price of their stock has fallen below $1.00 over a consecutive 30 trading day period (the "Dollar Price Standard"). The NYSE has extended the period during which listed companies may avoid delisting for failure to comply with the $50MM Standard or the Dollar Price Standard, by establishing a tolling period from April 21, 2020 through and including June 30, 2020.
The NYSE will continue to identify and notify companies that fall below these standards during the tolling period. Companies so notified will have to meet relevant press release requirements under the Listed Company Manual (Manual) and, where applicable, SEC Form 8-K disclosure requirements. In addition, the NYSE will continue to attach a .BC indicator to such companies' tickers, and identify them as below compliance on the NYSE website during the tolling period. However, the 18-month (for the $50MM Standard) or 6-month (for the Dollar Price Standard) compliance plan periods for companies whose non-compliance with these listing standards began during the tolling period will be deemed to begin on July 1, 2020.
For companies already in a compliance period with respect to either standard on April 21, 2020, the compliance period will be tolled and recommence on July 1, 2020. However, they remain eligible to cure non-compliance during the tolling period.
Companies that fail to comply with the $50MM Standard during the tolling period will continue to be required to submit compliance plans within the applicable time frames set forth in the Manual, and the NYSE will review their progress on a quarterly basis during the tolling period. The NYSE may continue to commence delisting proceedings prior to the end of the compliance plan period if a company fails to meet the material aspects of its compliance plan accepted by the NYSE or any of the quarterly milestones in that plan.
However, the adoption of the tolling period does not extend any time periods for any company for which the NYSE has commenced delisting proceedings prior to April 21, 2020, including those that have exercised their appeal right.
Shareholder Approval Requirements
The SEC has also approved the NYSE's waiver of certain of its shareholder approval requirements for securities issuances through and including June 30, 2020 to facilitate capital raising through private transactions.
20% Rule: NYSE-listed companies must obtain shareholder approval of any transaction relating to the issuance of 20% or more of the company's outstanding common stock or 20% of the voting power outstanding before such issuance other than a public offering for cash (20% Rule), subject to exceptions for certain bona fide private financings for cash at a price at least equal to the lower of the official closing price immediately preceding the signing of the binding agreement or the average official closing price for the five trading days immediately preceding the signing of the binding agreement (the Minimum Price Requirement).
Under existing rules, a bona fide private financing must either be: (i) a sale to a registered broker-dealer that purchases the securities from the issuer with a view to the private sale of such securities to one or more purchasers; or (ii) sales by the issuer to multiple purchasers, if no one purchaser, or group of related purchasers, acquires, or has the right to acquire upon exercise or conversion of the securities, more than 5% of the shares of the issuer's common stock or more than 5% of the issuer's voting power before the sale. The NYSE has waived these limitations on private financings through June 30, 2020.
This temporary waiver permits companies to undertake a bona fide private financing, regardless of its size, with a single purchaser without the involvement of a broker-dealer, provided that the transaction is a sale of the company's securities for cash at a price that meets the Minimum Price requirement. However, any transaction benefitting from the waiver will continue to require shareholder approval if required under any other rule, including rules pertaining to issuances in connection with equity compensation and a change of control and the Related Party Rule (described below). This waiver creates consistency with Nasdaq rules with respect to private placements relating to 20% or more of a company's common stock or voting power outstanding before such transaction.
Related Party Rule: Under existing rules, NYSE-listed companies must obtain shareholder approval prior to issuances to specified related parties (or their affiliates) if the number of shares of common stock to be issued, or if the number of shares of common stock into which the securities may be convertible or exercisable, exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance (Related Party Rule). However, shareholder approval is not required for cash sales to related parties (and their affiliates) that have that status solely because of security ownership in the company if the sales meet the Minimum Price requirement and relate to no more than 5% of the company's outstanding common stock or voting power.
This waiver allows companies to sell their securities to related parties and other persons subject to the Related Party Rule without complying with its numerical limitations, as long as the sale is in a cash transaction that meets the Minimum Price requirement and also meets the other requirements noted below. To qualify for this waiver, a transaction must be reviewed and approved by the company's audit committee or a comparable committee comprised solely of independent directors. However, any transaction benefitting from the waiver will continue to require shareholder approval if required under any other rule.. This waiver creates consistency with Nasdaq's rule related to sales of a listed company's securities to related parties.
