Deciding to list on The Nasdaq Stock Market (Nasdaq) brings with it the agreement to follow listing rules designed to achieve a strong standard of corporate governance, but a standard that is generally more flexible and accommodating to the needs of less mature companies than that of the NYSE. For example, Nasdaq provides an exceptional and limited circumstances exception permitting a non-independent director to serve on the Audit, Compensation or Nominating & Governance Committee. Larger or more mature Nasdaq companies will want to be familiar with, and consider generally following, the NYSE governance standards, as well as the expectations of ISS and other monitors of governance standards.

This chapter presents an overview of Nasdaq’s listing and corporate governance standards. Nasdaq’s requirements often mirror those imposed by the SEC, but are in fact independent obligations with separate ramifications if not met. Nasdaq companies need to satisfy both sets of requirements.

Listing Standards

Nasdaq imposes both quantitative (financial and public float) and qualitative (corporate governance) listing standards on its listed companies, both on initial listing and on a continuing basis.

Initial Listing Standards

A company electing to list its securities with Nasdaq will be indexed according to a three-tier classification system: The Nasdaq Global Select Market®; The Nasdaq Global Market®; and The Nasdaq Capital Market®. The initial listing standards for each of these markets are different, and are generally based on a company’s financial metrics. Nasdaq provides at least three different alternatives for meeting the initial listing standards for each of these markets. These initial listing standards are set forth in Appendix 5.

Trap for the Unwary
Heightened Requirements for Companies Going Public Through Reverse Mergers

Under applicable standards, companies formed through a reverse merger with a public shell company generally are eligible for initial Nasdaq listing only if the combined company has, in addition to satisfying all of Nasdaq’s other relevant initial listing standards:

•   Immediately prior to applying, traded for at least one year on the U.S. over-the-counter market, another national securities exchange or a regulated foreign exchange;

•   Timely filed with the SEC or other appropriate regulatory authority all required periodic financial reports for the prior year, including at least one annual report containing audited financial statements for a full fiscal year; and

•   Maintained a closing price of $4 per share or higher for a sustained period of time, but in no event for less than 30 of the 60 trading days immediately preceding both the filing of its listing application and Nasdaq’s approval of the application.

There are some limited exceptions to these additional requirements that you can discuss with your counsel and a Nasdaq representative, if needed.

Continued Listing Requirements

Nasdaq requires that its listed companies continue to meet minimum quantitative and qualitative standards to remain listed. These 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; they are set forth in Appendix 5. A company’s failure to meet its listing standards over a specified period of time may trigger a Nasdaq delisting procedure and the removal of a company’s securities from the applicable Nasdaq market or a move to a different Nasdaq market.

Practical Tip:
New to Nasdaq? A Little Time to Get Up to Speed

Is your company just going public, or is it transferring from another exchange? If so, you may have a grace period before being subject to some of Nasdaq’s corporate governance standards.

IPO Companies. If your company is listing in connection with its IPO, it will be allowed to phase in Nasdaq committee composition requirements. For each of the Audit, Compensation and Nominating & Governance Committees formed, your company generally must have:

  • One independent member at listing;
  • A majority of independent members (and the Audit Committee must have at least two independent members) within 90 days of listing; and
  • All fully independent members (and the Audit Committee must have at least three independent members) within one year.

The exceptional and limited circumstances exception, allowing one non-independent director up to two years on a committee, is most useful at the time of an IPO – in part because institutional shareholders may have more patience during the Board’s transition to a truly independent Board – although investor expectations will usually influence the make-up and independence of the Board and its committees at listing. Still, a Board may choose not to form an independent Nominating & Governance Committee and instead rely on a majority of independent directors to discharge this Committee’s responsibilities, but either way, a company will be required to meet the requirement of a majority of independent Board members within one year of listing.

