[Federal Register Volume 83, Number 34 (Tuesday, February 20, 2018)]
[Notices]
[Pages 7269-7274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03311]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82702; File No. SR-NASDAQ-2018-008]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To Modify the Listing
Requirements Contained in Listing Rule 5635(d) To Change the Definition
of Market Value for Purposes of the Shareholder Approval Rules and
Eliminate the Requirement for Shareholder Approval of Issuances at a
Price Less Than Book Value but Greater Than Market Value
February 13, 2018.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on January 30, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to modify the listing requirements contained
in Listing Rule 5635(d) to change the definition of market value for
purposes of the shareholder approval rules and eliminate the
requirement for shareholder approval of issuances at a price less than
book value but greater than market value.
The text of the proposed rule change is available on the Exchange's
website at http://nasdaq.cchwallstreet.com, at the principal office of
the Exchange, and at the Commission's Public Reference Room.
[[Page 7270]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq shareholder approval requirements were adopted in 1990.\3\
Among other circumstances, the rule requires shareholder approval for
security issuances for less than the greater of book or market value
(other than in the context of a public offering) if either (a) the
issuance equals 20% of the outstanding stock or voting power or (b) if
a smaller issuance coupled with sales by the officers, directors or
substantial security holders meets the 20% threshold.\4\ This provision
has remained substantively unchanged for the last 28 years. On the
other hand, the capital markets and securities laws, as well as the
nature and type of share issuances, have evolved significantly in that
time.
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\3\ Securities Exchange Act Release No. 28232 (July 19, 1990),
55 FR 30346 (July 25, 1990) (adopting [sic] the predecessor to
Listing Rule 5635(d)).
\4\ Id.
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In 2016, Nasdaq requested comments from, and held discussions with,
market participants regarding whether, given these changes, Nasdaq
could update its shareholder approval rules to enhance the ability for
capital formation without sacrificing investor protections. Based on
the feedback received, in June 2017, Nasdaq launched a formal comment
solicitation on a specific proposal to amend Listing Rule 5635(d) (the
``2017 Solicitation''). Based on Nasdaq's experience and the comments
received, Nasdaq proposes to amend Rule 5635(d) to change the
definition of market value for purposes of the shareholder approval
rules and eliminate the requirement for shareholder approval of
issuances at a price less than book value but greater than market
value.
I. Definition of Market Value
Listing Rule 5635(d) requires a Nasdaq-listed company to obtain
shareholder approval when issuing common stock or securities
convertible into common stock, which alone or together with sales by
officers, directors or Substantial Shareholders of the Company, equal
to 20% or more of the shares or 20% or more of the voting power
outstanding at a price less than the greater of the book value or
market value of that stock. Listing Rule 5005 defines ``market value''
as the closing bid price.
Market participants often express to Nasdaq their concern that bid
price may not be transparent to companies and investors and does not
always reflect an actual price at which a security has traded.
Generally speaking, the price of an executed trade is viewed as a more
reliable indicator of value than a bid quotation; and the more shares
executed, the more reliable the price is considered. Further, it was
noted by commenters in the 2017 Solicitation that in structuring
transactions, investors and companies often rely on an average price
over a prescribed period of time for pricing issuances because it can
smooth out unusual fluctuations in price.
Accordingly, Nasdaq proposes to modify the measure of market value
for purposes of Listing Rule 5635(d) from the closing bid price to the
lower of: (i) The closing price (as reflected on Nasdaq.com); or (ii)
the average closing price of the common stock (as reflected on
Nasdaq.com) for the five trading days immediately preceding the signing
of the binding agreement.
A. Closing Price
The closing price reported on Nasdaq.com is the Nasdaq Official
Closing Price, which is derived from the closing auction on Nasdaq and
reflects actual sale prices at one of the most liquid times of the day.