This waiver is not applicable to a sale of securities by a listed company to a related party if the proceeds will be used to fund an acquisition where the related party has a direct or indirect interest in the company or assets to be acquired or in the consideration to be paid for such acquisition, and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in outstanding common shares or voting power of 5% or more.
The Nasdaq Stock Market (Nasdaq) issued an information memorandum regarding the impact of COVID-19, and has provided guidance in a number of areas.
Listing Standards: At the time of issuance of the information memorandum, Nasdaq had not suspended any of its listing rules. However, on April 17, 2020, Nasdaq instituted a longer period of time for companies to regain compliance with its bid price and market value of publicly held shares continued listing requirements (Price-Based Requirements, set forth here) by tolling the 180-day compliance periods through and including June 30, 2020 (see "Price-Base Requirements" below).
Periodic Reports: Nasdaq-listed companies impacted by COVID-19 that satisfy the conditions in the SEC's order extending certain filing deadlines by 45 days will not be considered deficient under Nasdaq rules for failing to file Exchange Act reports by the existing deadlines (and will not receive a deficiency letter from Nasdaq). Companies that are unable to file a periodic report by the relevant due date, but are ineligible for the relief granted by the SEC, can submit a plan to Nasdaq Listing Qualifications describing how they intend to regain compliance and, under the Listing Rules, Listing Qualifications' staff can allow them up to six months to file.
Proxy Statements: The SEC has also exempted companies from any requirement to file or furnish proxy statements, annual reports, and other solicitation materials to shareholders with a mailing address where common carrier service has been suspended due to COVID-19, provided the registrant has made a good faith effort to deliver such materials. Such companies will be deemed to have satisfied the Nasdaq listing rule which requires companies to make available their annual, quarterly and interim reports to shareholders, and the Nasdaq rule requiring companies to solicit proxies and provide proxy statements for all meetings of shareholders.
ETFs: The SEC has issued an order granting exemptions to companies facing challenges due to COVID-19 from certain provisions of the Investment Company Act of 1940 (1940 Act). The order includes a temporary exemption for Exchange-Traded Funds (ETFs) registered under the 1940 Act that are required to file Form N-CEN or Form N-PORT. Under the order, reports eligible to rely on the relief now include filings originally due between March 1 and June 30, 2020 and must be filed within 45 days of the original filing date. ETFs that rely on the relief and file within the extended deadline will not be considered deficient under Nasdaq rules.
Virtual Meetings: Nasdaq permits virtual meetings if permissible under the relevant state law and shareholders have the opportunity to ask questions of management.
Shareholder Approval Rules: Nasdaq-listed companies are generally required 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) certain private placements at specified prices. An exception is available for companies in financial distress where the delay in securing stockholder approval would seriously jeopardize the financial viability of the company. Although generally this is a difficult standard to meet, Nasdaq will consider the impact of disruptions caused by COVID-19 in its review of any pending or new requests for a financial viability exception. Reliance on this exception must expressly be approved by the company's audit committee, and the company must obtain Nasdaq's approval prior to proceeding with the transaction. Companies must also provide notice to shareholders at least ten days prior to issuing securities in the exempted transaction.
Price-Based Requirements: Throughout the tolling period described above, Nasdaq will continue to notify companies of new instances of non-compliance with the Price-Based Requirements. Notified companies will be required to make a public announcement disclosing receipt of the notification by filing a Form 8-K, if required, or by issuing a press release. Commencing July 1, 2020, companies would receive the balance of any pending compliance period in effect at the start of the tolling period to return to compliance. Similarly, companies that were in a hearings process would return to that process at the same stage they were in when the tolling period began. If the company had received a temporary exception from the Hearings Panel before the tolling began, the company would receive the balance of the exception period beginning on July 1, 2020. A company in the hearings process would nonetheless be delisted and not get the benefit of the tolling period if such company had an oral or written hearing before a Hearings Panel and the Panel reached a determination to delist, even if it had not issued the written decision prior to the effective date of the tolling period. Companies newly identified as non-compliant during the tolling period would have 180 days to regain compliance, beginning on July 1, 2020. Nasdaq will continue to monitor securities to determine if they regain compliance with the Price-Based Requirements during the tolling period.
Companies adversely impacted by COVID-19 or the resulting market conditions, or that have any questions regarding the application of Nasdaq's listing rules, are encouraged to contact their Listing Analyst.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.