Share Caps and Conversion Floors: Clauses to Avoid Triggering 20% Shareholder Approval Rule

Summary

These clauses may be used in the documentation for a private offering of convertible debt securities to avoid triggering certain shareholder approval requirements of the New York Stock Exchange (NYSE) and/or The Nasdaq Stock Market (Nasdaq). These clauses include practical guidance and drafting notes. Both the NYSE and Nasdaq have rules requiring listed companies to receive shareholder approval prior to issuing common stock (or securities convertible into or exercisable for common stock) in a non-public offering which equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance, if the issuance is at a price less than the "Minimum Price" (20% Rule). The "Minimum Price" is defined as the price that is the lower of: (1) the official closing price on the exchange immediately preceding the signing of the binding agreement; or (2) the average official closing price of the common stock on the exchange for the five trading days immediately preceding the signing of the binding agreement. See Nasdaq Rule 5635(d) and NYSE Listed Company Manual Section 312.03(c)). Because obtaining shareholder approval is an onerous and time-consuming process, many companies seek to avoid application of the applicable rule. A common way of bypassing the shareholder approval requirement is to include share caps and conversion floors in the applicable instruments and offering documents. Each clause must be tailored to the specific aspects of the transaction. The definitions and mechanics surrounding a convertible debt issuance will be different than for a warrant or certificate of designations. For a discussion of the purpose and function of share cap and conversion floor clauses, see 20% Rule and Other NYSE and Nasdaq Shareholder Approval Requirements. For more on private placements generally, see Private Placements Resource Kit.