Not to be outdone by Nasdaq, the NYSE is now also proposing to take on the challenge of repeated reverse stock splits. More specifically, the NYSE proposes to limit the circumstances under which a listed company may use a reverse stock split to regain compliance with the minimum price criteria. Of course, Nasdaq has recently proposed or adopted similar rule changes limiting the use of reverse stock splits to satisfy the minimum bid price requirement. (See the SideBar below.) Although the NYSE had said in May that it had not experienced the same increased volume of reverse stock splits as Nasdaq, the exchanges are apparently seeking some consistency in their approaches to these issues.
Under Section 802.01C of the NYSE Listed Company Manual, if the average closing price of a security is less than $1.00 over a consecutive 30-trading-day period—to be defined by the NYSE under the proposal as the “Price Criteria”—the company will be considered to have fallen out of compliance with the listing standards. The NYSE will then notify the company, which must then 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, the company does not have both a $1.00 closing share price on the last trading day of the cure period and a $1.00 average closing share price over the 30 trading-day period ending on the last trading day of the cure period, the NYSE will begin suspension and delisting procedures.
If, to satisfy the Price Criteria, 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.
Under the proposal, the NYSE would limit the use of reverse stock splits to regain compliance with the Price Criteria. Specifically, the NYSE proposes to amend Section 802.01C to provide 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 seek review of the delisting determination.) The NYSE notes that the proposed rule would apply “even if the company was in compliance with the Price Criteria at the time of its prior reverse stock split.”
In addition, the proposal would 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 and the minimum number of publicly held shares. Shades of the just-approved new Nasdaq rule.
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, 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 Exchange has observed that the challenges facing such companies, generally, are not temporary and may be so severe that the company is not likely to maintain or regain compliance on a sustained basis.” The NYSE believes that the restrictions in the proposal “will protect investors by resulting 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.”
