Banking & Financial Institutions Capital Markets
Brief Summary
In September 2024, the New York Stock Exchange (“NYSE”) proposed a rule change intended to curb the excessive use of reverse stock splits as a means of regaining compliance with certain listing standards. The proposed rule closely mirrors a rule proposed by Nasdaq and would limit the circumstances in which a company can effect a reverse stock split.
Current Rules
NYSE listing standards require the average closing price of a company’s listed security to be at least $1.00 per share over any consecutive 30 trading-day period (the “Price Criteria Rule”). A company that violates the Price Criteria Rule has six months to cure the deficiency under Section 802.01C of the NYSE Listed Company Manual (the “Cure Period”). Often, to regain compliance under the listing standards during the Cure Period, companies have resorted to effecting reverse stock splits to increase their share price.
Proposed Changes
If approved by the Securities and Exchange Commission (the “SEC”), the proposed rule would amend Section 802.01C of the NYSE Listed Company Manual to impose additional eligibility requirements on companies seeking to use reverse stock splits to regain compliance with the Price Criteria Rule.
Under the proposed rule, if a company fails to satisfy the Price Criteria Rule and the company has (i) effected a reverse stock split over the prior one-year period, or (ii) effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, the company will not be able to avail itself of the Cure Period and the NYSE will immediately commence the process of delisting the company’s listed security. The proposed rule will make it more difficult for companies to regain compliance with the Price Criteria Rule by restricting the use of reverse stock splits to increase stock prices only to those companies that have not recently effected a reverse stock split.
By limiting the availability of reverse stock splits, the NYSE hopes to address a pattern in which companies experiencing prolonged financial or operational distress effectuate reverse stock splits to regain compliance despite the companies being inappropriate for trading on the exchange for investor protection reasons.
Next Steps
Prior to being effective, the proposed rule change must be approved by the SEC.
Nicholas C. Massey is a member of the firm’s Capital Markets practice group.
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