TheCorporateCounsel.net

Yesterday, the SEC posted notice of an NYSE proposal that, if approved, would make it harder for penny stocks to linger around as listed companies. Here’s what the change would look like if adopted:

Notwithstanding the foregoing, if a company’s security fails to meet the Price Criteria and the company (i) has effected a reverse stock split over the prior one-year period or (ii) has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, then the company shall not be eligible for any compliance period specified in this Section 802.01C and the Exchange will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00.

Furthermore, a listed company may not effectuate a reverse stock split if the effectuation of such reverse stock split results in the company’s security falling below the continued listing requirements of Section 802.01A.

The proposed rule would apply to a company even if the company was in compliance with the Price Criteria at the time of its prior reverse stock split. The NYSE’s rationale for the proposal isn’t too surprising:

As described above, many companies seek to cure their noncompliance with the Price Criteria or seek to increase their stock price for other reasons by effectuating a reverse stock split. However, the Exchange has observed that some companies, typically those in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits. The Exchange believes that such behavior is often indicative of deep financial or operational distress within such companies rendering them inappropriate for trading on the Exchange for investor protection reasons. In these situations, the Exchange has observed that the challenges facing such companies, generally, are not temporary and may be so severe that the company is not likely to maintain or regain compliance on a sustained basis.

If this proposal looks familiar, it’s because Nasdaq has also been looking to rein in the use of reverse splits as a compliance strategy. As Meredith noted a few months ago, this type of rule change, if approved, would make it more important to strike the right balance in calculating a reverse split.

In addition to this proposal about reverse splits, the NYSE is shaking its fist at delinquents. The Exchange also proposed a rule change to say that it would not review a compliance plan submitted by a listed company that is below compliance with a continued listing standard if the company owes any unpaid fees to the Exchange. Under this proposal, the NYSE would immediately commence suspension & delisting procedures if the fees aren’t paid in full by the plan submission deadline or at the time of any required periodic review. Here’s the SEC notice for that one.

– Liz Dunshee