What is a share cap and how is it used in relation to the shareholder approval rules?
Companies sometimes comply with the 20% limitation of the shareholder approval rule by placing a “cap” on the number of shares that can be issued in the transaction, such that there cannot, under any circumstances, be an issuance of 20% or more of the common stock or voting power previously outstanding without prior shareholder approval. If a company determines to defer a shareholder vote in this manner, shares that are issuable under the cap in the first part of the transaction must not be entitled to vote to approve the remainder of the transaction. Pursuant to IM-5635-2, a shareholder cap must apply for as long as the security is outstanding. Caps that apply only if the company is listed on NASDAQ do not obviate the need for shareholder approval before issuing any securities in the transaction.
