On 26 September 2018, the SEC approved amendments to Nasdaq Rule 5635(d), also known as the "20% Rule," which required shareholder approval prior to the issuance in a private placement of 20% or more of a company's common stock or 20% or more of its voting power outstanding before the issuance, if the issuance was at a price less than either market value or book value.
The amended rule creates a new defined term for "20% Issuance," which is defined as a transaction, other than a public offering, involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or substantial shareholders of the company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance.
Under the modified rule, shareholder approval is only required prior to a 20% Issuance at a price that is less than the "minimum price," instead of the market value or book value. "Minimum price" is defined as "the lower of (i) the closing price (as reflected on nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average closing price of the common stock (as reflected on nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement."
Nasdaq considered that the term "book value" may not be an appropriate measure for requiring shareholder approval. The amended rule no longer requires the use of book value as an accounting measure to determine whether shareholder approval is required for a 20% Issuance.
These amendments, which only apply to companies listed on the Nasdaq, aim to provide companies with additional flexibility in structuring private placement transactions and maintain dilution protection for shareholders.
As with most of the Nasdaq corporate governance standards, foreign private issuers may opt to follow their home country practice in lieu of the Nasdaq rules. However, such companies must disclose non-compliance in their annual report on Form 20-F and are required to submit to Nasdaq a statement from legal counsel certifying that the practice is not prohibited under the home country's laws.
The amended rule is available here.
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