[Federal Register Volume 83, Number 102 (Friday, May 25, 2018)]
[Notices]
[Pages 24379-24382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11224]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83294; File No. SR-NASDAQ-2018-008]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Modify the Listing Requirements Contained in 
Listing Rule 5635(d) To Change the Definition of Market Value for 
Purposes of the Shareholder Approval Rule and Eliminate the Requirement 
for Shareholder Approval of Issuances at a Price Less Than Book Value 
but Greater Than Market Value

May 21, 2018.

I. Introduction

    On January 30, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the listing requirements contained in 
Nasdaq Rule 5635(d) to (1) change the definition of market value for 
purposes of shareholder approval under Nasdaq Rule 5635(d); (2) 
eliminate the requirement for shareholder approval of issuances at a 
price less than book value but greater than market value; and (3) make 
other conforming changes. The proposed rule change was published for 
comment in the Federal Register on February 20, 2018.\3\ On April 4, 
2018, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to either approve the proposed 
rule change, disapprove the proposed rule change, or institute

[[Page 24380]]

proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission received three comments on the proposed rule 
change.\6\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \7\ to determine whether to approve or disapprove the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 82702 (February 13, 
2018), 83 FR 7269 (February 20, 2018) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 82994 (April 4, 
2018), 83 FR 15441 (April 10, 2018). The Commission designated May 
21, 2018, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ See Letters to Brent J. Fields, Secretary, Commission, from 
Michael A. Adelstein, Partner, Kelley Drye & Warren LLP, dated 
February 28, 2018 (``Kelley Drye letter''); Penny Somer-Greif, 
Chair, and Gregory T. Lawrence, Vice-Chair, Committee on Securities 
Law of the Business Law Section of the Maryland State Bar 
Association, dated March 13, 2018 (``MSBA Letter''); and Greg 
Rodgers, Latham Watkins, dated March 14, 2018 (``Latham Watkins 
Letter'').
    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposal

    The Exchange has proposed to amend Nasdaq Rule 5635(d) to modify 
the circumstances in which shareholder approval is required for 
issuances of securities in private placement transactions. Currently, 
under Nasdaq Rule 5635(d), the Exchange requires a Nasdaq-listed 
company to obtain shareholder approval prior to the issuance of 
securities in connection with a private placement transaction (i.e. a 
transaction other than a public offering \8\) involving: (1) The sale, 
issuance, or potential issuance by the company of common stock (or 
securities convertible into or exercisable for common stock) at a price 
less than the greater of book or market value which together with sales 
by officers, directors, or Substantial Shareholders \9\ of the company 
equals 20% or more of common stock or 20% or more of the voting power 
outstanding before the issuance; or (2) the sale, issuance, or 
potential issuance by the company of common stock (or securities 
convertible into or exercisable common stock) equal to 20% or more of 
the common stock or 20% or more of the voting power outstanding before 
the issuance for less than the greater of book or market value of the 
stock.\10\
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    \8\ See Nasdaq Rule IM-5635-3 (Definition of a Public Offering).
    \9\ An interest consisting of less than either 5% of the number 
of shares of common stock or 5% of the voting power outstanding of a 
Company or party will not be considered a substantial interest or 
cause the holder of such interest to be regarded as a ``Substantial 
Shareholder.'' See Nasdaq Rule 5635(e)(3).
    \10\ See Nasdaq Rule 5635(d). The Commission notes that Nasdaq 
Rule 5635 also requires shareholder approval under Nasdaq Rules 
5635(a), (b), and (c) for issuances involving an acquisition of 
stock or assets of another company, a change of control, and equity 
compensation. Nasdaq is not proposing to amend these other 
shareholder approval provisions in its proposal.
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    ``Market value'' is defined in Nasdaq Rule 5005(a)(23) as the 
consolidated closing bid price multiplied by the measure to be valued 
(e.g., a company's market value of publicly held shares is equal to the 
consolidated closing bid price multiplied by a company's publicly held 
shares).\11\ This definition applies to the shareholder approval rules 
as well as other listing rules. The Exchange has proposed to amend the 
definition of market value only for purposes of Nasdaq Rule 5635(d). 
The new definition, to be known as the ``Minimum Price,'' is defined as 
the price that is the lower of (1) the closing price (as reflected on 
Nasdaq.com) or (2) the average closing price of the common stock (as 
reflected on Nasdaq.com) for the five trading days immediately 
preceding the signing of the binding agreement.\12\ Under the proposal, 
shareholder approval will only be required for private placement 
transactions that are priced below the Minimum Price as described 
above.
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    \11\ See Nasdaq Rule 5005(a)(23).
    \12\ See proposed Nasdaq Rule 5635(d)(1)(A).
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    In proposing to use the closing price on Nasdaq, rather than the 
Nasdaq bid price as under the current rule, the Exchange explained, in 
its proposal, that the closing price reported on Nasdaq.com is the 
Nasdaq Official Closing Price, which is derived from the closing 
auction on Nasdaq, reflects actual sale prices at one of the most 
liquid times of the day, and is highly transparent to investors.\13\ 
According to the Exchange, the closing price reported on Nasdaq.com is 
a better reflection of the market price of the security than the 
closing bid price.\14\ The Exchange also noted that this use of closing 
price is consistent with the approach of other exchanges.\15\
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    \13\ See Notice, supra note 3, at 7270, which discusses the 
Nasdaq Official Closing Price and notes, among other things, that 
the closing auction is ``highly transparent to all investors through 
the widespread dissemination of stock-by-stock information about the 
closing auction, including the potential price and size of the 
closing auction.'' The Exchange stated that the closing price is 
published on Nasdaq.com with a 15 minute delay and is available 
without registration or fee. According to the Exchange, Nasdaq does 
not currently intend to charge a fee for access to this data or 
otherwise restrict availability of this data. The Exchange further 
stated that it would file a proposed rule change under Section 19(b) 
of the Act before implementing any such change and, in such filing, 
address the impact of the proposed rule change on compliance with 
this rule. See id. at 7270 n.6.
    \14\ See Notice, supra note 3, at 7270. According to the 
Exchange, the price of an executed trade generally is viewed as a 
more reliable indicator of value than a bid quotation. See id.
    \15\ See Notice, supra note 3, at 7270 & n.3 (citing Section 
312.04(i) of the NYSE Listed Company Manual).
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    Further, in proposing to also use a five-day average closing price 
to determine if a shareholder vote is required under Nasdaq Rule 
5635(d), the Exchange noted that while investors and companies 
sometimes prefer to use an average when pricing transactions, there are 
potential negative consequences to using a five-day average as the sole 
measure of whether shareholder approval is required. For example, in a 
declining market, the Exchange noted that the five-day average price 
will be above the current market price, which, according to the 
Exchange, could make it difficult for companies to close transactions 
because investors could buy shares at a lower price in the market. The 
Exchange also noted concerns with using a five-day average in a rising 
market, in that the five-day average price will appear to be at a 
discount to the closing current market price. Further, according to the 
Exchange, if material news is announced during the five-day period, the 
average price could be a worse reflection of market value than the 
closing price after the news is disclosed. The Exchange stated, 
however, that it believed that these risks of using the five-day 
average price are already accepted by the market, as evidenced by the 
use of an average price in transactions that do not require shareholder 
approval, such as those transactions where less than 20% of the 
outstanding shares are being issued. In its rule filing, the Exchange 
also noted that several commenters raised concerns regarding a 2017 
solicitation of comments by the Exchange on a proposal to use the five-
day average price as the sole measure of market value (``2017 
Solicitation'').\16\ The Exchange stated that it believed these 
concerns were justified and, as such, proposed to define market value 
as the lower of the closing price or five-day average price. As the 
Exchange noted, this means that, under its proposal, an issuance would 
not require shareholder approval as long as the issuance occurs

[[Page 24381]]

