Nasdaq Adopts Rules Modifying Delisting Process for Securities Failing to Maintain Compliance with Minimum Bid Price Requirement
As we previously reported,1 in August of 2024 the Nasdaq Stock Market LLC (“Nasdaq”) submitted proposed rule changes to the U.S. Securities and Exchange Commission (“SEC”) to modify the delisting process in respect to securities that fail to maintain a closing bid price of at least $1.00 per share for 30 consecutive days. On October 7, 2024, the SEC approved the proposal, and the new rules took effect.
The new rule accelerates the delisting process for a company whose securities either (i) fail to regain compliance with the minimum bid price requirement following the second compliance period granted under Nasdaq’s listing rules; or (ii) become non-compliant with the minimum bid price requirement within one year after a reverse stock split implemented to regain compliance with the minimum bid price requirement.
Previously, Nasdaq allowed a company to continue trading while it appealed a delisting determination for up to 180 days in order to regain compliance. This dispensation was in addition to the two 180-day compliance periods that Nasdaq afforded companies listed on the Nasdaq Capital Market. Those listed on the Nasdaq Global Select Market and Nasdaq Global Market were afforded one 180-day period to regain compliance. The newly approved rule limits a company to a maximum of 360 days to regain compliance with the minimum bid price requirement and eliminates the ability to trade while appealing a delisting determination. The new rule also calls for the immediate initiation of delisting procedures of any company’s securities that both do not meet the minimum bid price requirement and have conducted a reverse stock split, at any ratio, in the prior year. The new rule supplements the pre-existing Nasdaq rule stipulating that a company which has failed to meet the minimum bid price requirement and issued one or more reverse stock splits over the prior two-year period with a cumulative ratio of 250 shares or more to 1, shall be issued a delisting determination without the benefit of an additional compliance period.
NYSE Proposes Rule Limiting Methods Available to Regain Compliance After Failing to Meet Minimum Bid Price
On September 30, 2024,the New York Stock Exchange (“NYSE”) submitted proposed rule changes to the SEC similar to the Nasdaq rule change. If approved, the proposed rule would amend Section 802.01C of the NYSE Listed Company Manual, which currently states that a listed company is considered below compliance standards if the average closing price of its security is below $1.00 over a consecutive 30-day trading period.
Under current listing standards, once a company is notified of its failure to meet the minimum closing price standard, and the company in turn notifies the NYSE within ten business days of its intent to remedy the deficiency, the company generally has six months to bring their average share price back to at least $1.00. If at any point during the six-month period the company has a 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, the company can regain compliance. If a company intends to cure the deficiency through an action that requires stockholder approval, it must inform the NYSE and obtain shareholder approval by no later than its next annual meeting. Compliance will be regained if the price promptly exceeds $1.00 per share and the price remains above that level for at least the following 30 trading days.
The proposed rule would provide for immediate commencement of suspension and delisting procedures for a listed security that fails to meet the minimum closing price standard if (i) the issuer has effected a reverse stock split during the prior one-year period or (ii) has effected one or more reverse stock splits during the prior two-year period with a cumulative ratio of 200 shares or more to 1. As a result, such a company would not be eligible for any compliance period specified in Section 802.01C, as described above. In addition, the rule proposes to prohibit a listed company from effectuating a reverse stock split for purposes of regaining compliance with the minimum closing price or otherwise if such split results in non-compliance with the continued listing requirements of Section 802.01A, which sets forth the minimum number of stockholders or publicly held shares a company must maintain.
Many companies use reverse stock splits, which generally require shareholder approval, in order to regain compliance with the minimum closing price requirement. The NYSE has indicated that companies “in financial distress or experiencing a prolonged operational downturn, engage in a pattern of repeated reverse stock splits”, and it is therefore seeking to protect investors by delisting companies that use reverse stock splits excessively when trying to regain compliance with this standard.
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