A company that lists its securities with Nasdaq is indexed according to a three-tier classification system: The Nasdaq Global Select Market®, The Nasdaq Global Market® and The Nasdaq Capital Market®. The continued listing standards are the same for The Nasdaq Global Select Market and The Nasdaq Global Market and are slightly less burdensome for The Nasdaq Capital Market; these standards are set out in Appendix 5. A company’s failure to meet its listing standards over a specified period of time often triggers Nasdaq action, which can include a Nasdaq delisting procedure and the removal of a company’s securities from its Nasdaq market or require its move to a different Nasdaq market. See the end of this chapter for more information relating to a listed company’s failure to comply with listing standards and rules.

A Majority of Independent Directors

A majority of the Board members of a Nasdaq company must be independent. The Board itself annually determines independence – specifically, that directors do not have a relationship with the company that would interfere with their exercise of independent judgment in carrying out their director responsibilities. A company lists the independent directors in its annual proxy statement. A Nasdaq director is not independent if the director has one or more of the following relationships:

• Employment Relationship. A director who has been employed by the company within the past three years, or who had an immediate family member (as well as anyone residing in the director’s home) employed as an executive officer of the company within the past three years, will not be independent. Employment as an interim chairman, CEO or other executive officer for a year or less will not by itself disqualify a director from being considered independent following that employment.
• Compensation over $120,000. A director who has, or whose immediate family member (other than for compensation as a non-executive officer) has, received over $120,000 in compensation from the company, other than compensation for Board or committee service or for employment as an interim executive officer (for one year or less) or other amounts that are generally noncompensatory in nature, in any 12-month period within the past three years, will not be independent.

• Relationships with the Auditor. A director who is, or who has an immediate family member who is, a current partner of the company’s independent auditor, or who was a partner or employee of the company’s independent auditor and worked on the company’s audit at any time during the past three years, will not be independent.
• Interlocking Directorate. A director who is, or who has an immediate family member who is, a current executive officer of another company where, at any time during the past three years, an executive officer of the company has served on the other company’s compensation committee, will not be independent.
• Significant Business Relationship (including Nonprofits). A director who is, or who has an immediate family member who is, a current partner, executive officer or controlling shareholder of an entity, profit or nonprofit, to which the company made, or from which the company received, payments in the current year or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenues or $200,000, whichever is more (other than payments arising solely from investments in the listed company’s securities or payments under nondiscretionary charitable contribution matching programs), will not be independent. 

Nasdaq provides a cure period for a listed company’s failure to comply with the independent majority requirement if one director ceases to be independent for reasons beyond the director’s reasonable control or in the case of a single Board vacancy. The cure period ends on the earlier of the company’s next annual shareholders’ meeting or the first anniversary of the event that caused the noncompliance. However, if the next annual shareholders’ meeting is less than 180 days after the event that caused the noncompliance, the company will instead have 180 days to regain compliance. The company must notify Nasdaq immediately upon learning of the noncompliance.

Mandatory Executive Sessions of Independent Directors

Independent directors must meet “regularly” in executive sessions, without management or other directors present. Nasdaq contemplates that listed companies will hold at least two executive sessions each year. (We discuss executive sessions in further detail in Chapter 2.)

Audit Committee

Composition and Independence. Each Nasdaq company must have an Audit Committee consisting of at least three directors, all of whom must be independent. All Audit Committee members must be financially literate and at least one member must be financially sophisticated. (We discuss these requirements later in this chapter.) Directors who have participated in the preparation of the financial statements of the company or any current subsidiary of the company during the past three years cannot serve on the Audit Committee. 

Heightened Independence Requirements for Audit Committee Members. In addition to Nasdaq’s general independence requirements discussed above, Audit Committee members must satisfy the Sarbanes-Oxley Audit Committee independence requirements under Rule 10A-3 of the 1934 Act. These requirements provide that Audit Committee members cannot:

• Receive any compensatory payment from the company other than for Board or committee service; or
• Be an affiliated person of the company or any (We discuss these Sarbanes-Oxley Audit Committee independence requirements in Chapter 2.)

