With continuing downward pressure on the stock prices of small and micro-cap stocks, some public companies may find comfort in recent changes to the Delaware General Corporate Law (“DGCL”) and proposed changes to the Nasdaq Listing Rules that could make it easier to obtain stockholder approval of and effectuate a reverse stock split or increase its authorized shares.
Changes to Delaware Voting Standards
Generally, to amend a certificate of incorporation (“Charter”), a Delaware corporation must obtain: (1) approval from its board of directors and (2) the affirmative vote of holders of at least a majority in voting power of the outstanding stock entitled to vote on the matter. On August 1, 2023, a number of amendments to the DGCL became effective (the “Amendments”). The Amendments reduced the default stockholder voting standard required for a company incorporated in Delaware to effectuate certain amendments to its Charter.
Reverse Stock Splits and Increasing Authorized Shares
The Amendments reduce the stockholder approval threshold for amending a Charter to effect a reverse stock split or increase the number of authorized shares. For these actions, under the Amendments, a Delaware corporation would need: (1) the approval of the board of directors and (2) the affirmative vote of a majority of the votes cast by the stockholders entitled to vote on the matter. By changing the standard to the votes cast on the matter, the DGCL reduces the burden on Delaware companies to solicit stockholder votes.
This may be easier to understand with an example. Let’s assume a Delaware corporation is seeking approval for a reverse stock split. It has 1,000 shares outstanding. 600 shares vote on the reverse stock split proposal.
- Under the entitled to vote standard:
- As a majority of those entitled to vote, 501 shares would have to vote in favor of the proposal in order to pass.
- The company would need 83.5% support from those that voted in this scenario.
- Under the votes cast standard:
- More shares must vote for the proposal than against the proposal, or as few as 301 shares for the proposal in this scenario in order to pass.
- The company would need 50.1% support from those that voted.
This reduced voting threshold is expected to make it easier for Delaware corporations to receive stockholder approval for reverse stock splits and increasing authorized shares – both of which can be necessary for capital formation.
Further, under the Amendments, a Delaware corporation is no longer required to seek stockholder approval to amend its Charter to (a) effectuate a forward stock split and (b) proportionately increase its authorized shares, so long as the company has only one class of stock outstanding and it is not divided into series.
Proposed Changes to Nasdaq Listing Rules for Reverse Stock Split Mechanics
In the past two years, Nasdaq has been inundated with listed companies effecting reverse stock splits to attempt to maintain or regain compliance with Nasdaq’s listing standards. In response, Nasdaq has proposed amendments to its rules regarding reverse stock splits (the “Proposed Rules”). The Proposed Rules can be found here.
Generally, the Proposed Rules shorten the notification period to Nasdaq while requiring listed companies to set the particulars of the reverse stock split further in advance than previously required. Here is the breakdown of how the Proposed Rules change the timing of events before the reverse split becomes effective:
Notice due to Nasdaq
15 days before
5 business days before
Complete information required
About 2 days before
5 business days before
Public disclosure of split
1 p.m. ET at least 1 business day before
Noon ET at least 2 business days before
Nasdaq indicated in the Proposed Rules that if a company did not comply with the requirements of the Proposed Rules, if adopted, Nasdaq could halt trading in the company’s stock until all of the requirements in the Proposed Rules were met and the dissemination of material news was complete.
The Proposed Rules may elicit a mixed response from practitioners, given the rigidity of the new notification timeline in the context of volatile markets. While the shorter timeline before effecting a reverse stock split would likely be a welcome change to Nasdaq-listed companies, the thought of setting a particular reverse stock split ratio five business days before a reverse stock split can become effective may cause some heartburn for small and micro-cap companies seeking to maintain their Nasdaq listing in the face of a bid price rule deficiency.
This is an opportune time to pull out your Charter and bylaws and evaluate whether they need updating, whether to take advantage of these Amendments or to refresh the bylaws given the passage of time and introduction of technology into the boardroom. If you have any questions about the new amendments to the DGCL or the proposed amendments to the Nasdaq Listing Rules please contact a member of Harter Secrest & Emery LLP’s Securities and Capital Markets group at (585) 232-6500 or (716) 853-1616.