Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Nasdaq has proposed to amend its rule regarding shareholder approval for certain securities issuances. Currently the rule requires shareholder approval for security issuances for less than the greater of book or market value (other than in the context of a public offering) if either:

  • the issuance equals 20% of the outstanding stock or voting power or
  • if a smaller issuance coupled with sales by the officers, directors or substantial security holders meets the 20% threshold.

Currently the rule defines “market value” as the closing bid price. Market participants often express to Nasdaq their concern that bid price may not be transparent to companies and investors and does not always reflect an actual price at which a security has traded. Generally speaking, the price of an executed trade is viewed as a more reliable indicator of value than a bid quotation; and the more shares executed, the more reliable the price is considered.  Accordingly, Nasdaq proposes to modify the measure of market value from the closing bid price to the lower of:

  • the closing price (as reflected on; or
  • the average closing price of the common stock (as reflected on for the five trading days immediately preceding the signing of the binding agreement.

Nasdaq also proposes to eliminate the requirement for shareholder approval of issuances at a price less than book value but greater than market value. Nasdaq believes book value is an accounting measure and its calculation is based on the historic cost of assets, not their current value. As such, market participants have indicated, and Nasdaq agrees, that book value is not an appropriate measure of whether a transaction is dilutive or should otherwise require shareholder approval. Nasdaq has also observed that when the market price is below the book value, the rule becomes a trap for the unwary. In that regard, Nasdaq believes the existing book value test can appear arbitrary and have a disproportionate impact on companies in certain industries and at certain times.