TheCorporateCounsel.net

On Wednesday, the SEC posted this notice and request for comment for a proposed Nasdaq rule change that would amend Listing Rule 5810(c)(3)(A) to address the situation where a company effectuates a reverse stock split to regain a $1 bid price but, in doing so, trips up another continued listing requirement. This situation is sometimes avoidable; it can be tricky, but companies and their advisors have to take into account all the other minimum requirements when setting a split ratio.

When companies do find themselves in this situation, a new deficiency process is triggered under the existing rules. As amended, a company in this situation will no longer receive additional time to cure non-compliance with the newly violated standard. Here’s an example from the proposal:

Consider a company listed on the Nasdaq Capital Market (“Company A”) that has 1,600,000 Publicly Held Shares. In order to regain compliance with the Bid Price Requirement under Rule 5550(a)(2), Company A effects a reverse stock split at a ratio of 1-for-4. This reverse stock split initially increases Company A’s stock price above $1.00. Assuming Company A thereafter maintains a closing bid price above $1.00 for ten (10) consecutive business days, under current Rule 5810(c)(3)(A), Company A will achieve compliance with the Bid Price Requirement at the conclusion of the tenth (10th) consecutive business day.

However, in this example, at the same time that the reverse stock split increased Company A’s stock price, the 1-for-4 reverse stock split also reduced the number of Publicly Held Shares from 1,600,000 to 400,000, causing Company A to no longer satisfy the minimum number of Publicly Held Shares required to remain listed on the Nasdaq Capital Market. As a result, under these circumstances, the reverse stock split would allow Company A to regain compliance with the Bid Price Requirement of Rule 5550(a)(2) while at the same time causing non-compliance with the minimum Publicly Held Shares requirement of Rule 5550(a)(4).

Under Nasdaq’s current rules, Nasdaq would notify the company about this new deficiency and the company would be afforded 45 calendar days to submit a plan to regain compliance and could be afforded up to 180 calendar days to regain compliance.

Under the proposed amendment, Company A in the example above would continue to be considered non-compliant with the Bid Price Requirement until both the new Publicly Held Shares deficiency is cured and thereafter the company maintains a $1.00 bid price for a minimum of ten (10) consecutive business days. All of this must be accomplished during the compliance period applicable to the initial Bid Price Requirement deficiency.

The SEC is seeking comments on the proposal. As Cooley’s Cydney Posner points out:

It’s worth observing here that Nasdaq notes that it is “considering other changes to the delisting process applicable to companies that are noncompliant with the Bid Price Requirement.  Any such changes will be subject to a separate rule filing.”

– Meredith Ervine