Best Practice Newsletter – October 2024

SEC Approves

Nasdaq Changes Rules for Reverse Stock Splits-

On October 7, the Securities & Exchange Commission (SEC) approved Nasdaq’s proposed changes to Nasdaq Listing Rule 5810(c)(3), which pertain to the exchange’s minimum bid price requirement and the use of reverse stock splits to achieve price compliance.

Reverse stock splits are a practice where companies consolidate their outstanding, lower priced shares into fewer, higher priced shares. Nasdaq had proposed the rule changes due to a surge in penny stocks on its exchange.

Under Nasdaq Rule 5550(a)(2), companies listed on Nasdaq must maintain a minimum bid price of at least $1 per share. If a company’s bid price falls below this threshold for 30 consecutive trading days, it receives a deficiency notice.

The amendment to Rule 5810(c)(3) clarifies that if a company undertakes a reverse stock split to regain compliance but subsequently violates another listing requirement—such as the minimum number of publicly held shares or public holders—it will not be recognized as having regained compliance with the minimum bid price.

Consequently, no new compliance period will be granted for this violation. The company remains non-compliant until it resolves the subsequent violation and maintains a $1 bid price for 10 consecutive business days, unless Nasdaq opts to extend this period.

Three days following the SEC’s approval of the Nasdaq rules, the New York Stock Exchange filed its own proposal with the SEC, seeking to limit the number of reverse stock splits that companies can use to achieve the exchange’s minimum stock bid price in order to avoid delisting. NYSE requires that average closing share prices remain at $1 or more over a 30-day trading period.

To read Nasdaq’s rule changes approved October 7:

https://www.sec.gov/files/rules/sro/nasdaq/2024/34-101271.pdf

To read NYSE’s proposed rule changes:

https://www.sec.gov/files/rules/sro/nyse/2024/34-101306.pdf

Guess who Loves Chevron’s Demise?

San Francisco Sues EPA for Regulatory Overreach

It’s been a mere three months since the US Supreme Court overturned the 40-year-old Chevron Doctrine, and in what is viewed as an ironic turn of events, one of the nation’s most liberal cities is using the decision handed down by the conservative court to sue the Environmental Protection Agency (EPA) for regulatory overreach.

Chevron, originally decided in 1984, gave federal regulatory agencies sweeping regulatory and enforcement powers over businesses and individuals. Its overturn by the Supreme Court last June was expected to significantly curb the power of several federal regulatory agencies including the EPA, the Securities & Exchange Commission, and Department of Labor, which increasingly have been criticized for overreaching their authority.

The case of City and County of San Francisco v. EPA is significant because it’s one of the first major cases to test the impact of Chevron’s demise. In arguments before the Supreme Court on October 16, Bay Area officials sought to leverage the court’s Loper Bright Enterprises v. Raimondo decision in their legal battle against an environmental watchdog that historically has been aligned with San Francisco politics.

The fight began when the EPA, and environmental group San Francisco Baykeeper, sued San Francisco for sewer discharges into the Pacific, citing San Francisco’s lack of compliance with new discharge permitting rules adopted in 2019. Each permit violation is punishable with fines in excess of $66,000 per day, leaving San Francisco on the hook for potentially hundreds of millions in fines for violations dating back to 2013. After the city lost its case in the lower courts, and the Ninth Circuit stayed the lower court ruling, San Francisco took the case to the Supreme Court.

In Loper Bright, the Court ruled that agencies must provide clear statutory authority for their actions. In the San Francisco case, city officials argue that the EPA’s compliance order oversteps its authority, lacks adequate justification, and that its rules lack specific guidelines. The city contends that the Loper Bright decision underscores the necessity for the EPA to demonstrate explicit legal backing for its directives, suggesting that the compliance order does not meet this requirement.

In fighting the EPA, uber-liberal San Francisco finds itself allied with unusual partners, including the National Mining Association, American Farm Bureau Federation and American Fuel & Petrochemical Manufacturers, which filed an amicus brief in support of the city.

While some Bay Area officials look forward to a win against the EPA because it would mean a reprieve from having to fork over hundreds of millions in fines, and an additional billions in required retrofit of sewer systems, some officials are uncomfortable with their newest bedfellows, and concerned about winning the case.

Fearful that the Supreme Court would side with the city, San Francisco’s Board of Supervisors in early October voted 8-2 to urge city officials to settle the lawsuit quickly, noting that a ruling in favor of the city could diminish the EPA’s power nationwide.

To read the October 16 oral arguments before the Supreme Court:

https://www.supremecourt.gov/oral_arguments/argument_transcripts/2024/23-753_ljgm.pdf

CFO, CEO Compensation at IPO Companies Rises

CFOs and CEOs at companies that went public within the last two years netted an average compensation of $1.2 million and $2.6 million respectively, according to a recent report.

The annual 2024 Initial Public Offering Compensation Report issued by advisory firm Alvarez & Marsal (A&M) drew on data from proxy statements of 497 recently minted public companies with a median market capitalization of approximately $731.2 million.

A&M reported that for CFOs, 71% of the $1.2 million compensation package included annual and long-term incentive pay. For CEOs, the annual and long term incentive pay increased to 80% of their $2.6 million average compensation package.

According to the A&M, four out of five recent IPO companies use, as a long-term compensation incentive, “appreciation only” awards that are tied to an increase in a company’s stock price over a set period.

To access the report see:

https://www.alvarezandmarsal.com/insights/2024-initial-public-offering-ipo-compensation-report

IPOs See Slight Uptick from Previous Year

The U.S. initial public offering (IPO) market has been slowly trending upward in 2024 compared to 2023, with 152 companies making their debut on the stock markets at the close of Q3, according to StockAnalysis.com, which tracks US IPOs.

With several months to go before the year closes, that number is expected to surpass the 154 IPOs that closed for all of 2023.

After a tepid first half, third quarter activity rose, with 57 companies completing IPOs, compared to 41 IPOs completed in Q3 2023.

Sectors which completed the largest number of deals include healthcare and technology, reflecting their ongoing importance and growth potential in the market.

According to Renaissance Capital, which tracks IPO activity, companies that raised at least $100 million have seen their shares rise an average of 25% above the IPO price, and gains of 16% following the first day of activity.