Transferred Companies. For a company transferring from another exchange or market to Nasdaq (e.g., from the NYSE to Nasdaq), Nasdaq has special rules governing the phase-in period of its corporate governance requirements. Generally, if the exchange or market from which a company is transferring did not have the same requirements as Nasdaq, the transferring company has one year from the date of transfer in which to comply with the applicable Nasdaq requirements. If the exchange or market from which the company is transferring had substantially similar requirements, the company is afforded the balance of any grace period provided by the other exchange or market (other than for Audit Committee requirements, unless a transition period is available under Rule 10A-3 under the 1934 Act).

Nasdaq Corporate Governance Standards

Nasdaq corporate governance standards parallel the NYSE’s standards in many respects, but provide greater flexibility for a less mature company. However, Nasdaq companies find that institutional investors still expect a high standard of corporate governance, sometimes looking with disfavor on companies that, for example, use the exceptional and limited circumstances exception to include a non-independent director on an otherwise independent Compensation Committee.

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.

Practical Tip:
Controlled Companies Are Exempt From Independence Requirements

Does an individual, group or other entity own more than 50% of the voting power of your company’s securities? If so, your company may be a controlled company that does not need to have:

•   A Board consisting of a majority of independent directors;

•   A Compensation Committee, generally composed of two or more independent members; or

•   A Nominating & Governance Committee, generally made up of independent members (or independent directors making nomination decisions).

A controlled company must continue to comply with Nasdaq’s requirement for an independent Audit Committee and other Audit Committee rules. And the independent directors must hold regular executive sessions. Otherwise, Nasdaq’s corporate governance burdens are reduced. A controlled company must disclose its controlled company status in its annual proxy statement, as well as explain the basis for its status.

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 7.)

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 under the 1934 Act. These requirements provide that Audit Committee members cannot:

  • Receive any payment from the company other than for Board or Committee service; or
  • Be an affiliated person of the company or any subsidiary. (We discuss these Sarbanes-Oxley Audit Committee independence requirements in Chapter 7.)

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 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 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’s approval.

Trap for the Unwary
Use Exceptional and Limited Circumstances Exception From Independence With Great Care

Nasdaq permits a director who is not independent under Nasdaq criteria to serve on an Audit, Compensation or Nominating & Governance Committee for up to two years under its exceptional and limited circumstances exception, but Boards should be aware of important limits to this exception’s usefulness.

First, take the temperature of your shareholders before using this exception. Many institutional investors look with great disfavor on non-independent core committee members, particularly for the Audit and Compensation Committees. These investors may let you know that they will vote against those directors or against an entire Board slate that uses the exception without a very good reason (or at least one they do not agree with).

Second, separate and apart from Nasdaq, various regulations may make it cumbersome to use this exception. For example, Sarbanes-Oxley requires all public company Audit Committee members to be independent under the Sarbanes-Oxley definition. As we detail in Chapter 7, Sarbanes-Oxley has only two criteria for independence (but they do cover many potential relationships): no compensation from the company whatsoever other than for Board or committee service and no affiliate status, that is, a director who controls, is controlled by, or is under common control with the listed company (or an officer or director of another company that is an affiliate of the listed company). Also, regarding the Compensation Committee, the usual desire under the Internal Revenue Code and the 1934 Act to have “outside directors” and “nonemployee directors” approve certain compensation arrangements and option and share grants makes a fully independent Compensation Committee far more practical than having an appropriate subset of the Compensation Committee act on compensation. Further, as we discuss in Chapter 5, the Dodd-Frank Act requires enhanced executive compensation disclosure as well as a shareholder vote on executive compensation (Say-on-Pay), and a fully independent Compensation Committee gives shareholders additional comfort regarding a company’s compensation practices and may help a company avoid an unfavorable Say-on-Pay shareholder vote.

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 the 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 7.)

Audit Committee Charter. A Nasdaq-compliant written Audit Committee charter will detail the responsibilities and authority of the Audit Committee, including those established in Rule 10A-3 under the 1934 Act. Nasdaq 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. (We discuss other common duties of the Audit Committee in Chapter 7.)
  • Receive Adequate Funding to Meet Responsibilities. Be provided with 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 Audit Committee’s duties.

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 proxy disclosure, 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 5.)

