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E-MailCydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.
Time to catch up on some of the recent proposals at the Exchanges.
Nasdaq
Family member. Most recently, at Nasdaq, there is a new proposal to modify the definition of a “family member” for purposes of Listing Rule 5605(a)(2). The proposal would exclude “stepchildren” and domestic employees from the definition of “family member” in the context of defining director independence. Under the proposed new definition, a “family member” would mean a person’s spouse, parents, children, siblings, mothers and fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and anyone (other than domestic employees) who shares the person’s home.
Rule 5605(a) identifies relationships that preclude a finding of director independence, including relationships involving a family member of the director. Currently, “family member” refers to a person’s spouse, parents, children and siblings, whether by blood, marriage or adoption, or anyone residing in such person’s home. “Children by… marriage” includes stepchildren. Nasdaq believes the category of “stepchildren” became a part of the definition in 2002 inadvertently when the definition was revised to simplify it—not with the intent of making any substantive change. That revision has apparently not worked out the way it was intended, particularly because, as revised, the Nasdaq definition was not consistent with the NYSE’s. Nasdaq also believes that the category of “stepchildren” may represent too attenuated a relationship for purposes of determining director independence. Nasdaq is now proposing to modify the definition to revert to the language of the rule before it was “simplified.”
The proposal would also exclude from the definition of “family member” domestic employees who share a director’s home, because those relationships are typically commercial, not familial, as intended by the definition. In any event, both of these relationships will ultimately need to be scrutinized by a company’s board under the general Nasdaq requirement that the board affirmatively determine that no relationship exists that would interfere with the exercise of independent judgment in carrying out the director’s responsibilities.
Liquidity. Nasdaq has also proposed several amendments to increase the requirements for initial listing aimed primarily at ensuring adequate liquidity. Under initial listing rules, a company is required to have a minimum number of publicly held shares to list its equity on any Nasdaq tier. Currently, that calculation includes restricted shares. Nasdaq proposes to revise the initial listing criteria to exclude “restricted securities” from the calculations of a company’s publicly held shares, market value of publicly held shares and round lot holders, given that they are not freely transferable and are generally illiquid. To that end, Nasdaq is proposing to add new definitions for “restricted securities,” “unrestricted publicly held shares” and “unrestricted securities.”
As proposed, Nasdaq Rule 5005(a)(37), would define “restricted securities” as “any securities subject to resale restrictions for any reason, including restricted securities (1) acquired directly or indirectly from the issuer or an affiliate of the issuer in unregistered offerings such as private placements or Regulation D offerings; (2) acquired through an employee stock benefit plan or as compensation for professional services; (3) acquired in reliance on Regulation S, which cannot be resold within the United States; (4) subject to a lockup agreement or a similar contractual restriction; or (5) considered ‘restricted securities’ under Rule 144. Nasdaq is also proposing to adopt a new definition of ‘unrestricted securities’ at Nasdaq Rule 5005(a)(46), which includes securities of a company that are not restricted securities,” and to add a new definition of “unrestricted publicly held shares” at Rule 5005(a)(45), which would be defined as publicly held shares excluding the newly defined “unrestricted securities.” Similar revisions are proposed to other related rules, as well as to the calculation of “market value of publicly held shares” (proposed to be “market value of unrestricted publicly held shares”).
Nasdaq also proposes to amend the definition of “round lot holder” to refer to a holder of a normal unit of trading (generally, 100 shares) of unrestricted securities. Nasdaq believes that “these amendments will help ensure adequate distribution and investor interest in a listed security, which will result in a more liquid trading market and which will better protect investors.”
Second, Nasdaq proposes to impose a new requirement that at least 50% of a company’s round lot holders must each hold shares with a market value of at least $2,500. Currently, a shareholder may be considered a round lot holder by holding exactly 100 shares, which, in the case of a stock that is trading at the minimum bid price of $4 per share, would be worth only $400. Nasdaq believes that this amendment would “help ensure that a majority of the required minimum number of shareholders hold a meaningful value of stock and that a company has sufficient investor interest to support an exchange listing.”
Third, Nasdaq proposes to add a new listing requirement for a minimum average daily trading volume for securities trading over-the-counter at the time of their listing. Under the proposal, these OTC securities would be required to have a minimum average daily trading volume over the 30 trading days prior to listing of at least 2,000 shares a day, with trading occurring on more than half of those 30 days. Nasdaq believes that this amendment would help “ensure a liquid trading market, promote price discovery and establish an appropriate market price for the listed securities No changes are proposed to the continued listing requirements.“ Nasdaq is also proposing to adopt an exemption from the proposed average daily trading volume requirement for securities listed in connection with a firm commitment underwritten public offering of at least $4 million. The application of the proposal to ADRs is addressed separately in the notice.
NYSE
Equity Comp Plans. The NYSE is proposing to amend Section 303A.08 of the Listed Company Manual to clarify the circumstances under which certain sales of a listed company’s securities will not be deemed to be equity compensation for purposes of that rule. Section 303A.08 provides that an “equity-compensation plan” is a plan or other arrangement under which an employee, director or other service provider receives equity securities of the listed company as compensation for services. The adoption or material revision of an equity comp plan is subject to shareholder approval. However, certain types of equity comp plans are excluded, including plans “that merely allow employees, directors or other service providers to elect to buy shares on the open market or from the listed company for their current fair market value….” The NYSE
“has always interpreted ‘current fair market value’ as requiring that the price used be the most recent official closing price on the Exchange. For the avoidance of doubt, the Exchange now proposes to include in Section 303A.08 text specifying how the fair market value of the issuer’s common stock should be calculated for this purpose. ‘Fair market value’ will be defined as the most recent official closing price on the Exchange, as reported to the Consolidated Tape, at the time of the issuance of the securities. For example, if the securities are issued after the close of the regular session at 4:00 pm Eastern Standard Time on a Tuesday, then Tuesday’s official closing price will be used. If the securities are issued at any time between the close of the regular session on Monday and the close of the regular session on Tuesday, then Monday’s official closing price will be used.”
The NYSE is also proposing to make a clarifying change in Section 312.04(j) to the definition of “Official Closing Price.” As proposed, the “Official Closing Price” of the issuer’s common stock means the most recent official closing price on the NYSE, as reported to the Consolidated Tape “at the time” of the signing of a binding agreement to issue the securities, as opposed to the price “immediately preceding” the signing as currently provided.
The definition in Section 303A.08 is modeled on the definition in Section 312.04(j), except that 303A.08 is based on the time of issuance to take into account certain deferred comp arrangements that permit deferred issuances.
