Early in 2018, the Nasdaq filed with the SEC an amendment that would update certain aspects of the Nasdaq shareholder approval rules, Rule 5635. The proposal would:

  • amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
  • refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
  • eliminate the references to “book value” for purposes of the shareholder vote requirement.

The full text of the amendments is available here. The SEC has requested further comment (see the SEC notice here) on two aspects of the amendment:

  1. Is the five-day average closing price a reasonable alternative to determining market value for purposes of shareholder approval requirements under Nasdaq Rule 5635(d)? If so, what are the benefits and/or risks to companies and their shareholders? Do the benefits and risks to companies and shareholders change under certain market conditions, such as rising markets, and if so how?
  2. Are there benefits and/or risks to listed companies and shareholders by permitting sales in private placements that are above market value but below book value? Could there be any potential impact on share price? Would the assessment of any potential impact, if any, change depending on the reason why a stock is trading above market price but below book value (i.e., market conditions, accounting issues)?

Given the importance of the application of these rules to many private placements and PIPE transactions, capital markets participants are urged to provide comments.