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 directors. In some circumstances, however, a Nasdaq company may avail itself of the exceptional and limited circumstances exception to this independence requirement if it has three or more members. Heightened Independence Standards for Compensation Committee Members. Similar to Audit Committee members, Nasdaq requires its companies’ Compensation Committee members to meet enhanced independence standards to go along with Nasdaq’s general independence requirements. In determining independence for Compensation Committee service, the Board must consider all factors relevant to determining whether the director has a relationship to the company that materially affects that director’s ability to be independent from management in connection with Committee service, including:

  • Source of the director’s compensation, including any consulting, advisory or other compensatory fee received from the company (directly or indirectly); and
  • Status of the director’s affiliation with the company, a subsidiary or an affiliate of a subsidiary.

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

  • Responsibilities and Authority. Describes specific responsibilities and authority, including the Committee’s ability, at its discretion, to obtain advice of compensation consultants, legal counsel or other advisors, for whom it will be directly responsible for appointment, compensation (which the company will fund) and oversight of work.
  • Scope of Responsibilities. Provides scope and execution of the Committee’s responsibilities, 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 company’s CEO and other executive officer compensation, including requiring the CEO’s absence during voting or deliberation on CEO compensation.
  • Annual Self-Evaluation. Requires annual assessment of the Committee’s performance.

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.

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).

Limited Requirements for Smaller Reporting Companies. Nasdaq provides relief regarding Compensation Committee requirements for a company that qualifies as a “smaller reporting company” for SEC filing purposes. These companies must certify that they have and will continue to have a Committee meeting the composition requirements described above and a written charter or a Board resolution addressing the Committee’s scope of responsibilities and the review of CEO and other executive officer pay.

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 by a majority of independent directors (in 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.

A Nasdaq company with a Nominating & Governance Committee will need to have its Board 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.

Code of Conduct

A core component of a Nasdaq company’s good governance framework is to adopt and make publicly available a code of conduct that covers all its directors, officers and employees. Nasdaq requires that the code of conduct be in compliance with the code of ethics that Sarbanes-Oxley requires. 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. 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 noncompliance (whether there is an automatic cure period or not) by the company with Nasdaq’s corporate governance standards.

Shareholder Approval

Nasdaq requires shareholders to approve specified key corporate actions by a majority of the votes cast.

Stock Compensation Plans

Nasdaq generally requires that shareholders approve both new equity-based compensation plans or arrangements, whether or not officers and directors can participate, and material amendments to those types of existing plans or arrangements.

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 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 issuance (other than in a public offering) that may exceed 20% of the outstanding common stock or the outstanding voting power, if the issuance is priced below the greater of the stock’s book or market value (sales by officers, directors and 5% shareholders will be combined with the company’s issuance in determining whether the 20% threshold has been met). 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 (and this acquisition-related approval triggers a 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 that results in the issuance of over 5% (by number of shares or voting power) of outstanding common stock if a director, executive officer or 5% shareholder of the acquirer has a 5% (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.

Trap for the Unwary
Shareholder Voting Rights – Keep It Proportional (Usually Anyway)!

In general, the voting rights of a Nasdaq company’s current common shareholders cannot be disproportionately reduced or restricted through any corporate action or issuance, such as through capped or time-phased voting plans, issuance of super-voting stock or exchange of common stock for common stock with fewer voting rights per share. It is important to note, however, with regard to issuance of supervoting stock, that this restriction is primarily intended to apply to issuance of new classes of stock, so companies with existing dual-class capital structures generally are permitted to continue to issue any existing super-voting stock without conflict.

That said, a Nasdaq company (whether dual-class or not) that wishes to enter into an arrangement that may disproportionately affect the voting rights of its current common shareholders (through stock issuance or otherwise) should carefully consider consulting with its Nasdaq representative early in the proposed transaction process, because even shareholder approval of the proposed transaction does not make it permissible without a prior “green light” from Nasdaq.

Additional Corporate Governance Standards

Nasdaq companies must comply with a number of additional corporate governance standards. Four critical ones are:

  • Registered Auditor. Nasdaq requires a company to be audited by an auditor registered with the Public Company Accounting Oversight Board (PCAOB).
  • 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 applicable SEC filings).
  • Quorums. Nasdaq prohibits quorum provisions that require less than one-third of all outstanding shares of common voting stock.
  • 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 applicable SEC filings).