The Nasdaq closing auction is designed to gather the maximum liquidity
available for execution at the close of trading, and to maximize the
number of shares executed at a single price at the close of the trading
day. The closing auction promotes accurate closing prices by offering
specialized orders available only during the closing auction and
integrating those orders with regular orders submitted during the
trading day that are still available at the close. The closing auction
is made highly transparent to all investors through the widespread
dissemination of stock-by-stock information about the closing auction,
including the potential price and size of the closing auction. Nasdaq
believes its closing auction has proven to be a valuable pricing tool
for issuers, traders, and investors alike; and Nasdaq continually works
to enhance the experience for those that rely upon it. For these
reasons, Nasdaq believes that the closing price reported on Nasdaq.com
is a better reflection of the market price of a security than the
closing bid price. This proposal is consistent with the approach of
other exchanges.\5\
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\5\ See Section 312.04(i) of the NYSE Listed Company Manual
(``Market value'' of the issuer's common stock means the official
closing price on the [NYSE] as reported to the Consolidated Tape
immediately preceding the entering into of a binding agreement to
issue the securities.).
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In addition, because prices are displayed from numerous data
sources on different websites, to provide transparency within the rule
to the appropriate price, and assure that companies and investors use
the Nasdaq Official Closing Price when pricing transactions, Nasdaq
proposes to codify within the rule that Nasdaq.com is the appropriate
source of the closing price information.\6\
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\6\ The closing price is published on Nasdaq.com with a 15
minute delay and is available without registration or fee and Nasdaq
does not currently intend to charge a fee for access to this data or
otherwise restrict availability and, in the event that Nasdaq
subsequently determines to do so, it will file a proposed rule
change under Section 19(b) of the Act with respect to such change if
necessary to address the impact of compliance with this rule.
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B. Five-Day Average Price
Several commenters supported the use of a five-day average in their
responses to the 2017 Solicitation. For example, one commenter
suggested that ``[i]nvestors view a 5 day average as a more fair method
of determining `market value' (in a non-technical sense)'' and
continued that ``[u]sing the closing bid on the closing date is more
prone to unanticipated and inequitable results based on market
fluctuations.'' \7\ Another commenter stated that they believe that a
``five-day trailing average of the closing price is more representative
of actual market value than the closing bid price.'' \8\
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\7\ See Letter from Michael Grundei, Wiggin and Dana LLP, dated
June 16, 2017 (Grundei Letter).
\8\ Letter from Linda Zwobota, CPA, CFO, Lightbridge
Corporation, dated June 27, 2017 (Lightbridge Letter).
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While investors and companies sometimes prefer to use an average
when pricing transactions, Nasdaq notes that there are potential
negative consequences to using a five-day average as the sole measure
of whether shareholder approval is required. For example, in a
declining market, the five-day average price will always be above
[[Page 7271]]
current market price, thus making it difficult for companies to close
transactions because investors could buy shares in the market at a
price below the five-day average price. Conversely, in a rising market,
the five-day average price will appear to be a discount to the closing
price. In addition, if material news is announced during the five-day
period, the average could be a worse reflection of the market value
than the closing price after the news is disclosed. Nonetheless, Nasdaq
believes that these risks are already accepted in the market, as
evidenced by the use of an average price in transactions that do not
require shareholder approval under Nasdaq's rules, such as where less
than 20% of the outstanding shares are issuable in the transaction,
notwithstanding the risk of price movement during the period to the new
investor, the company and its current shareholders, each of which has
potential risk and benefit depending on how the price ultimately
changes during that period.
Other commenters in the 2017 Solicitation believed that the five-
day average price may be inappropriate as a measure of market value of
listed securities in certain circumstances and suggested that it
therefore should only be used as an optional alternative to closing
price. In that regard, one commenter, while agreeing that a five-day
trailing average is a useful alternative measure of market price,
pointed out that:
[T]he Rule 144A convertible bond market and the related call
spread overlay market (whether entered into in connection with a
Rule 144A or registered convertible bond) currently benefit from
certain synergies that arise from the use of the one-day closing
price in light of the complex regulatory, tax and accounting
analysis of these transactions and the related hedging activities of
market participants.\9\
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\9\ Letter from Greg Rogers, Latham and Watkins LLP, dated July
27, 2017 (Latham Letter).
