In July, the SEC posted a Nasdaq rule change proposal to “modify the application of the bid price compliance periods where a listed company takes an action to achieve compliance with the bid price requirement and that action causes noncompliance with another listing requirement.” (See this PubCo post.) The proposed rule change was designed to address instances where, to regain compliance with the minimum bid price required by Nasdaq listing rules, a listed company implements a reverse stock split; however, while the reverse split may bring the company into compliance with the minimum bid price requirement, it may also, at the same time, lead to non-compliance with another listing rule—particularly, the requirements for the number of publicly held shares and number of public holders, triggering a new deficiency process with a new time period for the company to seek to regain compliance. That’s excessive, Nasdaq said, and too confusing for investors, possibly adversely affecting investor confidence in the market. Because Nasdaq believed it was inappropriate for a company to receive additional time to cure non-compliance with the newly violated listing standard, it sought, with the proposal, to eliminate the additional compliance period that would otherwise result from the newly created deficiency. But by August, the SEC hadn’t yet approved the proposal and extended the deadline for approval. Now, Nasdaq has filed Amendment No. 2 to the proposal—primarily clarifications—and the SEC has just given its approval to the proposal as amended. As a result, companies will need to carefully calculate the potential impact of a reverse split on other listing requirements to avoid these consequences where possible.
As indicated in the initial proposal, each Nasdaq tier requires that specified securities maintain a $1.00 minimum bid price; if a listed company fails to satisfy the applicable bid price requirement for a period of 30 consecutive business days, under Rule 5810(3)(A), the company must regain compliance by meeting the applicable standard for a minimum of 10 consecutive business days during an automatic 180-calendar-day compliance period. In addition, each tier specifies minimum requirements for the number of public holders and the number of publicly held shares. If a company fails to satisfy either of those requirements, under Rule 5810(c)(2)(A), the company will have a period of 45 calendar days to provide to Nasdaq Staff a plan to regain compliance and, under Rule 5810(c)(2)(B), Nasdaq staff may grant an extension of the compliance period of up to 180 calendar days.
Under Nasdaq’s current rules, if a company effected a reverse split and, as a result, achieved compliance with the minimum bid price for 10 consecutive business days but also, as a result of the split, fell out of compliance with the minimum publicly held shares requirement or, depending on how fractional shares were treated, the minimum number of holders requirement, “Nasdaq would notify the company about this new deficiency and the company would be afforded 45 calendar days to submit a plan to regain compliance and could be afforded up to 180 calendar days to regain compliance.”
Under the amended proposal, in the event the company takes an action (e.g., a reverse split) to achieve bid-price compliance, and it leads to non-compliance with another listing requirement (disregarding any compliance periods that might otherwise have applied to the other listing requirement), the company will still not be considered to have regained compliance with the bid price requirement; that is, the company “will continue to be considered non-compliant until both: (i) the other deficiency is cured and (ii) thereafter the company meets the bid price standard for a minimum of ten consecutive business days, unless Nasdaq staff exercises its discretion to extend this ten day period as discussed in Rule 5810(c)(3)(H). If the company does not demonstrate compliance with (i) and (ii) during the compliance period(s) applicable to the initial bid price deficiency, Nasdaq will issue a Staff Delisting Determination Letter.” In effect, Nasdaq stated, both problems must be corrected “during the compliance period applicable to the initial Bid Price Requirement deficiency.”
Amendment No. 2 made the following changes to the proposal: “(1) clarified the application of Rule 5810(c)(3)(H) in extending the ten consecutive day compliance period for regaining compliance with the minimum bid price requirement, (2) clarified that the failure to satisfy the requirements during the compliance period(s) applicable to the initial bid price deficiency will result in the issuance of a Staff Delisting Determination Letter, and (3) made other technical and non-substantive changes for readability.” The SEC did not submit the amendment for notice and comment because, in the SEC’s view, it “does not materially alter the substance of the proposed rule change and makes clarifying modifications.” According to Nasdaq, the amendment was “intended to clarify Nasdaq’s original intent that Nasdaq Staff may exercise its discretion, as discussed in existing Rule 5810(c)(3)(H), to extend the minimum number of days for a Company to meet the bid price standard prior to determining that the Company has regained compliance with the bid price requirement, and includes changes to enhance readability.”
The SEC found that “the proposal reasonably addresses a gap in the Exchange’s current continued listing standards that potentially allows an issuer to delay delisting, through corporate action taken to cure a Bid Price Requirement deficiency that then results in a deficiency in another numeric continued listing requirement, and thereby remain listed on the Exchange for an extended period of time despite not maintaining the Exchange standards required for continued listing. Importantly, the Exchange’s proposal also prevents a company from requesting or receiving a compliance determination for its initial Bid Price Requirement deficiency and communicating to investors that it has regained compliance with the Exchange’s listing requirements until it has also cured any non-compliance with other numeric listing requirements caused by its actions to cure the initial Bid Price Requirement deficiency.” Accordingly, and because the SEC found that the proposal was “consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange,” the SEC approved the proposal as amended.