at a price greater than the lower of the two measures.\17\
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    \16\ As the Exchange stated in the Notice, in 2017, the Exchange 
solicited comments on a proposal to amend Nasdaq Rule 5635(d) and 
the Exchange based its current proposal on its experience and 
comments received during that process. See Notice, supra note 3, at 
7270. The Commission notes that, in its rule filing, the Exchange 
stated that it received support for this proposal in its 2017 
Solicitation, but four commenters raised concerns about reliance on 
the five-day average price to measure market value in certain 
circumstances. See id. at 7271.
    \17\ See Notice, supra note 3, at 7270-71.
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    The Exchange also proposed, in conjunction with its proposal to 
redefine market value for purposes of determining when a shareholder 
vote is triggered under Rule 5635(d), to eliminate its current 
requirement for shareholder approval of private placement issuances at 
a price that is less than book value. Currently, as noted above, the 
Exchange's rules require shareholder approval of a private placement 
transaction if it is priced below market or book value. Accordingly, 
under the proposal, private placement transactions that are priced 
below book value but above market value, as defined by the Minimum 
Price, would not require shareholder approval. In its proposal, the 
Exchange stated that book value is an accounting measure that is based 
on the historic cost of assets rather than their current value. 
According to the Exchange, book value is not an appropriate measure of 
whether a transaction is dilutive or should otherwise require 
shareholder approval.\18\
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    \18\ See Notice, supra note 3, at 7271. The Commission notes 
that, in its rule filing, the Exchange stated that it received 
support for this change in its 2017 Solicitation, but also received 
comments opposing the change, one of which raised specific concerns 
that the Exchange acknowledged in its proposal. See id. at 7271, 
7274.
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    Further, the Exchange proposed to revise Nasdaq Rule 5635(d) to 
provide that shareholder approval is required prior to a 20% Issuance 
at a price that is less than the Minimum Price.\19\ Under the proposal, 
the Exchange would define ``20% Issuance'' for purposes of Rule 5635(d) 
as a transaction, other than a public offering as defined in IM-5635-3, 
involving the sale, issuance, or potential issuance by the Company of 
common stock (or securities convertible into or exercisable for common 
stock), which alone or together with sales by officers, directors, or 
Substantial Shareholders of the Company, equals 20% or more of the 
common stock or 20% or more of the voting power outstanding before the 
issuance.\20\ According to the Exchange, the Exchange is not making a 
substantive change to the threshold for quantity or voting power of 
shares being sold that would give rise to the need for shareholder 
approval, although, as described above, the applicable market value 
pricing test will change.\21\
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    \19\ See proposed Nasdaq Rule 5635(d)(2).
    \20\ See proposed Nasdaq Rule 5635(d)(1)(B).
    \21\ See Notice, supra note 3, at 7271.
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    In addition, the Exchange proposed to amend the preamble to Nasdaq 
Rule 5635 and the title of Nasdaq Rule 5635(d) to replace references to 
``private placements'' with ``transactions other than public 
offerings'' \22\ to, according to the Exchange, conform the language to 
that in Nasdaq Rule IM-5635-3, which defines a public offering,\23\ and 
to make other conforming changes to Nasdaq Rules IM-5635-3 and IM-5635-
4.\24\
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    \22\ See proposed Nasdaq Rule 5635 and subsection (d).
    \23\ See Notice, supra note 3, at 7271.
    \24\ See proposed Nasdaq Rules IM-5635-3 and IM-5635-4.
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III. Summary of Comments

    The Commission received three comments on the proposed rule change, 
all of which supported the proposal.\25\ Of these commenters, one 
stated it supported the proposed rule change without reservation and 
the Exchange's reevaluation of its shareholder approval rules in light 
of changes in market practice and investor protection mechanisms that 
have taken place since the adoption of these rules.\26\ Another 
commenter stated that, while it supported more significant changes to 
Nasdaq Rule 5635(d), the proposed rule change would be a strong first 
step in correcting the inadequacies and inequitableness of Nasdaq Rule 
5635(d).\27\
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    \25\ See Kelley Drye Letter, MSBA Letter, and Latham Watkins 
Letter, supra note 6. These three commenters previously provided 
comment letters to the Exchange in response to the 2017 
Solicitation. For a summary prepared by the Exchange of these 
comment letters, see the Notice, supra note 3, at 7273-74.
    \26\ See Latham Watkins Letter, supra note 6.
    \27\ See Kelley Drye Letter, supra note 6, at 1-2.
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    Two of the commenters in support of the proposal specifically 
addressed the changes to the definition of market value. One commenter 
stated that the proposed method to determine market value using the 
lower of the Nasdaq closing price and five-day average of Nasdaq 
closing prices is a better determination of market value than the 
current use of closing bid price because it will more accurately 
reflect the type of price that would occur in an arms-length 
transaction. This commenter stated that the proposed measure will 
provide flexibility to account for market fluctuations and events, 
without incurring the typical adverse consequence of material 
movements, positive or negative, in a stock price at or near the end of 
a five-day period.\28\
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    \28\ See Kelley Drye Letter, supra note 6, at 3.
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    Another commenter noted that parties often prefer to structure a 
transaction using an average price to smooth out unusual price 
fluctuations. This commenter stated that the proposed changes to the 
definition of market value provides listed companies with additional 
flexibility in structuring their securities transactions, brings the 
shareholder approval rule more in line with how transactions are 
structured when the rule is not a consideration, and provides a 
reasonable indication of market value.\29\ This commenter also 
supported the proposed change to use the Nasdaq Official Closing 
Price.\30\
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    \29\ See MSBA Letter, supra note 6, at 1-2.
    \30\ See MSBA Letter, supra note 6, at 2.
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    As to the proposal to eliminate book value, two of the commenters 
specifically discussed their support of this change. One commenter 
stated that book value does not reflect the actual value of securities 
and is not relied upon in connection with investment decisions, whereas 
market price of an issuer's common stock represents the market's 
consensus on the value of the security. This commenter also stated that 
in the rare instances where book value exceeds market value, this 
usually occurs due to the accounting treatment of certain types of 
capital investments by the issuer and should not impact the issuer's 
ability to raise capital at market prices.\31\ Another commenter 
strongly supported the proposed elimination of book value and stated it 
agreed with statements in the Notice that book value is not an 
appropriate measure of current value and, therefore, whether a 
transaction is dilutive or should require shareholder approval.\32\
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    \31\ See Kelley Drye Letter, supra note 6, at 2. In addition, 
this commenter stated that book value may exceed market value due to 
a market correction, burst bubble, or financial crisis, which is a 
time when an issuer needs to be able to raise sufficient capital. 
See id.
    \32\ See MSBA Letter, supra note 6, at 2.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2018-008 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the proposal should be 
approved or disapproved.\33\ Institution of such proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
disapproval proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved.
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    \33\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act, the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is