Exceptional and Limited Circumstances Exception to Audit Committee Independence Requirements. A director who does not satisfy Nasdaq’s general independence standards for directors but who does satisfy the Sarbanes-Oxley Audit Committee independence requirements and is not a current executive officer or employee, or an immediate family member of a current executive officer of the company, can serve on the Audit Committee for up to two years.

The company must disclose in the company’s annual proxy statement the nature of the director’s relationship and the reasons for the Board’s determination that the director’s service on the Audit Committee is in the best interests of the company and its shareholders. Only one director may be appointed under this exception at one time and, if so appointed, may not serve as the Audit Committee chair. The company may rely on this exception without obtaining Nasdaq approval.

Companies Can “Cure” Inadvertent Noncompliance with Nasdaq’s Audit Committee Composition Requirements. Nasdaq provides a cure period if a company fails to comply with the Audit Committee composition requirements because one director ceases to be independent for reasons beyond the director’s reasonable control or because of a single Board vacancy. If reasons beyond the director’s reasonable control cause the failure to comply, the cure period ends on the earlier of the company’s next annual shareholders’ meeting or the first anniversary of the event that caused the noncompliance. If a single Board vacancy causes the failure to comply, then the cure period also ends on the earlier of the company’s next annual shareholders’ meeting or the first anniversary of the event that caused the noncompliance, except that if the next annual shareholders’ meeting is less than 180 days after the event that caused the noncompliance, the company will instead have 180 days to regain compliance. The company must notify Nasdaq immediately upon learning of noncompliance. Nasdaq will excuse only a single noncomplying Audit Committee member from meeting the Nasdaq independence requirements, and the director must at all times meet Sarbanes-Oxley’s Audit Committee independence requirements.

Financial Literacy and Sophistication. Audit Committee members must be financially literate, meaning they are able to read and understand fundamental financial statements, including balance sheets and income and cash flow statements, at the time of their appointments. In addition, at least one member of the Audit Committee must have financial sophistication. Past employment experience in finance or accounting, requisite professional certification in accounting or other comparable experience or background, including being or having been a CEO, CFO or other senior official with financial oversight responsibilities, may result in financial sophistication. Although Nasdaq did not expressly adopt the SEC’s Audit Committee financial expert standard, any director who meets that standard will meet Nasdaq’s financial sophistication standard. (We discuss the SEC’s Audit Committee financial expert standard in Chapter 2.)

Audit Committee Charter. A Nasdaq-compliant written charter must detail the membership, structure, processes, responsibilities and authority of the Audit Committee, including those elements established in Rule 10A-3 of the 1934 Act. Nasdaq rules, in conjunction with SEC rules, call for a charter that requires the Audit Committee to:

• Oversee Outside Auditors. Be directly responsible for the appointment, compensation, retention and oversight of the outside auditors and their independence.
• Preapprove Outside Audit Services. Preapprove all permissible services provided by the company’s outside auditors.
• Set Procedures for Financial Whistleblower Complaints. Establish procedures for the receipt, retention and treatment of complaints to the company regarding accounting, internal accounting controls or auditing matters and for the confidential, anonymous submission by employees of accounting or auditing concerns.
• Retain Advisors. Be authorized to engage, and determine funding for, independent legal counsel and other advisors.
• Receive Adequate Funding to Meet Responsibilities. Receive appropriate funding from the company for payment of compensation to auditors, independent legal counsel and other advisors and for ordinary administrative expenses necessary or appropriate to carry out the Committee’s duties.
• Annual Charter Evaluation. Requires annual assessment of the Committee’s charter.

We discuss other common duties of the Audit Committee in Chapter 2.

Audit Committee Review and Oversight of Related Party Transactions

A Nasdaq company’s Audit Committee (or a comparable body of independent directors) must review and oversee all related party transactions for potential conflicts of interest on an ongoing basis. To be consistent with SEC disclosure requirements, Nasdaq defines related party transactions as those described in Item 404 of Regulation S-K (which covers the SEC’s definition of related person transactions). These transactions include those in which the company is a participant that involve over $120,000 and in which any director or nominee, executive officer or 5% or more shareholder, or any immediate family member of the foregoing, has a direct or indirect material interest. (We discuss related person transactions in more detail in Chapter 7.)