Other commenters raised similar concerns.\10\ Nasdaq believes these
concerns are justified and as such, Nasdaq proposes to amend Listing
Rule 5635(d) to define market value as the lower of the closing price
at the time of the transaction or the five-day average of the closing
price as the measure of market value for purposes of the shareholder
approval rules. This means that the issuance would not require an
approval by company's shareholders, so long as it is at a price that is
greater than the lower of those measures.\11\ To improve the
readability of the rule, Nasdaq proposes to define this new concept as
the ``Minimum Price'' and eliminate references to book value and market
value from Listing Rule 5635(d).
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\10\ Letter from Michael Adelstein, Kelley Drye & Warren LLP,
dated July 28, 2017 (Kelley Drey Letter); Letter from Michael
Nordtvedt, Wilson Sonsini Goodrich & Rosati, P.C., dated July 31,
2017 (Wilson Sonsini Letter); Joseph A. Smith, Ellenoff Grossman &
Schole LLP, dated July 31, 2017 (Ellenoff Grossman Letter).
\11\ Issuances below Market Value to officers, directors,
employees, or consultants are, and will continue to be, subject to
Listing Rule 5635(c). See Nasdaq's FAQ #275 at https://listingcenter.nasdaq.com/Material_Search.aspx?materials=275&mcd=LQ&criteria=2.
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II. Book Value
Nasdaq proposes to eliminate the requirement for shareholder
approval of issuances at a price less than book value but greater than
market value. Book value is an accounting measure and its calculation
is based on the historic cost of assets, not their current value. As
such, market participants have indicated, and Nasdaq agrees, that book
value is not an appropriate measure of whether a transaction is
dilutive or should otherwise require shareholder approval. Nasdaq has
also observed that when the market price is below the book value, the
rule becomes a trap for the unwary. In that regard, the existing book
value test can appear arbitrary and have a disproportionate impact on
companies in certain industries and at certain times. For example,
during the financial crisis in 2008 and 2009, many banks and
finance[hyphen]related companies temporarily traded below book value.
Similarly, companies that make large investments in infrastructure may
trade below the accounting carrying value of those assets. In these
situations companies are often frustrated when they learn that they
cannot quickly raise capital on terms that are favorable to the market
price. Based on conversations with investors, Nasdaq also believe that
book value is not considered by shareholders to be a material factor
when they are asked to vote to approve a proposed transaction. Most
commenters in the 2017 Solicitation supported the elimination of the
book value requirement from the shareholder approval rules.\12\ The
only support for retaining the book value limitation, came from one
commenter who appeared to believe that issuances below book value would
result in negative investor perception of the issuer and that book
value was an alternative measure not subject to market
manipulation.\13\ The commenter did not elaborate or provide any
evidence of price manipulation surrounding the pricing of transactions
(which would be investigated by Nasdaq Regulation and FINRA) and Nasdaq
does not believe this hypothetical and unsubstantiated concern
justifies retaining the book value requirement in light of the other
concerns raised about its arbitrary and disproportionate impact on
certain companies and the lack of importance placed on this requirement
by investors.
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\12\ Comments supporting the change could be summarized through
words of one commenter who suggested that ``investors don't view
book value as the equivalent (or even a reasonable substitute for)
market value.'' Grundei Letter.
\13\ Letter from Heather Koziara, Chief Risk Officer, Conifer
Holdings Inc., dated June 16, 2017 (Conifer Letter).
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III. Other Changes
To improve the readability of Listing Rule 5635(d) Nasdaq proposes
to define ``20% Issuance'' as ``a transaction, other than a public
offering as defined in IM-5635-3, involving the sale, issuance or
potential issuance by the Company of common stock (or securities
convertible into or exercisable for common stock), which alone or
together with sales by officers, directors or Substantial Shareholders
of the Company, equals 20% or more of the common stock or 20% or more
of the voting power outstanding before the issuance.'' This definition
combines the situations described in existing Rule 5635(d)(1) and
(d)(2) and makes no substantive change but for the change to the
pricing tests, as described above, such that shareholder approval would
be required under the same circumstances for a 20% Issuance as under
existing Listing Rule 5635(d).
