Client Alert: NASDAQ Modifies 20% Shareholder Approval Rule, Increasing Flexibility

Capital Markets Client Alerts

Effective September 26, 2018, the Nasdaq Stock Market LLC modified Nasdaq Rule 5635(d), increasing the flexibility of the shareholder approval requirements for below-market, nonpublic offerings of 20% or more of an issuer’s common stock or voting power outstanding.

Under the previous Rule 5635(d) framework, Nasdaq-listed companies were required to obtain shareholder approval prior to commencing a nonpublic offering if (i) the number of shares of common stock to be issued (or securities convertible into or exercisable for common stock) was equal to 20% or more of the common stock or voting power outstanding prior to the issuance, and (ii) the issuance price was less than the greater of the book or market value (the closing bid price) of the common stock.

Modified Rule 5635(d) still applies to nonpublic offerings of 20% or more of the common stock or voting power outstanding prior to the issuance, but only if such offerings are below the “Minimum Price”.  Minimum Price is defined as “the lower of: (i) the closing price (as reflected on immediately preceding the signing of the binding agreement; or (ii) the average closing price of the common stock (as reflected on for the five trading days immediately preceding the signing of the binding agreement”. 

The concept of the Minimum Price in the modified Rule 5635(d) removes book value. Nasdaq noted that book value may not be an appropriate measure of whether a transaction is truly dilutive, and that book value often has little correlation to the real value of a company’s stock. Additionally, modified Rule 5635(d) incorporates a five-day trailing average closing price, which is more closely aligned with the way transactions are often structured to help address price fluctuations. Together, these changes provide Nasdaq-listed companies with greater clarity and flexibility in structuring their securities transactions.

The modified Rule 5635(d) does not affect the requirement to obtain shareholder approval with respect to other transactions described under Rule 5635.

Nasdaq Rule 5635, as amended:

SEC Release approving the amendments to Nasdaq Rule 5635(d):


Lorna A. Knick, Donald R. Reynolds and S. Halle Vakani are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.