Compensation Committee

Composition and Independence. Each Nasdaq company must have a Compensation Committee composed of at least two directors, generally all of whom must be independent. In addition, when determining the independence of a director who will serve on the Compensation Committee, the Board must specifically consider all relevant factors regarding whether the director has a relationship to the listed company that is material to the director’s ability to be independent from management with regard to Compensation Committee service, including:

• The source of the director’s compensation, including any consulting, advisory or other compensatory fee paid by the listed company to the director; and
• Whether the director is affiliated with the listed company, a subsidiary of the listed company or an affiliate of a subsidiary of the listed company.

In some circumstances, however, a Nasdaq company may avail itself of the exceptional and limited circumstances exception to this independence requirement if the Compensation Committee has three or more members.

Compensation Committee Charter. Nasdaq requires a listed company to have a written Compensation Committee charter that addresses:

• Scope of Responsibilities. Provides scope of the Committee’s responsibilities and how it carries them out, including structure, processes and membership requirements.
• CEO and Other Executive Officer Pay. Details the Committee’s responsibility for determining, or recommending to the Board for determination, the compensation of the CEO and other executive officer compensation.
• Absence of CEO from CEO Compensation Deliberations. Requires the CEO’s absence during voting or deliberation on CEO compensation.
• Annual Charter Evaluation. Requires annual assessment of the Committee’s charter.
• Advisors. Requires the Committee to have the authority to retain or obtain the advice of a compensation consultant, independent legal counsel or other advisor, following an independent assessment of the advisor.

Exceptional and Limited Circumstances Exception to Compensation Committee

Independence Requirements. A director who does not satisfy Nasdaq’s general independence standards for directors but who is not a current executive officer or employee, or an immediate family member of a current executive officer of the company, can serve on the Compensation Committee for up to two years, as long as the Committee is composed of at least three members (not the usual minimum of two members).

The company must disclose in the company’s annual proxy statement or on the company’s website that it is relying on this exemption and explain the basis for the company’s conclusion that this exemption is applicable. A director appointed under this exception may not serve longer than two years. The company may rely on this exception without obtaining Nasdaq approval.

Companies Can “Cure” Inadvertent Noncompliance with Nasdaq’s Compensation Committee Composition Requirements. Nasdaq provides a cure period if a company fails to comply with the Compensation Committee composition requirements because one director ceases to be independent for reasons beyond the director’s reasonable control or because of one vacancy. In either case, the cure period ends on the earlier of the company’s next annual shareholders’ meeting or the first anniversary of the event that caused the noncompliance, except that if the next annual shareholders’ meeting is less than 180 days after the event that caused the noncompliance, the company will instead have 180 days to regain compliance. The company must notify Nasdaq immediately upon learning of the noncompliance.

Limited Requirements for Smaller Reporting Companies. For a company that qualifies as a “Smaller Reporting Company” for SEC filing purposes, Nasdaq provides relief from some of the Compensation Committee requirements. A Smaller Reporting Company must certify that it has, and will continue to have, a Compensation Committee meeting the composition requirement of at least two independent members, as well as a written charter or a Board resolution addressing the Committee’s scope of responsibilities generally, the determination of CEO and other executive officers pay, and that the CEO and other executive officers may not be present during voting or deliberations on their executive compensation. Smaller Reporting Companies may rely on the independence cure period and the independence exception described above.

Nominating & Governance Committee (or Nominations by Independent Directors)

The third core independent Board committee of a Nasdaq company is the independent Nominating & Governance Committee. The Board may forgo the Nominating & Governance Committee and choose instead to act on director nominations by a majority of independent directors (through a vote in which only independent directors participate). The Nominating & Governance Committee (or an appropriate majority of independent directors) will select, or recommend to the Board for selection, all director nominations, except for those Board “seats” where a third party has a contractual or other right to nominate a director. The Board may use the exceptional and limited circumstances exception for service by one non-independent director on the Nominating & Governance Committee.

The Board of a Nasdaq company with a Nominating & Governance Committee will need to adopt a formal written charter covering at least the nomination process. If, instead, the Board acts by having an appropriate majority of independent directors make nomination decisions, then a comparable Board resolution should address the nomination process.