Nasdaq also proposes to amend the title of Listing Rule 5635(d) and
the preamble to Listing Rule 5635 to replace references to ``private
placements'' to ``transactions other than public offerings'' to conform
the language in the title of Listing Rule 5635(d) and the preamble to
the language in the rule text and that of IM-5635-3, which provides the
definition of a public offering.
Finally, Nasdaq proposes to amend Listing Rules IM-5635-3 and IM-
5635-4, which describe how Nasdaq applies the shareholder approval
requirements, to conform references to book and market value with the
new definition of Minimum Price, as described above, and to utilize the
newly defined term 20% Issuance.
2. Statutory Basis
The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\14\ in general, and furthers the
[[Page 7272]]
objectives of Section 6(b)(5) of the Act,\15\ in particular, in that it
is designed to promote just and equitable principles of trade, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general to protect
investors and the public interest. Nasdaq believes that the approach
taken in the proposal strikes an appropriate balance between investor
protection and impediments upon issuers.
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\14\ 15 U.S.C. 78f(b).
\15\ 15 U.S.C. 78f(b)(5).
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Definition of Market Value
The proposed rule change will modify the minimum price at which a
20% Issuance would not need shareholder approval from the closing bid
price to the lower of: (i) The closing price (as reflected on
Nasdaq.com); or (ii) the average closing price of the common stock (as
reflected on Nasdaq.com) for the five trading days immediately
preceding the signing of the binding agreement.
Nasdaq believes that allowing issuers to price transactions at the
closing price (as reflected on Nasdaq.com) rather than closing
consolidated bid price will perfect the mechanism of a free and open
market and protect investors and the public interest because the
closing price will represent an actual sale, which generally occurs at
the same or greater price than the bid price.\16\ Further, the closing
price displayed on Nasdaq.com is the Nasdaq Official Closing Price,
which is derived from the closing auction on Nasdaq and reflects actual
sale prices at one of the most liquid times of the trading day.
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\16\ Sales typically take place between the bid and ask prices.
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Allowing share issuances to be priced at the five-day average of
the closing price will further align Nasdaq's requirements with how
many transactions are structured, such as transactions where Listing
Rule 5635(d) is not implicated because the issuance is for less than
20% of the common stock and the parties rely on the five-day average
for pricing to smooth out unusual fluctuations in price. In so doing,
the proposed rule change will perfect the mechanism of a free and open
market. Further, allowing a five-day average price continues to protect
investors and the public interest because it will allow companies and
investors to price transactions in a manner designed to eliminate
aberrant pricing resulting from unusual transactions on the day of a
transaction. Maintaining the allowable average at just a five-day
period also protects investors by ensuring the period is not too long,
such that it would result in the price being distorted by ordinary past
market movements and other outdated events. In a market that rises each
day of the period, the five-day average will be less than the price at
the end of the period, but would still be higher than the price at the
start of such period. Further, as some commenters indicated, aside from
Nasdaq requirements, when selecting the appropriate price for a
transaction company officers and directors also have to consider their
state law structural safeguards, including fiduciary responsibilities,
intended to protect shareholder interests.\17\
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\17\ See Wilson Sonsini Letter.
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In addition, because prices could be displayed from numerous data
sources on different websites, to provide certainty about the
appropriate price, Nasdaq proposes to codify within the rule that
Nasdaq.com is the appropriate source of the closing price information,
which is available with only 15 minute delay and without registration
or fee. Because the closing bid price is not included in many public
data feeds, this requirement will promote just and equitable principles
of trade and remove impediments to and perfect the mechanism of a free
and open market because it will improve the transparency of the rule
and provide additional certainty to all market participants about the
appropriate price to be used in determining if shareholder approval is
required.