Breaking News:
Nasdaq to Adopt Listing Standards That Mandate “Clawback” Policies

The Dodd-Frank Act requires the SEC to adopt rules requiring Nasdaq and other national securities exchanges to establish rules requiring listed companies to adopt and implement “clawback” policies to recover certain incentive-based compensation paid to current and former executives in the three years preceding a financial restatement that was made due to material noncompliance with financial reporting requirements. The clawback would apply even in the absence of misconduct on the part of the executive. As of September 2015, the SEC had not taken final action regarding adoption of these rules and Nasdaq had not adopted any related rules.

Keep Nasdaq Informed! Notices and Forms

Nasdaq asks that listed companies notify, and provide supporting documentation to, Nasdaq and, in some cases, file a Listing of Additional Shares form or other relevant form, at or prior to many corporate actions, including the following:

  • 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;
  • Declaring a dividend or stock distribution;
  • Reclassifying or exchanging securities or changing the par value of stock;
  • Undertaking a reverse stock split;
  • Reincorporating;
  • Causing any change in the number of outstanding shares greater than 5%;
  • Changing the company’s general character or nature of business, address of principal executive offices or corporate name; 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.

Disclosure of Material News

Nasdaq, like the NYSE, generally requires a listed company to promptly and publicly disclose any material news or information that might affect the market for its securities. This obligation exists side by side with securities law and SEC obligations, and results in an affirmative company disclosure obligation – with a variety of exceptions.

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.

Practical Tip:
What Is Material News?

Nasdaq provides examples of material news, similar to the SEC’s list of possible material information that we set out in Chapter 3, that serve as a useful guide for determining whether news merits public disclosure. Nasdaq companies must notify Nasdaq’s MarketWatch Department usually at least ten minutes prior to the release of the following types of material information:

  • Financial disclosures, including quarterly and yearly earnings, earnings restatements, preannouncements and earnings guidance;
  • Corporate reorganizations and acquisitions, including mergers, tender offers, asset transactions and bankruptcies or receiverships;
  •  New major products or discoveries, or significant developments regarding customers or suppliers;
  • Senior management changes of a material nature or a change of control;
  • Resignation or termination of independent auditors, or withdrawal of a previously issued audit report;
  • Events regarding the company’s securities, for example, defaults on senior securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to the rights of security holders or public or private sales of additional securities;
  • Significant legal or regulatory developments; and
  • Any event requiring the filing of a Form 8-K.

Chapter 3 provides a list of other factors that may help your company determine when news merits public disclosure.

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, and so long as no investor has an unfair information advantage. To take advantage of this, a company must keep the information confidential and remind persons 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.

Practical Tip:
Rumors: Where There’s Smoke . . . Don’t Get Burned!

A Nasdaq company needs to carefully guard confidential information to prevent rumors that originate from company sources from circulating. Nasdaq specifies that if unusual market activity or rumors indicate that investors are aware of current actions or impending events, your company may be required to make a clear public announcement regarding the state of negotiations or the development of corporate plans in the rumored area. This disclosure may be required even if your Board has not yet taken up the matter for consideration.

If the rumors are false, your company may need to issue a press release publicly denying or clarifying the false or inaccurate information. This statement must obviously be truthful and not omit material information necessary to prevent the disclosure from being misleading.

Because a premature public announcement, including that triggered by rumors, can jeopardize proposed plans, careful monitoring of confidential information, and of rumors, can protect a critical corporate initiative.

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 and Form 8-K, as well as a conference call, press conference or webcast, provided that the public is given adequate 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 3.)

Nasdaq requires a listed company to notify Nasdaq’s Market-Watch Department usually at least ten minutes prior to the release of material information referenced in its list of material events. (See the list in the “What Is Material News?” Practical Tip earlier in this chapter.) 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 in a 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 Market-Watch 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 in order to 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 or after trading hours.

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 understand 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.