Exceptional and Limited Circumstances Exception to Nominating & Governance Committee Independence Requirements. A director who does not satisfy Nasdaq’s general independence standards for directors but who is not a current executive officer or employee, or an immediate family member of a current executive officer of the company, can serve on the Nominating & Governance Committee for up to two years, as long as the Committee is composed of at least three members.

The company must disclose in the company’s annual proxy statement or on the company’s website that it is relying on this exemption and explain the basis for the company’s conclusion that this exemption is applicable. A director appointed under this exception may not serve longer than two years. The company may rely on this exception without obtaining Nasdaq approval.

Code of Conduct

A core component of a Nasdaq company’s good governance framework is adoption and public availability of a code of conduct that covers all its directors, officers and employees. Nasdaq requires that the code of conduct comply with the code of ethics mandated by Sarbanes-Oxley. Item 406 of Regulation S-K defines this code of ethics as written standards reasonably designed to deter wrongdoing and to promote honest and ethical conduct and fair and full disclosure. The code of conduct must include enforcement mechanics, and the Board must approve any waivers from the code of conduct for directors or executive officers. Waivers must be disclosed to shareholders within four business days.

Notification of Noncompliance with Nasdaq Corporate Governance Standards

A Nasdaq company must promptly notify Nasdaq if an executive officer of the company becomes aware of any cany nomponcompliance with Nasdaq’s corporate governance standards (whether there is an automatic cure period or not).

Nasdaq defines a material amendment to include:

• Material increase in the number of shares available under the plan, other than increases to reflect reorganizations, stock splits, mergers, spin-offs and similar transactions;
• Material increase in the benefits available to plan participants;
• Material expansion of the class of persons eligible to participate in the plan;
• Any expansion in the types of awards provided under the plan;
• Material extension of the plan’s term;
• Reduction in the price at which shares or stock options may be offered; and
• Repricing of stock options, where the plan does not specifically permit the repricing.

There are a variety of special-purpose exemptions to these shareholder approval requirements. These include exemptions for warrants or rights offered generally to all shareholders (poison pills), stock purchase plans available on equal terms to all shareholders (dividend reinvestment plans), some types of awards made in connection with mergers and acquisitions, tax-qualified nondiscriminatory employee benefit plans and parallel nonqualified plans (like 401(k) plans or other ERISA plans), and grants of equity awards made as a material inducement to a person’s initial employment with the company. Even when a plan or an arrangement is exempt from shareholder approval requirements, Nasdaq generally still requires that the Compensation Committee (or a majority of independent directors) approve inducement grants and tax-qualified nondiscriminatory employee benefit and parallel nonqualified plans. In addition, the company must promptly disclose in a press release the material terms of inducement grants made in reliance on the shareholder approval exception.

20% Stock Issuance (5% to Affiliates in an Acquisition)

Shareholders of Nasdaq companies have long been required to approve major additional issuances of common stock (or convertible securities). These are the provisions that generally trigger a shareholder vote and proxy solicitation on significant transactions, including stock-for-stock mergers. 

20% Rule. Shareholders must approve any securities issuance (other than in a public offering) that may exceed 20% of the outstanding common stock or the outstanding voting power outstanding before the issuance, if the issuance is priced below the minimum price (sales by officers, directors and 5% shareholders will be combined with the company’s securities issuance in determining whether the 20% threshold has been met). Nasdaq defines “minimum price” as the lesser of (1) the official closing price of the listed company’s common stock immediately preceding the signing of the binding agreement to issue the additional common stock; or (2) the average official closing price for the five trading days immediately preceding the signing of the binding agreement to issue the additional common stock. Nasdaq also requires shareholder approval for any acquisition that results in the issuance of common stock (or convertible securities) of 20% or more of the outstanding common stock or the outstanding voting power outstanding before the issuance (and this acquisition-related approval triggers a shareholder vote regardless of the price of the Nasdaq purchaser’s common stock).

5% Affiliate Acquisition Rule. A Nasdaq acquirer must also seek shareholder approval of an acquisition where a related issuance of securities could result in an increase of over 5% (by number of shares or voting power) of outstanding common stock or voting power, if a director, executive officer or 5% shareholder of the acquirer has a 5% interest (or those insiders together have a 10% interest) in the target company.