Finally, Nasdaq believes that where two alternative measures of
value exist that both reasonably approximate the value of listed
securities, defining the Minimum Price as the lower of those values
allows issuers the flexibility to use either measure because they can
also sell securities at a price greater than the Minimum Price without
needing shareholder approval. This flexibility, and the certainty that
a transaction can be structured at either value in a manner that will
not require shareholder approval, further perfects the mechanism of a
free and open market without diminishing the existing investor
protections of the Listing Rule 5635(d).
Book Value
Nasdaq also believes that eliminating the requirement for
shareholder approval of issuances at a price less than book value but
greater than market value does not diminish the existing investor
protections of Listing Rule 5635(d). Book value is primarily an
accounting measure calculated based on historic cost and is generally
perceived as an inappropriate measure of the current value of a stock.
Nasdaq has also observed that the existing book value test can appear
arbitrary and have a disproportionate impact on companies in certain
industries and at certain times. For example, during the financial
crisis in 2008 and 2009, many banks and finance[hyphen]related
companies traded below book value. Similarly, companies that make large
investments in infrastructure may trade below the accounting carrying
value of those assets. Because book value is not an appropriate measure
of the current value of a stock, the elimination of the requirement for
shareholder approval of issuances at a price less than book value but
greater than market value will remove an impediment to, and perfect the
mechanism of, a free and open market, which currently unfairly burdens
companies in certain industries, without meaningfully diminishing
investor protections of Listing Rule 5635(d).
Other Changes
To improve the readability of Listing Rule 5635(d) Nasdaq proposes
to define ``20% Issuance'' as ``a transaction, other than a public
offering as defined in IM-5635-3, involving the sale, issuance or
potential issuance by the Company of common stock (or securities
convertible into or exercisable for common stock), which alone or
together with sales by officers, directors or Substantial Shareholders
of the Company, equals 20% or more of common stock or 20% or more of
the voting power outstanding before the issuance.'' This definition
combines the situations described in existing Rule 5635(d)(1) and
(d)(2) but makes no substantive change. Under the proposed rule, but
for the separate change to the pricing test, shareholder approval would
be required under the same circumstances for a 20% Issuance as under
existing Listing Rule 5635(d). Nasdaq believes that the improved
readability of the rule will perfect the mechanism of a free and open
market by making the rule easier to understand and apply.
Nasdaq also believes that amending the title of Listing Rule
5635(d) and the preamble to Listing Rule 5635 to replace references to
``private placements'' to ``transactions other than public offerings''
to conform the language in the title of Listing Rule 5635(d) and the
preamble to the language in the rule text and that of IM-5635-3, which
provides the definition of a public offering, will perfect the
mechanism of a free and open market by making the rule easier to
understand and apply.
[[Page 7273]]
Finally, Nasdaq believes that amending Listing Rules IM-5635-3 and
IM-5635-4, which describe how Nasdaq applies the shareholder approval
requirements, to conform references to book and market value with the
new definition of Minimum Price, as described above, and to utilize the
newly defined term 20% Issuance will perfect the mechanism of a free
and open market by eliminating confusion caused by references to a
measure that is no longer applicable and by making the rule easier to
understand and apply.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act. The proposed rule change would
revise requirements that burden issuers by unnecessarily limiting the
circumstances where they can sell securities without shareholder
approval All listed companies would be affected in the same manner by
these changes. As such, these changes are neither intended to, nor
expected to, impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In the 2017 Solicitation, Nasdaq solicited comments on a specific
proposal to amend Listing Rule 5635(d) to:
(1) Change the definition of market value for purposes of the
shareholder approval rules from closing bid price to a five-day
trailing average;
(2) require that any issuance of 20% or more be approved by the
independent directors where shareholder approval is not required; and
(3) eliminate the requirement for shareholder approval of issuances
at a price less than book value but greater than market value.
