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Late last year, we were tracking the saga of the NYSE’s “direct listing” proposal for primary offerings. A lot has happened since then, and you’d be forgiven if you assumed that going public without the benefit of a traditionally marketed & placed IPO was no longer a very attractive option. But the NYSE hasn’t given up hope that we’ll return to better times. Last week, they filed the third version of a proposed rule change that would permit companies to raise money in a “direct listing.”

As this Davis Polk memo explains, this version of the proposal gives more detail about the mechanics of a direct listing – but it would also make this path available to fewer companies:

The NYSE’s current proposal eliminates the 90-day grace period that was previously proposed for the minimum holder requirement. As a result, both primary and secondary direct listings would continue to be subject to the requirement to have 400 shareholders at the time of initial listing.This requirement will continue to preclude many private companies from pursuing a direct listing because they do not having the required number of round lot holders.

Unlike the prior proposals, this version also provides more granular detail around the auction process for a primary direct listing. Significantly, the auction process would require that the company disclose a price range and the number of shares to be sold in the SEC registration statement for a primary direct listing, and would require that the opening auction price be within the disclosed price range. For purposes of the opening auction, the company would be required to submit a limit order for the number of shares that it wishes to sell, with the limit set at the bottom end of the price range. The proposed rule changes would not allow the company’s limit order to be cancelled or modified, and the limit order would need to be executed in full in order to conduct the primary direct listing

Suspending Preferred Dividends? Your Form S-3 Might Be At Risk

As some companies look to suspend dividend payments due to economic fallout from the pandemic, here’s a reminder from a recent Mayer Brown blog:

In order to remain eligible to use a Form S-3 registration statement, among other requirements, neither the issuer nor any of its consolidated or unconsolidated subsidiaries shall have failed to pay any dividend on its preferred stock since the end of the last fiscal year for which audited financial statements are included in the registration statement (General Instruction I.A.4 of Form S-3). The reference to materiality in the instruction does not apply to the failure to declare dividends on preferred stock.

A declared but unpaid dividend on preferred stock would disqualify an issuer from using Form S-3, as would the existence of accrued and unpaid dividends on cumulative preferred stock. The issuer also would be disqualified from using Form S-3 even if it has a history of accumulating such dividends for three quarters before paying them at the end of each year.

The blog notes a few ins & outs of this analysis – including that eligibility remains intact if a board doesn’t declare a dividend on non-cumulative preferred stock, or if the terms of the debt permit deferred payments and the deferral isn’t a default, since no liability arises under the terms of the stock. Also, even if a dividend payment on cumulative preferred stock was missed, a company can continue to use an already effective Form S-3 registration statement so long as there is no need to update the registration statement.

Secured Notes Offerings: Covid-19 Trends

In these desperate times, more companies are turning to secured notes to keep them afloat – and it’s not a terrible option, given current pricing and the possibility that other loans will be unaffected. This 3-page Cleary Gottlieb memo discusses current trends to consider – including disclosure, timing, covenants, collateral & intercreditor issues, call protection and reporting. Here’s an excerpt:

A common trend for these new secured notes offerings has been a five-year maturity, with two years of call protection, resulting in a much shorter tenor than the usual seven- to eight-year maturity for secured notes. This trend for a shorter tenor offers more flexibility to the issuer for refinancing if circumstances improve but still provides noteholders with more call protection than would be typical for a credit facility.

One feature in pre-crisis secured notesofferings, a 10% per annum call right at 103% for the first years after the offering (or if shorter, during the non-call period), appears to have fallen away in these recent secured notes deals.

– Liz Dunshee