Change-of-Control Transactions

Nasdaq requires shareholder approval for issuances or potential issuances of securities resulting in a change of control of the company.

• Annual Shareholders’ Meeting. Nasdaq requires a company to hold an annual shareholders’ meeting within one year of its fiscal year-end and to provide notice to Nasdaq of the meeting (which requirement can be met through SEC filings). At the annual meeting, shareholders must have the opportunity to discuss company affairs with management.

• Quorums. Nasdaq prohibits quorum provisions that require less than one-third of all outstanding shares of common voting
• Solicitation of Proxies. Nasdaq requires a company to solicit proxies, provide proxy statements for all shareholders’ meetings and send copies of the proxy solicitation to Nasdaq (which requirement can be met through SEC filings).

• Becoming aware of noncompliance with Nasdaq corporate governance standards;
• Establishing or materially amending a stock option plan, purchase plan or other equity compensation arrangement under which stock may be acquired by officers, directors, employees or consultants without shareholder approval;
• Issuing securities that may potentially result in a change of control;
• Issuing common stock or securities convertible into common stock in connection with the acquisition of another company, if any officer, director or 5% shareholder of the issuing company has a 5% or greater interest (or if such persons collectively hold a 10% or greater interest) in the target company or the consideration to be paid;
• Entering into a transaction that may result in the potential issuance of common stock (or convertible securities) greater than 10% of the outstanding common stock or the outstanding voting power on a pre-transaction basis;
• Having an increase or a decrease of 5% of the outstanding listed securities;
• Declaring a dividend or stock distribution;
• Reclassifying or exchanging listed securities or changing the par value;
• Undertaking a reverse stock split;
• Reincorporating;
• Changing the company’s general character or nature of business, address of principal executive offices, or corporate name or symbol; or
• Changing the transfer agent or registrar.

At its discretion, Nasdaq may request any additional documentation, public or nonpublic, it finds necessary to consider a company’s continued listing.

Material news includes information that would reasonably be expected to affect the value of a company’s securities or influence an investor’s decision to trade in the company’s securities. Categories of material news are very broad; generally, all significant events affecting the company, including its business, products, management, securities and finances, presumably merit prompt public disclosure consideration.

Exceptions to Nasdaq’s Disclosure Requirements

The exceptions to Nasdaq’s disclosure requirements soften the general mandate to always promptly publicly disclose material news. A listed company may delay announcement of material news if it is possible for the company to maintain confidentiality and immediate public disclosure would prejudice the company’s ability to pursue legitimate corporate objectives – the delay must not, however, give any investor an unfair information advantage. To take advantage of this exception, a company must keep the information confidential and remind those who possess the information of their obligation to refrain from trading on insider information.

The investor relations department and other responsible officers of a listed company will need to closely monitor the trading of its securities for unusual price or volume movements, and be prepared to make a public announcement if it becomes clear that confidential information has leaked. If Nasdaq detects unusual or suspicious trading activity in a company’s securities, Nasdaq’s MarketWatch Department may contact the company and require that it promptly and publicly disclose the information. In this case, Nasdaq may require a trading halt in the company’s securities until the public has time to absorb the information.

Procedures for Public Disclosure

Nasdaq permits its listed companies to disclose material information through any, or any combination of, Regulation FD– compliant methods. These methods include a broadly disseminated press release or a Form 8-K, as well as a conference call, press conference or webcast, provided that the public is given adequate prior notice (generally by press release) and access. In addition, with appropriate prior notice and disclosure regarding company public disclosure methods, a company’s websites and social media channels may also be adequate tools for public disclosure – although company website and social media disclosures are often coupled with more standard disclosure methods, particularly regarding very significant news. (We provide practical tips for making Regulation FD–compliant disclosures in Chapter 5.)

Nasdaq requires a listed company to notify Nasdaq’s MarketWatch Department usually at least ten minutes prior to the release of material information. (See the “What Is Material News?” Practical Tip earlier in this chapter for details on timing and material events.) For material disclosure not in written form (e.g., in a press release, Form 8-K or appropriate company website or social media disclosure), companies should provide prior notice to Nasdaq of the press release announcing the logistics of the future disclosure and a descriptive summary of the information to be announced.