In an effort to seek the broadest response, Nasdaq widely
distributed the 2017 Solicitation to investors, issuers, legal
professionals and other interested parties. In addition, the proposal
was posted on the Nasdaq Listing CenterTM.\18\ In total, 12
comments were received. A copy of the 2017 Solicitation is attached to
the rule filing as Exhibit 2a. Copies of the comments received are
attached to the rule filing as Exhibit 2b.
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\18\ https://listingcenter.nasdaq.com/assets/Shareholder%20Approval%20Comment%20Solicitation%20June%2014%202017.pdf.
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With regard to the proposal to change the definition of market
value for purposes of the shareholder approval rules from closing bid
price to a five-day trailing average, of the 12 commenters, seven
supported the change,\19\ one expressed no opinion,\20\ while the
remaining four suggested the five-day average price should be used as
an alternative to the closing price rather than being an exclusive
measure of value of listed securities.\21\ Nasdaq determined to adopt
this suggestion and now proposes to amend Listing Rule 5635(d) to allow
companies the flexibility [sic] of using either the closing price at
the time of the transaction or the five-day average of the closing
price when pricing 20% Issuances. Transactions could be structured to
use either price knowing that neither the lower price nor the higher
one would result in the transaction needing shareholder approval under
the proposed rule because each will be at or above the new measure of
market value for purposes of the shareholder approval rules, which is
now defined as Minimum Price.
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\19\ See Letter from Dickerson Wright, Chairman and CEO of NV5,
dated June 15, 2017 (NV5 Letter); Grundei Letter; Letter from
Kenneth A. Bertsch, Executive Director, Council of Institutional
Investors, dated June 26, 2017 (CII Letter); Lightbridge Letter;
Letter from Penny Somer-Greif, et al., Chair, the Committee on
Securities Law of the Business Law Section of the Maryland State Bar
Association, dated July 31, 2017 (Md Bar Letter); Letter from Harvey
Kesner, Sichenzia Ross Ference Kesner LLP, dated July 31, 2017
(Sichenzia Letter); Letter from Anne Sheehan, Director of Corporate
Governance, California State Teachers' Retirement System, dated
August 1, 2017 (CALSTRS letter).
\20\ See Conifer Letter (addressing only the proposal to
eliminate the requirement for shareholder approval of issuances at a
price less than book value but greater than market value).
\21\ See Latham Letter, Kelley Drey Letter, Wilson Sonsini
Letter, and Ellenoff Grossman Letter.
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Two commenters suggested the use of the volume weighted average
price (VWAP) instead of the five-day average price because VWAP
includes a broader array of trades, such as trades outside the Nasdaq
closing auction that forms the closing price, and because VWAP gives
greater weight to the price at which a greater number of shares is
traded.\22\ However, the commenters acknowledged that VWAP methodology
generally requires a paid subscription to providers of financial
information, such as Bloomberg, to obtain the VWAP.\23\ Given the
complexity of the VWAP methodology and the potential resulting lack of
transparency among retail investors who do not have access to financial
data that includes VWAP, at this time, Nasdaq is proposing to change
the definition of market value for purposes of the shareholder approval
[sic], as described above, by incorporating the concept of the five-day
average closing price, rather than VWAP, as the alternative to the
closing price at the time of the transaction.
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\22\ See Kelley Drye Letter and Ellenoff Grossman Letter.
\23\ Id.
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Two commenters suggested that the Nasdaq should amend its rules
such that shareholder approval is required for any issuance a [sic]
price that is below market price and for any 20% Issuance.\24\ Nasdaq
is concerned that under their proposal even de minimis issuances below
market price and 20% Issuances at substantial premium to market price
would require shareholder approval. As such, given the expense and
delay associated with obtaining shareholder approval, Nasdaq does not
propose amending the rule as these commenters requested at this time.
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\24\ See CALSTERS Letter and CII Letter.
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In the 2017 Solicitation, Nasdaq noted some potential negative
consequences to using a five-day average as the measure of whether
shareholder approval is required and suggested a potential new
safeguard that would have required that any transaction of more than
20% of the company's shares outstanding also be approved by either a
committee of independent directors (as defined in Listing Rule
5605(a)(2)) or a majority of the independent directors on the board,
unless it is approved by the company's shareholders (the ``Independent
Director Approval Requirement'').
