NASDAQ proposes amendment to its one dollar minimum bid requirement

The purpose of this news alert is twofold: First, to give a short description of the Nasdaq Stock Market Inc. (“Nasdaq”) proposed amendment to its listing criteria for securities listed on its national market, and second, to propose effective steps to regain compliance with the minimum bid price requirement.

The Proposed Amendment

Nasdaq has recently announced the proposed amendment to the one (1) dollar minimum bid price requirement for shares listed on the Nasdaq National Market. The essence of the amendment is to leave the one dollar minimum bid price as is but to extend the grace period for companies whose shares fall beneath the minimum bid price requirement from 90 days to 180 days.

This amendment has been submitted to the Securities and Exchange Commission (“SEC”) for approval. The expectation in the industry is that the SEC will approve the amendment in due course.

Action Items to Regain Compliance

There are at least two effective means of regaining compliance with the one dollar minimum bid price requirement if the stock price does not “correct itself” during the extended grace period under the proposed new ruling. The most common approach is to implement a reverse stock split whereby the issuer effectively reduces the amount of its shares in the marketplace thereby raising the market price of each share. For example, if a company has ten million shares trading in the public market at fifty cents per share and wishes to raise the price to at least one dollar in order to maintain its listing on the national market, it could implement a one for two reverse split thereby increasing the market price of each share to one dollar.

The problem with this approach is that the share price of stocks that undergo a reverse split tend to decline. The unfortunate impact to shareholders in the example cited above could be that they relinquish fifty percent of their share holdings only to see their share price decline to beneath the one dollar requirement. One way to solve this conundrum is to implement a reverse split at a ratio of 1:3 or 1:4 rather than 1:2 in the above example. This would allow room for the post split shares to decline somewhat until the share price rallies.

In any event, a reverse split must be approved by shareholders and often requires an amendment to a company’s articles of incorporation which could involve super majority voting requirements.

Another means of essentially accomplishing the same effect with much better results for shareholders is for a company to institute a share repurchase program. Rule 10b-18 of the Securities Exchange Act of 1934 offers clear guidelines for a company to choose an independent broker for the purpose of implementing an orderly share repurchase program. The obvious limitation in implementing such a program is that a company must be “cash rich”, which is not often the case where a company’s share price is below one dollar.

By Steve Kronengold. © 2003. All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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