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Follow-Up on Potential Alternative to Repricing Underwater Stock Options

A couple weeks ago, I wrote on SEC approval of the New York Stock Exchange’s request to provide temporary waivers of the shareholder approval requirements applicable to certain kinds of equity sales to officers and directors, see A Potential Alternative to Repricing Underwater Stock Options. This week, the SEC approved a similar request by Nasdaq.

Similar to the NYSE, Nasdaq Listing Rule 5635(c) requires shareholder approval for certain sales to officers, directors, employees, or consultants (affiliates) when such issuances could be considered a form of “equity compensation.” In light of many companies’ need to quickly raise capital during the pandemic, the SEC approved Nasdaq’s proposal to adopt Listing Rule 5636T(c), which would provide for an exception from shareholder approval under Listing Rule 5635(c) for an affiliate’s participation in a capital-raising transaction alongside non-affiliated investors. Unlike the NYSE rule, however, this exception will only apply if the affiliate’s participation in the transaction was specifically required by unaffiliated investors.

In addition, to protect against self-dealing, under the exception, an affiliate investing in the transaction must not have participated in negotiating the economic terms of the transaction, any affiliate’s participation must be less than 5% of the transaction, and all affiliates’ participation collectively must be less than 10% of the transaction.

To rely on this exception, a company must execute a binding agreement governing the issuance of the securities and submit certain notices no later than June 30, 2020. The company also must file a Form 8-K describing the transaction, but is not required to notify Nasdaq at least 15 calendar days in advance of the transaction, as normally would be required by Listing Rule 5250(e)(2).

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This entry has been created for information and planning purposes. It is not intended to be, nor should it be substituted for, legal advice, which turns on specific facts.