In October last year, the NYSE proposed, like Nasdaq, to take on the challenge of repeated reverse stock splits by limiting the circumstances under which a listed company could use a reverse stock split to regain compliance with the minimum price criteria. The NYSE subsequently filed a couple of amendments to the proposal, and, while comments are still being solicited, the SEC has now approved the proposed rule change, as modified by Amendment No. 2, on an accelerated basis.
Under the new rule as amended, the NYSE will limit the availability of the use of reverse stock splits to regain compliance with the Price Criteria. As described in the release approving the changes to Section 802.01C of the Listed Company Manual, the NYSE will now provide that “(i) a listed company that falls below the price criteria set forth therein and effects a reverse stock split to regain compliance will not be eligible for a compliance period in certain circumstances, and (ii) a listed company may not effectuate a reverse stock split if it would result in the company falling below continued listing requirements” set forth in Section 802.01A of the Manual.
Prior to the amendment, under Section 802.01C of the Manual, if the average closing price of a security is less than $1.00 over a consecutive 30-trading-day period—defined by the NYSE under the new amended rule as the “Price Criteria”—the company will be considered to have fallen out of compliance with the listing standards. The NYSE will notify the company of its noncompliance, but the company is not eligible to use the procedures in Sections 8.02 and 8.03 of the Manual (essentially, submitting a plan to regain compliance over time). The company must, however, issue a press release disclosing that it has fallen below NYSE continued listing standards within the allotted time period. The company must also advise the NYSE, within 10 business days of receipt of the NYSE notification, of its intent to cure this deficiency or be subject to suspension and delisting procedures as set forth in Section 804.00. The company has six months from receipt of notification of noncompliance to bring its closing share price and average share price back above $1.00. A company will regain compliance at any time during this six-month cure period if the company has, on the last trading day of any calendar month during the cure period, a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30 trading-day period ending on the last trading day of that month. If, at the end of the cure period, those two requirements have not been satisfied, the NYSE will begin suspension and delisting procedures. If, to cure the noncompliance, the company determines to take an action requiring shareholder approval—typically a reverse stock split—the company must advise the NYSE in its notification, obtain shareholder approval by no later than its next annual meeting and implement the action promptly thereafter. If the price promptly exceeds $1.00 per share and remains above that level for at least the following 30 trading days, the company will be considered to have regained compliance.
The new amendment limits the circumstances under which a company that, within the prior two-year period, has effected a reverse stock split but does not satisfy the Price Criteria will be allowed a compliance period under Section 802.01C. More specifically, the amendment to Section 802.01C provides that, if a company’s security “fails to meet the Price Criteria and (i) the company has effected a reverse stock split over the prior one-year period or (ii) has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, then the company shall not be eligible for any compliance period specified in Section 802.01C and the Exchange will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00.” (The company can still seek review of the delisting determination.) The NYSE notes that the rule will apply “even if the company was in compliance with the Price Criteria at the time of its prior reverse stock split.”
In addition, the new amendment will preclude a company—once again, on pain of commencement of suspension and delisting procedures—from effecting a reverse stock split, whether to regain compliance with the Price Criteria or otherwise, if it would result in the company’s security falling below the continued listing requirements of Section 802.01A—essentially, the minimum number of shareholders, minimum trading volume and minimum number of publicly held shares. Amendment No. 2 to the proposal included “additional rule text to provide that if a company effectuates a reverse stock split in such circumstances, the company would not be eligible to follow the procedures outlined in Sections 802.02 and 802.03 of the Manual, and the Exchange would immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00 of the Manual.”
Echoing Nasdaq’s proposal, the NYSE, in its rationale for the proposal, observed that “some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits,” which pattern, the NYSE believes, “is often indicative of deep financial or operational distress within such companies, rendering them inappropriate for trading on the Exchange for investor protection reasons.” In these situations, the NYSE observed, “the challenges facing such companies generally are not temporary and may be so severe that the company is not likely to maintain compliance with the Price Criteria on a sustained basis.” The NYSE believes that the enhanced listing requirements will protect investors and the public interest by limiting the ability of listed companies with a history of having a low stock price from using “reverse stock splits as a means to remain qualified for listing and will result in the delisting of companies whose history of recurring inability to maintain price compliance is indicative of their financial instability and unsuitability for continued listing.” In addition, the NYSE believes that “it is consistent with the protection of investors and the public interest to delist any company that takes a deliberate action that causes it to fall below an Exchange listing standard, including the effectuation of a reverse split that causes a company to fall below the Distribution Criteria.”
In assessing the proposal, the SEC considered the proposal’s impact on efficiency, competition and capital formation. After review, the SEC determined that the proposed rule change was consistent with the requirements of the Act and the rules applicable to a national securities exchange, including that the rules (1) “be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest, and not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers”; and (2) “that the rules provide a fair procedure for the prohibition or limitation by the exchange of any person with respect to access to services offered by the exchange.” For example, the SEC found that the proposal was “appropriately targeted to those listed companies’ securities that are more likely to have serious recurrent issues in regaining and maintaining compliance with the Exchange’s Price Criteria and other continued listing standards.” Further, the SEC concluded that the proposal was “reasonably designed to further investor protection by limiting the ability of listed companies with a history of having a low stock price to use reverse stock splits to remain qualified for listing.” In addition, “the continued listing of low-priced securities raises concerns that these securities may not have sufficient public float, investor base, and trading interest to promote fair and orderly markets and relatedly may have heightened susceptibility to manipulation.” As a result, the SEC found, the NYSE proposal “to immediately suspend and delist a company that is non-compliant with the Price Criteria or Distribution Criteria in the circumstances described above is appropriate and consistent with Section 6(b)(5) of the Act.” The SEC also determined that the proposal provided a fair procedure because a “listed company whose securities are subject to immediate suspension and delisting under the proposal would still be able to seek review of a delisting determination from the Committee for Review of the Board of Directors of the Exchange.” Finally, the SEC stated, the comment letters on the proposal were “generally supportive.”
Accordingly, the SEC approved the proposal on an accelerated basis.