Nasdaq encourages companies to provide prior notice of material news disclosures, even if not mandated, whenever the company believes, based on its knowledge of the significance of the information, that a temporary halt in trading may be appropriate. Nasdaq’s MarketWatch Department is required to keep nonpublic information confidential and use it only for regulatory purposes.

Trading Halts

Nasdaq requires advance notice of disclosures in part to help determine whether the material news justifies a trading halt in a company’s securities. A listed company can generally avoid a trading halt by broadly issuing the disclosure to the public with an adequate amount of time before market open.

When an issuer makes a significant announcement during trading hours, the exchange may require a trading halt to allow investors to gain equal access to information, fully digest the material news and consider its impact. A trading halt also alerts the market that material news has been released. Nasdaq determines when a trading halt is necessary and how long it should last, usually permitting trading to resume within 30 minutes after news is fully disseminated.

Automatic Cure or Compliance Period. As described earlier in this chapter, Nasdaq provides a cure period for a listed company’s failure to comply with some of its standards, such as various corporate governance standards related to the composition of the Board or its committees.

Deficiencies for Which a Company May Submit a Plan of Compliance. With some exceptions, Nasdaq may accept and review a plan to regain compliance when there is one or more of the following deficiencies:

• a quantitative deficiency from standards that do not provide a compliance period;
• a corporate governance deficiency regarding standards related to the composition of the Board or its committees where a cure period is not provided;
• a deficiency from various other standards, for example, some regarding shareholder meetings, review of related party transactions, shareholder approvals, a company’s code of conduct and shareholder voting rights;
• a failure to make the disclosure required by Nasdaq rules regarding arrangements between any of the company’s directors or director nominees and a third party, relating to compensation or other payment in connection with that person’s service or candidacy as a director of the company;
• a failure to file periodic financial reports required by the SEC; and
• a failure to meet a continued listing requirement of non-primary equity securities, such as debt securities (other than convertible debt) and exchange traded fund shares (ETFs).

A deficient company must provide the compliance plan generally within 45 calendar days, except for compliance plans with respect to failures to file periodic financial reports required by the SEC, which must be provided generally within 60 calendar days. There are notable exceptions to these time periods regarding compliance plans, including for a company’s deficiencies relating to bid price, market makers and market value.

Staff Delisting Determinations and Public Reprimand Letters. Specific types of deficiencies will immediately result in a Staff Delisting Determination, such as failure by a company to timely solicit proxies or if Nasdaq believes continued listing raises a public concern. When Nasdaq determines that a Staff Delisting Determination is an inappropriate sanction for a company that has violated a Nasdaq corporate governance or notification listing standard, it may instead issue a Public Reprimand Letter. This will depend on factors such as whether the violation was inadvertent, whether the violation materially adversely affected shareholders’ interests, whether the violation has been cured, whether the company reasonably relied on an independent advisor and whether the company has demonstrated a pattern of violations.

Nasdaq may issue a Staff Delisting Determination or a Public Reprimand Letter at its discretion after a cure or compliance period has expired, after Nasdaq reviews a compliance plan submitted by the company, or if a company does not regain compliance within the time period provided by Nasdaq.

Public Announcement of Notice. A company that receives a notification of deficiency, Staff Delisting Determination or Public Reprimand Letter is required to disclose that notice in a public announcement by (1) filing a Form 8-K (where required by SEC rules), (2) issuing a press release or (3) sometimes both, depending on the deficiency. Both actions are required if the deficiency is due to a failure to file periodic financial reports required by the SEC. The company should make the public announcement promptly and not more than four business days following receipt of the notification. If the company fails to timely make the required announcement, Nasdaq will halt trading of the company’s securities generally at least until the required information has been made public.

Appeals Process. Upon receiving a Staff Delisting Determination or a Public Reprimand Letter, a company may request in writing that the Hearings Panel review the matter in a written or an oral hearing. The Hearings Panel is an independent panel generally made up of two or more persons who have been authorized by the Nasdaq Board of Directors and who are not employees or otherwise affiliated with Nasdaq or its affiliates. After the Hearings Panel has issued a decision, the company may further appeal to the Nasdaq Listing and Hearing Review Council.