On May 4, 2020, The Nasdaq Stock Market LLC (“Nasdaq”) adopted a temporary rule waiving until June 30, 2020 key shareholder approval requirements for certain private investments in public equity (“PIPE”) and similar transactions by companies impacted by COVID-19. The temporary waiver operates by creating a new “COVID-19 exception” to the so-called “20% rule” that is significantly broader than the existing “financial viability exception.” The temporary relief continues a trend of both major exchanges[1] providing incremental additional flexibility to companies that require an immediate cash infusion to weather the COVID-19 pandemic.

Nasdaq’s 20% rule requires shareholder approval of PIPEs and other privately negotiated transactions that involve issuances of common stock (or securities convertible into or exercisable for common stock) equal to, following issuance, more than 20% of the outstanding shares of common stock or voting power existing before the issuance if the price is below a “minimum price” equal to the lower of (i) the most recent closing price at the time the purchase agreement is signed, or (ii) the average of the five most recent closing prices.

The financial viability exception can act to exempt companies in severe financial distress from the 20% rule, but may be too limiting to help many companies materially impacted by the COVID-19 pandemic. That existing financial viability exception allows a company to avoid prior shareholder approval if it can demonstrate to Nasdaq that delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise. This exception imposes a high standard, and requires providing a detailed written analysis to Nasdaq covering matters such as the company’s current cash position and ability to meet current obligations, as well as whether or not the company would be rescued or forced to file for bankruptcy if it did not take advantage of the new relief.

By contrast, the new COVID-19 exemption is available to companies that are materially impacted by COVID-19 and the governmental responses to it, but that may not meet the financial viability test.  For example, in Nasdaq’s proposal to adopt the new rule, it indicated that a company that needs additional cash so that it can continue to pay employees during a period of decreased or no revenue could qualify for the COVID-19 exception even if the company’s viability may not otherwise be in jeopardy.

For a transaction to qualify for the COVID-19 exception, the delay in securing shareholder approval must:

  • have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan;
  • result in workforce reductions;
  • adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
  • seriously jeopardize the financial viability of the enterprise.

The company must also demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company. As with the financial viability exception, the company’s audit committee (or a comparable body comprised solely of independent, disinterested directors) must also approve the transaction and determine that it is in the best interest of shareholders.

Unlike the financial viability exception, reliance on the COVID-19 exception does not necessarily require prior approval by Nasdaq. Under the COVID-19 exception, prior approval by Nasdaq is not required to be obtained if:

  • the maximum issuance of common stock (or securities convertible into common stock[2]) issuable in the transaction is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction; and
  • the maximum discount to the minimum price at which shares could be issued is 15%.

Another advantage of the COVID-19 exception is that the prior public notice required for reliance on the exception is two business days as compared to 10 days for the financial viability exception.

However, unlike the financial viability exception, the COVID-19 exception does not also apply to Nasdaq’s other shareholder approval rules in relation to acquisition of stock or assets of another company, change of control and equity compensation (except to the limited extent necessary to facilitate, subject to conditions, the participation in the transaction by officers, directors and other affiliates under circumstances that would otherwise require shareholder approval in a qualifying transaction). In structuring any transaction intended to qualify for the COVID-19 exception, close attention should be paid to these other rules, particularly the change of control rule which effectively requires prior approval of, among other potential issuances, any issuance that would result in an investor (or group) actually or potentially acquiring more than 20% of the outstanding shares of common stock or voting power after the issuance, particularly when the investor (or group) would then also have the largest ownership position.

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For a listed company facing urgent liquidity needs, from an imminent debt maturity to working capital necessary to continue operating, a PIPE or similar transaction, if structured appropriately, is a fast, precise and flexible tool to address those needs. This new rule should facilitate even more PIPEs and similar transactions that can create lifelines for companies impacted by the pandemic.

