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In response to the current market conditions caused by the ongoing spread of COVID-19, the New York Stock Exchange (NYSE) and Nasdaq Stock Market (Nasdaq) have each effected rule changes in the past week that temporarily relax certain continued listing standards through June 30, 2020. This alert summarizes these two most recent rule changes filed with the Securities and Exchange Commission (SEC), as well as earlier rule changes effected by the NYSE to relax certain other continued listing standards and shareholder approval rules.  <h5>Continued Listing Requirements</h5>  NYSE  On April 20, 2020, the NYSE filed <a href="https://www.sec.gov/rules/sro/nyse/2020/34-88717.pdf">an immediately effective rule change</a> to provide companies with additional time to regain compliance with its continued listing requirements to maintain, over a consecutive 30-trading-day period, (i) an average global market capitalization and stockholders’ equity of at least $50 million (the $50 Million Standard), and (ii) an average closing price of at least $1.00 per share (the Dollar Price Standard).  Normally, companies that fail to meet the $50 Million Standard or Dollar Price Standard would generally have 18 months or six months, respectively, to regain compliance. This rule change extends each cure period by tolling them through and including June 30, 2020.  However, the NYSE will continue to monitor securities and notify companies of any new instances of noncompliance throughout the tolling period. The NYSE will also continue to attach a “.BC” indicator to such companies’ tickers and continue to identify them as below compliance on the NYSE website during the tolling period.  Further, the rule change does not toll any of the applicable notice, press release or compliance plan development obligations set forth in the NYSE Listed Company Manual in Section 802.01C (with respect to the Dollar Price Standard) and Sections 802.02 and 802.03 (with respect to the $50 Million Standard). Accordingly, if a company receives notice of its noncompliance with either standard, that company must still: (i) publicly disclose the fact that it has fallen below the continued listing standards by issuing a press release within four business days after receiving notice (or within 30 days for non-U.S. companies) and, where applicable, file an 8-K within the time period allotted by SEC rules; and (ii) contact the NYSE within 10 business days after notice to confirm its receipt of the notification. If the company is notified of its noncompliance with the $50 Million Standard, it must also submit a plan to the NYSE within 45 days after notice that describes the definitive actions taken, or to be taken, by the company to regain compliance with the $50 Million Standard within the 18-month cure period. In addition, the rule change does not limit the NYSE’s authority to commence delisting procedures prior to the expiration of the 18-month cure period, including during the tolling period, if the company fails to meet any material aspect of the compliance plan or any quarterly milestones set forth in that plan.  Companies are still eligible to regain compliance during the tolling period. A company may regain compliance with (i) the $50 Million Standard prior to the end of the cure period by meeting the standard for a period of two consecutive quarters; and (ii) the Dollar Price Standard if on the last trading day of any calendar month during the cure period the company has a closing share price of at least $1.00 and an average closing share price of at least $1.00 over the 30-trading-day period ending on the last trading day of that month.  This rule change is in addition <a href="https://www.sec.gov/rules/sro/nyse/2020/34-88441.pdf">to the rule change effected by the NYSE on March 19, 2020</a>, pursuant to which the NYSE suspended its continued listing requirement that companies maintain an average global market capitalization over a consecutive 30-trading-day period of at least $15 million (the Market Capitalization Standard). This suspension is also effective only through June 30, 2020.  Unlike the tolling periods described above, this earlier rule change protects only those companies that fall below the Market Capitalization Standard on or after the filing date. The suspension does not affect the status of any company that was already in the NYSE’s delisting appeal process after being notified of noncompliance with the Market Capitalization Standard prior to March 19, 2020. Following the suspension, any new instances of noncompliance would be based on a consecutive 30-trading-day period commencing on or after July 1, 2020.  Nasdaq  On April 16, 2020, Nasdaq filed <a href="https://www.sec.gov/rules/sro/nasdaq/2020/34-88685.pdf">an immediately effective rule change</a> that also tolls through June 30, 2020, the applicable cure periods for the continued listing requirements to maintain a $1.00 minimum bid price and market value of publicly held shares (collectively, the Price-based Requirements).  