Nasdaq Adopts New Reverse Split Rule Change
On November 1, 2023, the SEC approved Nasdaq’s rule changes to the notification and disclosure requirements for reverse splits. The new rules went effective immediately upon approval. For the proposed rule changes see HERE.
Background
After the market highs of the second half of 2020 and all of 2021, we have all witnessed the general decline, including noticeably depressed valuations and market price, especially in the small cap space. In 2022, Nasdaq processed 196 reverse stock splits, compared to 31 in 2021 and 94 in 2020. As of June 23, 2023, Nasdaq has processed 164 reverse stock splits, and projects significantly more throughout 2023. The majority of reverse splits are completed by companies that trade on the Nasdaq Capital Market tier of the exchange and are completing the split to maintain the minimum $1.00 bid price to avoid delisting.
In response to concerns by Nasdaq that market participants do not have enough visibility on these companies or their capital changes, Nasdaq has shortened the notification period from 15 calendar days to 5 business days and is requiring a public disclosure via press release at least two business days before effectiveness of the reverse split.
Interestingly, the Delaware legislature responded to the same market metrics by implementing amendments to reduce the burdens on Delaware chartered corporations. In particular, the Delaware General Corporation Law (“DGCL”) amendments allow for approval by a majority of votes cast (instead of majority of outstanding) and eliminate the class or series shareholder approval requirement if (a) the shares of such class are listed on a national securities exchange immediately before such amendment becomes effective and meet the listing requirements of such national securities exchange relating to the minimum number of holders immediately after such amendment becomes effective, and (b) at an annual or special meeting, a vote of the stockholders entitled to vote thereon, voting as a single class, is taken for and against the proposed amendment, and the votes cast for the amendment exceed the votes cast against the amendment. For more on the 2023 DGCL amendments, see HERE.
Rule Changes
Prior to the rule change Nasdaq did not have specific rules related to reverse splits. Rather, a reverse split fell within the general “Substitution Listing Event” category requiring a 15-day calendar day advance notice to Nasdaq. Nasdaq has now added new Rule 5250(b)(4), 5250(e)(7) and IM-5250-3 to require a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split at least five (5) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date and make public disclosure about the reverse stock split at least two (2) business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date.
New Listing Rule 5250(b)(4) specifies that a company must provide public notice about a reverse stock split using a Regulation FD compliant method no later than 12:00 p.m. ET at least two (2) business days prior to the proposed market effective date. As is required with all news, disclosure would need to be made to MarketWatch at least 10 minutes prior to the public announcement.
New Listing Rule 5250(e)(7) requires that, for a reverse stock split, the company must notify Nasdaq by submitting a complete Company Event Notification Form no later than 12:00 p.m. ET five (5) business days prior to the proposed market effective date. The submission must include all information required by the form and a draft of the disclosure required by proposed Rule 5250(b)(4). For more on this process, see HERE. Information required by the notification includes, but is not limited to, the split ratio; new CUSIP number; dates of board approval, shareholder approval, and DTC eligibility; a copy of the proposed Regulation FD press release; and the effective date of the reverse stock split.
Any deviation from the new rule requirements would delay the processing of the reverse split. Nasdaq gives this provision teeth by adding that “if a company takes legal action, such as under state law or in any other manner, to effect a reverse stock split notwithstanding its failure to timely satisfy these requirements, or Nasdaq determines that the company has provided incomplete or inaccurate information about either the timing or ratio of the reverse stock split in the public disclosure required under proposed Rule 5250(e)(4) [sic], Nasdaq will halt the stock in accordance with the procedure set forth in Equity 4, Rule 4120(a)(1), which provides Nasdaq with the authority to halt trading to permit the dissemination of material news.”
Nasdaq believes the shorter notification period will allow a company to get its ducks in a row and have all information available by the time disclosure is made.
Prior to the rule change Nasdaq processed reverse stock splits overnight, with the security opening for trading at 4:00 a.m. EST in the pre-market hours (i.e., the trading session between 4:00 a.m. to 9:30 a.m. EST) on a split-adjusted basis. The new rule imposes a regulatory halt, which prohibits pre-market trading immediately after a reverse stock split and open trading in such securities using the Nasdaq Halt Cross process set forth in Rule 4753. The trading halt will be declared before the end of post-market hours on the day immediately before the market effective date of a reverse stock split. In general, Nasdaq expects to initiate the halt at or around 7:30 p.m., prior to the close of post-market trading at 8:00 p.m. on the day immediately before the split is effective, and resume trading at 9:00 a.m. on the day the split is effective.