For more information, please see our recent articles here and here, providing an overview and answers to a few of the initial questions that may be on the minds of companies and investors considering PIPEs and other alternative equity offerings in these volatile markets.

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Proskauer’s market leading Global Capital Markets Practice has experience acting for issuers, investment banks and investors in a wide variety of capital markets financing transactions, including PIPEs, both in the U.S. and in Europe. Please contact us if we can be of assistance.

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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.

[1] The NYSE recently waived the rules related to certain differences that made Nasdaq more flexible in this area than the NYSE through June 30, 2020 on a temporary emergency basis in light of COVID-19 (for further details, please see our recent memo on the subject).

[2] Nasdaq’s prior approval is still required for a transaction involving issuance of warrants exercisable for shares of common stock.

Photo of Peter Castellon Peter Castellon

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer…

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer of several committees, including the IBA Capital Markets Forum, the International Securities Matters Subcommittee of the ABA Committee on the Federal Regulation of Securities and the ABA International Securities & Capital Markets Committee.

Peter has written several articles on securities law topics, including the following:

  • US Private Placements: When Rule 144A is unavailable, PLC, July, 2015.
  • SAS 72 letters: Seeking comfort, PLC, May, 2013.

  • Another way in, IFLR, March, 2012.

Before joining Proskauer, Peter was Deputy General Counsel for Citi and advised the Equity Capital Markets Division and Investment Banking Division. While at Citi, Peter worked on most of Citi’s ECM transactions in Europe, the Middle East and Africa.

Photo of Michael Choate Michael Choate

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both…

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both public and private offerings as well as private equity and joint venture transactions along with mergers and acquisitions, corporate governance issues and federal securities compliance matters.

Photo of David A. Curtiss David A. Curtiss

David A. Curtiss is a partner in the Corporate Department and a member of the Capital Markets Group. As businesses globally are impacted by the Coronavirus (COVID-19) pandemic, David is a member of the firm’s Coronavirus Response Team helping clients respond and solve…

David A. Curtiss is a partner in the Corporate Department and a member of the Capital Markets Group. As businesses globally are impacted by the Coronavirus (COVID-19) pandemic, David is a member of the firm’s Coronavirus Response Team helping clients respond and solve issues across myriad fronts.

David’s practice focuses on capital markets, including the representation of sponsors, companies and underwriters in equity and debt offerings.  His diverse transactional experience includes private preferred equity and PIPE investments, high-yield debt offerings, initial public offerings, in and out-of court restructuring transactions, leveraged buy-outs,  “follow-on” equity offerings and investment grade debt offerings.

In 2016, David was mentioned in The Legal 500 U.S. for Capital Markets: Equity Offerings.

Photo of Steven A. Fishman Steven A. Fishman

Steven A. Fishman, a senior counsel in the Corporate Department, concentrates his practice in real estate securities, real estate private equity investments and finance matters. Steve has extensive experience in connection with acquisitions and dispositions of public and private limited partnerships and limited…

Steven A. Fishman, a senior counsel in the Corporate Department, concentrates his practice in real estate securities, real estate private equity investments and finance matters. Steve has extensive experience in connection with acquisitions and dispositions of public and private limited partnerships and limited liability companies, the formation of real estate joint ventures and private equity funds, the sale of hotel companies, and debt and equity financings.

Steve also has broad experience representing public and private corporations in all aspects of their securities filings and commercial transactions.

Photo of Daniel Forman Daniel Forman

Daniel Forman is a partner in Proskauer’s Capital Markets Group. His practice focuses on securities offerings and related transactions, and he regularly represents issuers, sponsors, investors and underwriters in securities transactions including initial public offerings, secondary equity offerings, debt offerings, convertible note offerings…

Daniel Forman is a partner in Proskauer’s Capital Markets Group. His practice focuses on securities offerings and related transactions, and he regularly represents issuers, sponsors, investors and underwriters in securities transactions including initial public offerings, secondary equity offerings, debt offerings, convertible note offerings, tender offers and consent solicitations, debt restructurings and private placements. He also counsels public companies on general corporate representation, SEC compliance, disclosure matters, mergers and acquisitions and complex securities law issues. Daniel has significant experience advising on transactions for companies in the life sciences, technology, consumer/retail, industrial, financial institutions and real estate sectors.