The market value of publicly held shares must be at least (i) $5 million for primary equity securities on the Global Market under the equity standard, (ii) $15 million for primary equity securities on the Global Market under the market value and total assets/total revenue standards, or (iii) $1 million for preferred stock and secondary classes of common stock on the Global Market and for any securities listed on the Capital Market.  Companies that are out of compliance with the Price-based Requirements would normally have 180 days to regain compliance by meeting the applicable standard for a minimum of 10 consecutive business days during the applicable compliance period. This rule change gives these noncompliant companies additional time to achieve compliance by tolling the applicable compliance periods through and including June 30, 2020. If a company becomes noncompliant at any point during this tolling period, it will have 180 days to regain compliance beginning July 1, 2020.  Like the NYSE relief described above, Nasdaq will continue to monitor securities and notify companies of any new instances of noncompliance with the Price-based Requirements. If a company is notified of any noncompliance, the rule change does not waive that company’s obligation to publicly disclose its receipt of such notification by filing a Form 8-K, where required by SEC rules, or by issuing a press release. Nasdaq will also continue to monitor whether any companies successfully regain compliance with the Price-based Requirements during the tolling period.  <h5>Shareholder Approval Rules</h5>  On April 3, 2020, the NYSE filed <a href="https://www.sec.gov/rules/sro/nyse/2020/34-88572.pdf">an immediately effective rule change</a> that temporarily waives the shareholder approval requirements for certain transactions through and including June 30, 2020. This waiver is designed to provide companies with additional flexibility to raise funds by selling equity in private placement transactions in the event that they experience urgent liquidity needs that cannot be met by raising funds in public markets, as a result of the economic disruption caused by the current pandemic.  Related Party Transactions Rule  Section 312.03(b) of the NYSE Listed Company Manual requires shareholder approval prior to the issuance of common stock or derivatives thereof to related parties – including directors, officers, substantial shareholders and affiliates thereof – if the number of shares to be issued would exceed 1% of the voting power outstanding prior to the issuance. However, if the related party is classified as such solely because that person is a substantial shareholder and if the issuance meets certain minimum price requirements set forth in Section 312.04, then no shareholder approval is required unless the number of shares to be issued would exceed 5% of the voting power outstanding prior to the issuance. “Minimum price” means a price that is the lower of (i) the official closing price immediately preceding the signing of the binding agreement and (ii) the average official closing price for the five trading days immediately preceding the signing of the binding agreement.  The waiver temporarily permits sales of securities to such related parties regardless of the percentages issued, provided that (i) the sale is for cash at a price that meets the minimum price requirement, (ii) the transaction is reviewed and approved by the company’s audit committee or a comparable committee comprised solely of independent directors, (iii) proceeds from the sale will not be used to directly or indirectly fund the acquisition of the stock or assets of another company in which any related party has a 5% or greater interest (or in which the related parties collectively have a 10% or greater interest), and (iv) the transaction would not trigger a change in control of the issuer.  With the waiver, the NYSE’s shareholder approval requirements for related party transactions will be consistent with those of Nasdaq Rule 5635(a).  20% Rule and the Bona Fide Private Placement Exception  NYSE-listed companies are required to obtain shareholder approval for transactions relating to 20% or more of the company’s outstanding common stock or voting power outstanding. One of the exceptions to the 20% rule is for bona fide private financing transactions that comply with the minimum price requirement. For a sale to multiple purchasers to qualify as a bona fide private financing, no single purchaser (or group of related purchasers) may acquire more than 5% of the company’s outstanding shares or voting power before the sale.  The rule change temporarily eliminates the 5% limitation to the bona fide purchase exception to the 20% rule, thereby permitting issuers to engage in private placements of securities, regardless of size or the amount purchased by any single investor, so long as the minimum pricing requirements are met. Again, as a result of the waiver, the NYSE’s bona fide private financing exception will temporarily be consistent with the Nasdaq Rule 5635(c)’s private placement exception.  Authorship Credit: Samuel F. Toth and Janet A. Spreen

NYSE And Nasdaq Relaxed Listing Standards in Response to COVID-19

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