The Independent Director Approval Requirement was not embraced by
the commenters, many of whom doubted the utility of the Independent
Director Approval Requirement.\25\ Some commenters saw the Independent
Director Approval Requirement as a new burden on listed companies that
largely duplicates the existing state corporate law requirements and
thus outweighs any offsetting benefits to shareholders.\26\ In that
regard,
[[Page 7274]]
commenters noted state law protections, such as the fiduciary duties of
care and loyalty imposed on management and directors to act in the best
interest of the company and its shareholders.\27\ Thus, given the cool
reception received from investors, who did not believe the addition of
this listing requirement would meaningfully add to investor
protection,\28\ and the belief of commenters that the Independent
Director Approval Requirement is ``solving the problem that does not
exist,'' \29\ Nasdaq is not proposing to adopt the Independent Director
Approval Requirement at this time.
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\25\ One commenter supported the proposed Independent Director
Approval Requirement. See Md Bar Letter (``[W]e believe the
[Independent Director Approval Requirement] is reasonable, as it
adds an additional protection for investors without unduly burdening
Nasdaq-listed companies seeking to raise capital.''). Some
commenters supported this proposal without discussing the specific
burdens and benefit of this proposal. See Lightbridge Letter; Latham
Letter. Some commenters did not address this issue. See Kelley Drye
Letter, Sichenzia Letter, and Conifer Letter. The remaining six
commenters opposed this proposal. See Footnotes 26 and 28 below.
\26\ See Wilson Sonsini Letter (``Rather than ensuring adequate
consideration of shareholder interests, we respectfully submit that
the [Independent Director Approval Requirement] would be duplicative
of, and already more effectively addressed by, the corporate law
requirements of an issuer's jurisdiction of incorporation in the
vast majority of cases.''). See also, Grundei Letter (``. . . there
are already state law requirements regarding such approvals.'').
\27\ See Wilson Sonsini Letter.
\28\ See CALSTERS Letter (``[W]e genuinely believe and
appreciate that a majority of independent directors should always
screen and vote on any stock issuances . . .''). Yet, CALSTERS
Letter suggested removal the Independent Director Approval
Requirement for the proposed rule. See also, CII Letter (suggesting
removal the Independent Director Approval Requirement for the
proposed rule and the imposition of shareholder approval
requirements for any issuance a price that is below market price and
any 20% Issuances). See also, Ellenoff Grossman Letter
(``[Independent Director Approval Requirement] may not prove helpful
to outside shareholders, in practice''). See also, NV5 Letter.
\29\ Grundei Letter.
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With regard to the proposal to eliminate the requirement for
shareholder approval of issuances at a price less than book value but
greater than market value, of the 12 commenters, only one specifically
opposed the proposed rule change.\30\ The commenter that opposed the
proposed rule change seemed to have been concerned with potentially
negative market perception of issuances below book value and with
potential stock price manipulations by suggesting that the ``. . .
proposed rule change compromises Nasdaq's commitment to protect
investors . . . by allowing companies the potential power to materially
affect the stock price without prior approval of current
stockholders.'' \31\ The commenter did not elaborate and did not
provide any evidence of price manipulation (which would be investigated
by Nasdaq Regulation and FINRA) and Nasdaq does not believe this single
hypothetical and unsubstantiated concern justifies retaining the book
value requirement in light of the other concerns raised about its
arbitrary and disproportionate impact on certain companies and the lack
of importance placed on this requirement by investors.
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\30\ One commenter indicated that he disagreed with the proposed
change, but did not address the issue directly. See NV5 Letter.
\31\ Conifer Letter.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2018-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2018-008. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NASDAQ-2018-008, and should be submitted
on or before March 13, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03311 Filed 2-16-18; 8:45 am]
BILLING CODE 8011-01-P