As stock prices of many companies stagnated or declined in this year’s uncertain economic, financial, and geopolitical climate, companies with low-price stocks faced immense pressure to address their listing status.
Since early 2023, hundreds of small public companies have risked being delisted for non-compliance with Nasdaq, Inc. and NYSE American’s continued listing requirements. Chief among the deficiencies has been failure to maintain at least a $1 closing bid price per share for 30 consecutive business days.
As of Dec. 8, 557 companies listed on these exchanges were trading below $1 per share, up from fewer than a dozen in early 2021, according to Dow Jones market data. Of these companies, 464 were listed on the Nasdaq Stock Market and subject to possible delisting.
Many of these companies are in the technology space, with some well-known names that would normally be considered promising emerging growth companies.
Nasdaq and NYSE American monitor deficiencies closely, contending that non-compliant companies are more likely to engage in fraudulent practices and have their stock manipulated, with shareholders bearing the losses.
An initial bid price deficiency notification from Nasdaq results in consequences from which many companies have found difficult to rebound.
Nasdaq allows 180 calendar days to regain compliance by maintaining a $1 closing bid price for a minimum of 10 consecutive days during the 180-day period.
Boards of directors routinely consider several aggressive responses, including reverse stock splits, stock buybacks, stock issuances, ramped-up investor relations, and business combinations. These steps are often counterproductive and serve as a temporary band-aid rather than a long-term solution.
A reverse stock split increases a company’s share price while reducing the number of outstanding shares. Reverse splits rarely achieve a lasting solution to the bid price deficiency for struggling companies, ultimately resulting in other deficiencies based on the company’s market value when the company’s stock price sinks to near pre-split levels. Therefore, Nasdaq will wait for the reverse split price to settle in the market before lifting the bid price deficiency.
Some companies consider a stock repurchase program to boost the company’s stock price. However, this approach becomes more complicated under state corporate law, which prohibits companies from repurchasing shares when the company’s capital is or may become impaired.
Many Nasdaq companies that wish to address stock price and stockholders’ equity deficiencies by raising capital will run into the 20% stockholder approval limit.
Instead of a straight equity infusion, these companies are typically offered high-interest convertible debt that turns into equity at some discount to future market prices. This leads to a large number of additional shares to be issued and seriously dilutes existing shareholders.
For companies that are eligible to use a Form S-3 shelf registration, if a company’s market capitalization is less than $75 million, it is subject to a one-third public float limit on the number of securities it can sell.
Other Nasdaq companies consider strategic opportunities to steer their stock price upward. But since any stock-for-stock merger would require using a joint proxy-prospectus on Form S-4, its onerous requirements regarding SEC review time and professional fees make it inappropriate for more troubled companies.
If a company doesn’t regain compliance, it may be eligible for a second 180-day period if it meets all other continued listing requirements, including the $2.5 million in stockholders’ equity and $1 million of market value of publicly traded shares tests.
Nevertheless, Nasdaq can accelerate delisting and shorten the compliance period for stocks with a closing bid price at or below $0.10 for 10 consecutive trading days or for stocks that have had one or more reverse stock splits with a cumulative ratio of 1-for-250 or more shares over the prior two-year period.
Nasdaq should consider a less harsh enforcement option for delisting than the continuous threat of suspended trading. Issuing a public reprimand letter or adding an extra letter to a listed company’s ticker symbol may be sufficient for many companies.
More drastic sanctions could be saved for companies with repeated and flagrant listing standard violations, such as delinquent SEC filings and failures to maintain a company’s audit committee composition.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Spencer G. Feldman is a partner at Olshan Frome Wolosky, focused on securities and capital markets.
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