NYSE Proposes Rule Change to Limit the Use of Reverse Stock Splits to Regain Price Criteria Compliance

NYSE Proposes Rule Change to Limit the Use of Reverse Stock Splits to Regain Price Criteria Compliance

On September 30, 2024, the New York Stock Exchange (NYSE) filed a proposed rule change with the Securities and Exchange Commission (SEC) that would amend Section 802.01C's definition of Price Criteria in the NYSE Listed Company Manual (Manual)¹.  The proposal would also limit the ability of listed companies to utilize reverse stock splits in order to regain compliance with certain minimum trading price criteria set forth in the Manual. Under the current Price Criteria, listed companies are deemed non-compliant if their stock price closes below $1.00 for 30 consecutive days.

In regulating the circumstances in which listed companies can use reverse stock splits to come into compliance with listing requirements, the NYSE follows Nasdaq, which proposed a related rule in July 2024. Under the Nasdaq rule, a listed company that takes action to regain price compliance, such as by using a reverse stock split, will be not be considered compliant if the action causes the company to fall out of compliance with another Nasdaq listing rule².

Why It's Happening

The NYSE's new Price Criteria rule is geared towards protecting investors from companies with a history of reverse stock splitting, in which the company consolidates the number of outstanding shares by exchanging them for a fraction of what the investor once held, reducing the supply, and increasing the price per share. The practice has been used by struggling companies to increase their share price and maintain price compliance with the NYSE rules.

The NYSE views the repeated use of Reverse Stock Splits as a red flag for a company's financial health and a sign of distress. As a result, the NYSE will amend its Price Criteria to limit the ability of companies to use repeated Reverse Stock Splits to bolster their share price by delisting said companies if they fail to keep their stock price consistently above $1.00 per share. The NYSE believes companies who repeatedly use Reverse Stock Splits to regain compliance may be unlikely to maintain financial health in the long term.

The New Section 802.01C

The proposed rule would define the NYSE's Price Criteria to state that "once notified that it has fallen below the Price Criteria, the company must bring its share price and average share price back above $1.00 by six months following receipt of the notification." Companies which fall below the Price Criteria will be ineligible to cure their defect through existing procedures to return to compliance found in Section 802.02 (procedures for domestic companies) or 802.03 (procedures for non-domestic companies). Instead, the proposed change requires the company to notify the NYSE of its intent to cure within 10 days of being notified of its failure to meet the pricing criteria or face possible suspension and delisting procedures.

The company will be deemed compliant once again if, on the last trading day of any month during the six month period, its closing stock price both i) closes $1.00 or more, and ii) averaged a closing price of at least $1.00 over the previous 30 trading-day period. Failure to meet both criteria during the cure period will result in the NYSE commencing suspension and delisting procedures.
If the company anticipates that shareholder approval may be necessary to implement the desired curative steps, then the company must inform the NYSE of its plan and secure approval at its next shareholders meeting.

Reverse Stock Splitting Limitations

The new Price Criteria will also limit the circumstances and frequency in which a company can use Reverse Stock Splits to regain compliance. The company will not be eligible for the six month cure period in Section 802.01C if, the company either i) effectuated a reverse stock split in the prior year or ii) effectuated reverse stock splits over the prior two years with a cumulative ratio of 200 or more shares to one. If either of these circumstances exist, the NYSE will immediately begin suspension and delisting procedures without providing the company with an opportunity to cure.

Section 804.00 permits companies facing delisting to seek review of the action from the Committee for Review of the Board of Directors of the Exchange. Accordingly, failing to meet the Price Criteria or enacting one too many Reverse Stock Splits is not an automatic and inevitable delisting.

What's Next?

If this amendment is approved, listed companies who fall out of compliance with the NYSE's Pricing Criteria will have one less tool to regain compliance. The SEC is currently accepting comments on this proposal. The amendment will become effective within 45 days of the notice's publication to the Federal Register, or within up to 90 days if the SEC or NYSE deems appropriate.

Authors: Brandon Chesner, Junior Associate.

^{1 See Securities and Exchange Commission, Release No. 34-101306; File No. SR-NYSE-2024-48, Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change to Amend Section 802.01C of the NYSE Listed Company Manual (Price Criteria for Capital or Common Stock) to Limit the Use of Reverse Stock Splits to Regain Compliance with the Price Criteria in Certain Circumstances (2024). https://www.sec.gov/files/rules/sro/nyse/2024/34-101306.pdf. 
2 Ashurst Alerts, Nasdaq Proposes to Modify the Application of Bid Price Compliance Periods, Impacting Companies Planning a Reverse Stock Split (August 1, 2024), https://www.ashurst.com/en/insights/nasdaq-proposes-to-modify-the-application-of-bid-price-compliance-periods/.}