[[Page 24382]]

instituting proceedings to allow for additional analysis and input 
concerning the proposed rule change's consistency with the Act \34\ 
and, in particular, with Section 6(b)(5) of the Act, which requires, 
among other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to remove impediments 
to and perfect the mechanism of a free and open market and a national 
market system and, in general, to protect investors and the public 
interest.\35\
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    \34\ 15 U.S.C. 78f(b)(5).
    \35\ Id.
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    As discussed above, the Exchange proposed to modify Nasdaq Rule 
5635(d) to change the definition of market value for purposes of 
shareholder approval of private placement transactions such that (1) 
shareholder approval would be required prior to an issuance of 20% or 
more at a price that is less than the lower of the closing price or the 
five-day average price; and (2) shareholder approval would not be 
required prior to an issuance of 20% or more at a price that is less 
than book value but greater than market value. In response to the 
Exchange's 2017 Solicitation, as noted above, some commenters had 
raised questions about the use of a five-day average price as a measure 
of market value under certain market conditions and the elimination of 
the book value standard. Accordingly, the Commission is specifically 
requesting additional comment on these two parts of the Exchange's 
proposal in light of the questions raised in connection with the 
Exchange's 2017 Solicitation.\36\
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    \36\ The Commission also notes that the Exchange proposal stated 
that the ``closing price'' used is the closing price (as reflected 
on Nasdaq.com) at the time of the transaction. The Exchange should 
address in its rule proposal if ``at the time of the transaction'' 
would use the previous day's close or the close on the day of the 
transaction and should clarify this in the rule text. Unlike the 
closing price reference, the five-day average closing price 
provision, as proposed, currently makes clear it is based on the 
five days immediately preceding the signing of a binding agreement.
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V. Commission's Solicitation of Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
view of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, or 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\37\
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    \37\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Act Amendments of 1975, Public Law 94-29 (June 4, 1975), 
grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Act Amendments of 
1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 
75, 94th Cong., 1st Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by June 15, 2018. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by June 29, 
2018. The Commission asks that commenters address the sufficiency of 
the Exchange's statements in support of the proposal which are set 
forth in the Notice,\38\ in addition to any other comments they may 
wish to submit about the proposed rule change. In particular, the 
Commission seeks comment, including where relevant, any specific data, 
statistics, or studies, on the following:
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    \38\ See Notice, supra note 3.
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    1. Is the five-day average closing price a reasonable alternative 
to determining market value for purposes of shareholder approval 
requirements under Nasdaq Rule 5635(d)? If so, what are the benefits 
and/or risks to companies and their shareholders? Do the benefits and 
risks to companies and shareholders change under certain market 
conditions, such as rising markets, and if so how?
    2. Are there benefits and/or risks to listed companies and 
shareholders by permitting sales in private placements that are above 
market value but below book value? Could there be any potential impact 
on share price? Would the assessment of any potential impact, if any, 
change depending on the reason why a stock is trading above market 
price but below book value (i.e., market conditions, accounting 
issues)?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2018-008 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2018-008. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-008 and should be submitted 
on or before June 15, 2018. Rebuttal comments should be submitted by 
June 29, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-11224 Filed 5-24-18; 8:45 am]
 BILLING CODE 8011-01-P


