Tuesday, January 25, 2022 3:41:20 PM
LBL, information re the 20% rule, basically it's used to execute a change of control, NASDAQ and NYSE vary by definition. Thanks for the heads up 
What types of transactions trigger the 20% rule?
The 20% rule applies to any non-public transaction and
certain public transactions, including shares issued in
connection with acquisitions (in the case of an NYSElisted company) and issuances of equity securities or
securities exercisable for equity securities.
How does the 20% rule relate to the rules governing
transactions involving a “change in control” or an
acquisition?
Change of Control
Both Nasdaq and the NYSE American require an issuer
to obtain shareholder approval prior to an issuance
of securities that will result in a “change of control.”
Nasdaq requires issuers to notify Nasdaq at least
15 calendar days before issuing securities that may
potentially result in a change of control. The NYSE
American simply cautions that an issuer considering
issuing “a significant percentage” of its shares should
consult the exchange to determine whether shareholder
approval is required.
While neither Nasdaq nor the NYSE American has
formally defined “change of control,” Nasdaq has
provided some guidance. Nasdaq will consider several
factors in determining whether a change of control will
occur as a result of a transaction, the most salient of
which are the post-transaction stock ownership and
voting rights of the investors. This “change of control”
test can be somewhat subjective. Generally, if a
transaction results in an investor or group of investors
obtaining a 20% interest or a right to acquire that
interest in the issuer on a post-transaction basis, and
that ownership position would be the largest position
in the issuer, the transaction may be presumed to be
a change of control and should be carefully reviewed.
Needless to say, this threshold is less than the “51%
2 See Nasdaq Rule 5801, NYSE Rule 801.00, and NYSE
American section 1002.
or greater” ownership that might suggest “control”
to many; accordingly, practitioners should make the
parties to a transaction aware of these issues as early as
possible. However, if pre-existing control positions are
not displaced by the transaction (for example, if another
shareholder has a more significant ownership interest),
Nasdaq may determine that shareholder approval is
not required with respect to the transaction (although
it may be required for other reasons, including the 20%
rule).3
The NYSE has a similar rule that shareholder
approval is required prior to an issuance that will
result in a “change of control.” The NYSE also does
not define change of control, and the exchange applies
a subjective test on a case-by-case basis. Generally,
purchases of more than 30% of the outstanding voting
stock are presumed to constitute a change of control, and
purchases of between 20% and 30% of the outstanding
voting stock may be presumed to constitute a change
of control, depending on the NYSE’s review of the
issuer’s corporate governance structure, such as board
seats, management rights and other control rights
of the acquirer of the securities. Although the NYSE
has allowed certain transactions to proceed without
a shareholder vote under both the 20% rule and the
change of control rule, under this subjective NYSE test,
an issuance of even less than 20% of common stock or
voting power may be sufficient in some situations to be
deemed to have resulted in a change of control. Issuers
should seek specific guidance from the NYSE before
proceeding with a transaction.
Acquisitions
Nasdaq issuers must also keep in mind that an
acquisition-related issuance of securities may fall
under the “acquisition rule” rather than the 20% rule,
if the issuance is equal to or greater than 20% of the
number of shares of common stock or voting power
outstanding, or if insiders have an interest in the target
entity, 5% of the number of shares of common stock
or voting power outstanding. Nasdaq will use the
following factors to determine which rule to apply:
• proximity of the financing to the acquisition;
• timing of board approvals;
• stated contingencies in the acquisition documents;
and
• stated uses of proceeds.4
3 See, e.g., Nasdaq Staff Interpretative Letters 2007-25, 2008-3
and 2008-5.
4 For more information on the Nasdaq acquisition rule, see
Nasdaq FAQs, Shareholder Approval—Acquisitions.
Morrison & Foerster LLP Capital Market
What types of transactions trigger the 20% rule?
The 20% rule applies to any non-public transaction and
certain public transactions, including shares issued in
connection with acquisitions (in the case of an NYSElisted company) and issuances of equity securities or
securities exercisable for equity securities.
How does the 20% rule relate to the rules governing
transactions involving a “change in control” or an
acquisition?
Change of Control
Both Nasdaq and the NYSE American require an issuer
to obtain shareholder approval prior to an issuance
of securities that will result in a “change of control.”
Nasdaq requires issuers to notify Nasdaq at least
15 calendar days before issuing securities that may
potentially result in a change of control. The NYSE
American simply cautions that an issuer considering
issuing “a significant percentage” of its shares should
consult the exchange to determine whether shareholder
approval is required.
While neither Nasdaq nor the NYSE American has
formally defined “change of control,” Nasdaq has
provided some guidance. Nasdaq will consider several
factors in determining whether a change of control will
occur as a result of a transaction, the most salient of
which are the post-transaction stock ownership and
voting rights of the investors. This “change of control”
test can be somewhat subjective. Generally, if a
transaction results in an investor or group of investors
obtaining a 20% interest or a right to acquire that
interest in the issuer on a post-transaction basis, and
that ownership position would be the largest position
in the issuer, the transaction may be presumed to be
a change of control and should be carefully reviewed.
Needless to say, this threshold is less than the “51%
2 See Nasdaq Rule 5801, NYSE Rule 801.00, and NYSE
American section 1002.
or greater” ownership that might suggest “control”
to many; accordingly, practitioners should make the
parties to a transaction aware of these issues as early as
possible. However, if pre-existing control positions are
not displaced by the transaction (for example, if another
shareholder has a more significant ownership interest),
Nasdaq may determine that shareholder approval is
not required with respect to the transaction (although
it may be required for other reasons, including the 20%
rule).3
The NYSE has a similar rule that shareholder
approval is required prior to an issuance that will
result in a “change of control.” The NYSE also does
not define change of control, and the exchange applies
a subjective test on a case-by-case basis. Generally,
purchases of more than 30% of the outstanding voting
stock are presumed to constitute a change of control, and
purchases of between 20% and 30% of the outstanding
voting stock may be presumed to constitute a change
of control, depending on the NYSE’s review of the
issuer’s corporate governance structure, such as board
seats, management rights and other control rights
of the acquirer of the securities. Although the NYSE
has allowed certain transactions to proceed without
a shareholder vote under both the 20% rule and the
change of control rule, under this subjective NYSE test,
an issuance of even less than 20% of common stock or
voting power may be sufficient in some situations to be
deemed to have resulted in a change of control. Issuers
should seek specific guidance from the NYSE before
proceeding with a transaction.
Acquisitions
Nasdaq issuers must also keep in mind that an
acquisition-related issuance of securities may fall
under the “acquisition rule” rather than the 20% rule,
if the issuance is equal to or greater than 20% of the
number of shares of common stock or voting power
outstanding, or if insiders have an interest in the target
entity, 5% of the number of shares of common stock
or voting power outstanding. Nasdaq will use the
following factors to determine which rule to apply:
• proximity of the financing to the acquisition;
• timing of board approvals;
• stated contingencies in the acquisition documents;
and
• stated uses of proceeds.4
3 See, e.g., Nasdaq Staff Interpretative Letters 2007-25, 2008-3
and 2008-5.
4 For more information on the Nasdaq acquisition rule, see
Nasdaq FAQs, Shareholder Approval—Acquisitions.
Morrison & Foerster LLP Capital Market