Photo of Karen J. Garnett Karen J. Garnett

Karen Garnett is a partner in the Corporate Department, and a member of the Capital Markets Group.

Karen’s practice focuses on regulatory matters under the federal securities laws, equity finance transactions and public company advisory services. Karen has extensive experience in applying and…

Karen Garnett is a partner in the Corporate Department, and a member of the Capital Markets Group.

Karen’s practice focuses on regulatory matters under the federal securities laws, equity finance transactions and public company advisory services. Karen has extensive experience in applying and interpreting federal securities laws and regulations, including requirements governing public company registration, reporting and disclosure.

Karen joined Proskauer following almost 24 years on the staff of the U.S. Securities and Exchange Commission. Most recently, she was an Associate Director in the Division of Corporation Finance, where she led the disclosure review program. Karen routinely provided guidance on a broad range of complex transactions and disclosure matters. She oversaw the work of several industry-focused review teams and has significant expertise in disclosure relating to REITs and commodity pools. As a senior officer, Karen helped develop many of the Division’s policies and procedures, and she worked closely with staff across the SEC on matters involving broker-dealers, investment companies, and novel financial products.

Photo of Maximilian P. Kirchner Maximilian P. Kirchner

Dr. Max Kirchner is a partner in the Corporate Department and a member of the Capital Markets and Finance Group. His practice focuses on the representation of private equity sponsors, multi-national companies, investment banks and investment funds in capital markets and leveraged finance…

Dr. Max Kirchner is a partner in the Corporate Department and a member of the Capital Markets and Finance Group. His practice focuses on the representation of private equity sponsors, multi-national companies, investment banks and investment funds in capital markets and leveraged finance transactions. He regularly works on the most complex high-yield bond offerings, IPOs, restructurings and acquisition financings by companies around the world across a broad array of industries.

Max is leading the Firm’s European high-yield team and is consistently recognized in both Chambers and Legal 500. Clients note that he is “commercial, dedicated, client-focused and constructive” and that he “stands out as a top-class lawyer; he has a deep understanding of the market, outstanding technical skills, and he provides invaluable strategic advice to ensure clients obtain the best possible outcome.”

Photo of Steven L. Lichtenfeld Steven L. Lichtenfeld

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge…

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge funds, and pension advisors regarding public offerings and private placements of real estate-related debt and equity securities, real estate-related mergers and acquisitions, real estate preferred equity investments and joint ventures, real estate-related senior and mezzanine financings and other corporate, partnership and limited liability company matters.

Steven has been widely recognized as a driving force in the real estate capital markets and finance space during his more than thirty-five year career. He has garnered several prestigious accolades in this area, including receiving a coveted ranking from Chambers USA, which has described him as “a brilliant real estate attorney with experience in many asset classes.” Chambers has also described Steven as “highly analytical and highly strategic” and “encyclopedic in terms of his knowledge” in handling a broad spectrum of public and private debt offerings, M&A, joint venture and other corporate real estate matters. Steven is also recommended for Real Estate and REITs by Legal 500 United States and is consistently recognized as a leading real estate lawyer in Best Lawyers in America and Super Lawyers.

Photo of Carlos Martinez Carlos Martinez

Carlos E. Martinez is a partner and head of the Latin America Practice Group.

Carlos has 30 years of experience in Latin American cross-border transactions. He has participated in numerous debt and equity securities offerings by Latin American issuers, representing issuers, selling stockholders…

Carlos E. Martinez is a partner and head of the Latin America Practice Group.

