Nasdaq Amends Stockholder Approval Rule for Private Placements

Amended Minimum Stock Value Under Nasdaq Rules

The original Nasdaq amendment would have amended the definition of market value for purposes of the 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 Nasdaq.com) and (2) the average closing price of the common stock (as reported on Nasdaq.com) for the five trading days immediately preceding the signing of a binding agreement to issue the shares.

On August 16, 2018, Nasdaq filed Amendment No. 1 to its proposed rule change to make the following clarifications to the originally proposed amendments:

• amend the definition of “Minimum Price,” to clarify that the closing price (as reflected on Nasdaq.com) will be measured “immediately preceding the signing of the binding agreement,” and
• expressly provide that, for purposes of Rule 5635(d) and related Nasdaq interpretive materials, references to “transactions other than public offerings” in the amended text of the Nasdaq rules, which replace the former references to “private placements,” continue to include private placements.

Reasons for the Nasdaq Amendments

Companies and market participants expressed dissatisfaction with “market value,” as previously defined, because the closing bid price is not necessarily clear, and does not always reflect actual trading prices. 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 prior book value test because it is an accounting measure based on historic asset costs, and does not reflect the current value of the company.

The original SEC release (February 13, 2018) soliciting public comment, and the original Nasdaq proposal (January 30, 2018), are available on their respective websites.