Carlos has 30 years of experience in Latin American cross-border transactions. He has participated in numerous debt and equity securities offerings by Latin American issuers, representing issuers, selling stockholders and underwriters. In the mergers and acquisitions area, Carlos has represented acquirers, investors and target companies in several cross-border transactions. He also represents creditors and borrowers in a wide range of other financial transactions, including bank lending, project finance, asset-backed financings and restructurings.

Several of Carlos’s transactions were “first-of-its-kind,” including some which were awarded “Deal of the Year” honors by specialized publications such as Latin Lawyer, M&A Advisor, Latin Finance and Project Finance MagazineChambers Latin America recently referred to Carlos as a “well-respected generalist” who is “one of the best names in top-end bond work.”

Carlos has written articles on privatization capital markets, free trade agreements and restructurings in Latin America. He has also lectured on the legal aspects of international finance at several symposia and universities.

Photo of Matthew O'Loughlin Matthew O'Loughlin

Matthew O’Loughlin is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group. Matthew counsels clients on corporate, strategic and transactional matters, representing public and private companies, entrepreneurs, high-net worth families, investors, private equity groups and investment…

Matthew O’Loughlin is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group. Matthew counsels clients on corporate, strategic and transactional matters, representing public and private companies, entrepreneurs, high-net worth families, investors, private equity groups and investment banks. He acts as outside corporate counsel, advises boards of directors and assists companies with their day-to-day legal needs. This includes public and private securities offerings, mergers and acquisitions, joint ventures, and other strategic and complex transactions and liquidity events. He also advises clients on SEC reporting matters and corporate governance.

Matthew’s clients are principally in the life science/healthcare, food and beverage, health and wellness, consumer products, technology and entertainment industries. He also has particular experience in cross border transactions.

Photo of Ben Orlanski Ben Orlanski

Ben Orlanski is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group and the Capital Markets Group. Ben focuses on major corporate transactions and strategically solving critical business challenges. He has significant experience in securities and…

Ben Orlanski is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group and the Capital Markets Group. Ben focuses on major corporate transactions and strategically solving critical business challenges. He has significant experience in securities and public company representation; mergers and acquisitions; capital markets transactions; special committee, board of directors and general corporate representation; and corporate governance. His experience covers a wide range of industry sectors, including software-as-a-service, REITs, digital media, specialty manufacturing and consumer products.

Capital Formation and Securities

Ben has significant experience in managing, structuring and executing sophisticated securities and capital raising transactions. His approach reflects understanding of market operation, well-designed capital structure and the practical realities of the capital raising process. He represents public companies and investors in public offerings, registered direct transactions, self-tenders, warrant exchanges/flush transactions, recapitalizations, defensive strategies and secondary offerings. He also advises clients on corporate finance transactions for private businesses, ranging from venture capital and private placements to public offerings and debt restructurings.

Mergers and Acquisitions

Ben has completed scores of transactions representing buyers, sellers, investment bankers and financiers through all phases of the M&A process. He is actively involved in planning, structuring, negotiating and documenting strategic merger and acquisition transactions as well as dispositions of sophisticated enterprises.

General Counsel, Public Reporting and Strategic Advice

Ben acts as outside general counsel for numerous public and private companies, applying a business-like approach to produce practical legal solutions to both day-to-day and exceptional legal challenges. In representing his public clients, Ben has successfully guided the public reporting process for clients facing accounting and SEC challenges, proxy contests, cash flow issues, litigation, shareholder activism and strategic alternatives. He frequently advises on issues related to compliance with insider trading laws and major compliance challenges. He also represents boards of directors and special committees of public companies in special situations, including “interested” transactions, investigations, executive succession planning and sensitive corporate governance issues.

Photo of Antonio N. Piccirillo Antonio N. Piccirillo

Antonio N. Piccirillo is the head of the São Paulo office and a member of the Latin America Practice Group.

Antonio’s practice focuses principally on transactional and finance matters in Latin America. He has extensive experience in bank finance, securities law and corporate…

Antonio N. Piccirillo is the head of the São Paulo office and a member of the Latin America Practice Group.

Antonio’s practice focuses principally on transactional and finance matters in Latin America. He has extensive experience in bank finance, securities law and corporate governance (including Sarbanes-Oxley compliance), capital markets, project finance, debt restructurings (including tender offers, consent solicitations and exchange offers), securitizations and mergers & acquisitions.

Photo of William J. Tuttle William J. Tuttle

William Tuttle is a partner in the Corporate Department and focuses his practice on capital markets and corporate matters. Will represents business development companies (BDCs), asset managers, issuers, closed-end funds and underwriters/investment banks. His experience includes facilitating public and private securities transactions for…

William Tuttle is a partner in the Corporate Department and focuses his practice on capital markets and corporate matters. Will represents business development companies (BDCs), asset managers, issuers, closed-end funds and underwriters/investment banks. His experience includes facilitating public and private securities transactions for investment banks and strategic mergers and acquisitions for companies. In addition, Will counsels investment advisers on structuring and forming new investment funds, with an emphasis on leveraged loan funds.

Photo of Frank Zarb Frank Zarb

Frank Zarb is a partner in the Corporate Department, where he concentrates his practice on regulatory matters under the U.S. federal securities laws, as well as on equity finance transactions regulated under those laws.

He counsels public and private companies, broker-dealers, hedge funds…

Frank Zarb is a partner in the Corporate Department, where he concentrates his practice on regulatory matters under the U.S. federal securities laws, as well as on equity finance transactions regulated under those laws.

He counsels public and private companies, broker-dealers, hedge funds, as well as other investors, on a wide range of transactional and securities regulatory compliance matters

Photo of Lily C. Desmond Lily C. Desmond

Lily Desmond is a senior counsel in the Corporate Department and a member of The Capital Markets Group. Lily concentrates her practice on capital markets transactions, including the representation of issuers, underwriters and selling security holders in domestic and international public and private…

Lily Desmond is a senior counsel in the Corporate Department and a member of The Capital Markets Group. Lily concentrates her practice on capital markets transactions, including the representation of issuers, underwriters and selling security holders in domestic and international public and private debt and equity offerings. Lily also advises clients on corporate governance matters, periodic reporting and other general corporate matters.

Lily’s ongoing pro bono and social responsibility practice includes support of Read Ahead, the Flatbush Avenue Business Improvement District and the Veterans Assistance Project. She is a Member of the International Human Rights Committee of the New York City Bar Association.

Photo of Samuel Kardon Samuel Kardon

Samuel Kardon is a special capital markets counsel in the Corporate Department and a member of the Real Estate Capital Markets Group. He focuses his practice on REITs and represents issuers, selling stockholders, investors and underwriters in a variety of public and private…

Samuel Kardon is a special capital markets counsel in the Corporate Department and a member of the Real Estate Capital Markets Group. He focuses his practice on REITs and represents issuers, selling stockholders, investors and underwriters in a variety of public and private capital markets transactions. He regularly advises clients on SEC reporting obligations, corporate governance, mergers, acquisitions and a wide range of other transactions and obligations.

Photo of Louis Rambo Louis Rambo

Louis Rambo is an associate in the Corporate Department and a member of the Capital Markets Group. He concentrates his practice on regulatory matters under the federal securities laws and advises companies on general corporate and transactional issues, including public disclosure, federal and…

Louis Rambo is an associate in the Corporate Department and a member of the Capital Markets Group. He concentrates his practice on regulatory matters under the federal securities laws and advises companies on general corporate and transactional issues, including public disclosure, federal and state proxy requirements, debt and equity securities transactions, business combinations and corporate and board governance. Prior to joining the Firm, Louis served as an attorney in the division of corporation finance with the Securities and Exchange Commission.