In addition to quantitative requirements, companies that apply to list and that are listed on The NASDAQ Stock Market must comply with certain qualitative or corporate governance requirements. This section briefly highlights some of the most frequently asked questions arising from these requirements. However, for complex issues or transactions, the company should contact its Listing Qualifications analyst directly to discuss these requirements in further detail or submit a request for written interpretation. NASDAQ publishes summaries of previously issued letters of interpretation. See Staff Interpretative Letters for further information.

Applicable Rules: Marketplace Rules 4200, 4350, 4351, 4360.and interpretative materials thereunder.

Annual Shareholder Meetings

Must a NASDAQ company hold an annual shareholder meeting?
Yes. Rule 4350(e) requires that each issuer listing common stock or voting preferred stock, and their equivalents, shall hold an annual meeting of shareholders.

Are any companies not subject to the annual meeting requirement?
Pursuant to IM-4350-8, the requirement to hold an annual meeting is not applicable as a result of an issuer listing the following types of securities: securities listed pursuant to Rule 4420(f) (such as Trust Preferred Securities and Contingent Value Rights), unless the listed security is a common stock or voting preferred stock equivalent (e.g., a callable common stock); Portfolio Depository Receipts listed pursuant to Rule 4420(i); Index Fund Shares listed pursuant to Rule 4420(j); and Trust Issued Receipts listed pursuant to Rule 4420(l). Notwithstanding, if the issuer also lists common stock or voting preferred stock, or their equivalent, the issuer must still hold an annual meeting for the holders of that common stock or voting preferred stock, or their equivalent.

Is a company required to hold an annual shareholder meeting even if the only listed security is non-voting common stock?
Yes. A company that lists only non-voting common stock on NASDAQ is required to hold an annual meeting.

When must a company hold its annual shareholder meeting?
A company must hold its annual shareholder meeting no later than 12 months following the end of its fiscal year. Please note, however, that most companies hold their annual meeting within six months of their fiscal year-end.

My company recently listed on NASDAQ. When must we hold our first annual meeting?
A new listing that was not previously subject to a requirement to hold an annual meeting is required to hold its first meeting within one-year after its first fiscal year-end following listing. This includes both initial public offerings and companies that are already public at the time of application to NASDAQ. Of course, NASDAQ's meeting requirement does not supplant any applicable state or federal securities laws concerning annual meetings.

What is the effect of a change in a company's fiscal year-end on its annual shareholder meeting requirement?
Whether an annual shareholder meeting is required when a company changes its fiscal year-end depends on the treatment of the transition period under SEC Rules 13a-10 and 15d-10. In general, if the company files a transition report with audited financials for the new fiscal year-end, it must hold an annual meeting for this transition period within one year of the transition period end date. Otherwise, the company need not hold a separate annual meeting for the transition period, but should include the transition period in its next annual meeting.

Can the annual shareholder meeting be held via the web?
NASDAQ permits the use of webcasts instead of, or in addition to, a physical meeting, provided such webcasts are permissible under the relevant state law. It is important, however, that shareholders have the opportunity to ask questions of management.

Certification

Are companies required to submit a Corporate Governance Certification Form annually?
No. After the initial certification, an updated certification form is required only if a change in the company's status results in the prior certification no longer being accurate. For example, if a company indicated on its certification that it was not subject to a requirement because it was a controlled company, that company must submit a new form if it ceases to be a controlled company. Similarly, a foreign private issuer that relied on an exemption in its certification would have to file a new certification if the company ceased to be a foreign private issuer.

Code of Conduct

Was disclosure required of a waiver to the Code of Conduct granted to an officer or director before the May 4, 2004 effective date for Marketplace Rule 4350(n)?
If the pre-existing waiver related to a matter concluded before May 4, 2004, then disclosure was not required. If the waiver relates to a matter not concluded by such date or to an ongoing matter without a specific end-date, then disclosure is required, notwithstanding the fact that the waiver was granted prior to the effective date of the Rule. In view of the potential for company confusion as to the applicability of the disclosure requirement to pre-existing waivers, companies were afforded up to June 15, 2004 to disclose waivers to officers and directors that preceded May 4, 2004.

What disclosure is required for a waiver to the Code of Conduct for an officer or director that extends beyond one year?
For on-going matters or matters extending beyond one year, disclosure is required at least annually.

Distribution of Annual & Interim Reports

Are NASDAQ-listed companies required to provide annual reports to their shareholders?
Yes. Under Marketplace Rule 4350(b), each issuer shall make available to shareholders an annual report containing audited financial statements of the company and its subsidiaries, which, for example, may be on Form 10-K, 20-F, 40-F or N-CSR.

May a listed company satisfy NASDAQ's annual report requirement by posting a copy of the report on its website?
Yes. An issuer may comply with this requirement either: (i) by mailing the report to shareholders, or (ii) by posting the annual report to shareholders on or through the company's website (or, in the case of an issuer that is an investment company that does not maintain its own website, on a website that the issuer is allowed to use to satisfy the website posting requirement in Exchange Act Rule 16a-3(k)), along with a prominent undertaking in the English language to provide shareholders, upon request, a hard copy of the company's annual report free of charge. An issuer that chooses to satisfy this requirement via a website posting must, simultaneous with this posting, issue a press release stating that its annual report has been filed with the Commission (or other appropriate regulatory authority). This press release must also state that the annual report is available on the company's website and include the website address and that shareholders may receive a hard copy free of charge upon request. An issuer must provide such hard copies within a reasonable period of time following the request.

When does NASDAQ require that the annual report be available?
NASDAQ does not have a requirement as to when the annual report be made available. However, SEC rules provide deadlines for filing an annual report with the Commission and also require that the annual report be provided to shareholders before the company's annual meeting.

Does NASDAQ define the term "reasonable period of time" for purposes of an issuer responding to a shareholder's request for a hard copy of the annual report?
No. Issuers are encouraged, however, to use as a guideline the SEC's requirements for responding to a shareholder's request for a hard copy of the proxy materials. Under these requirements, issuers are generally required to respond within 3 business days. .

Is a company required to send a copy of its annual report to NASDAQ?
An issuer is required to file with NASDAQ all documents that are required to be filed with the SEC. This requirement is fulfilled if the issuer files the document through EDGAR. If the annual report is not filed with the SEC, or is filed with the SEC but not via EDGAR, the company must provide to NASDAQ a hard copy of the report.

Are companies required to provide NASDAQ with the "glossy" version of their annual report?
No. Companies are not required to provide NASDAQ with the "glossy" annual report if the company has otherwise fulfilled its obligation to provide NASDAQ with a copy of its Form 10-K (or equivalent) for the same period. This obligation is considered fulfilled if the Form 10-K (or equivalent) is filed with the SEC through EDGAR. .

Are NASDAQ-listed companies required to distribute interim reports to their shareholders?
While a company is not required to distribute interim reports to its shareholders, pursuant to Rule 4350(b), it must make these reports available to shareholders. Thus, if a shareholder requests a copy of the interim report, the company is required to provide a copy.

Is the interim report considered to have been made available for purposes of Rule 4350(b) if it is posted on the issuer's website?
Posting an interim report on the issuer's website is not sufficient to comply with this requirement. As is the case with the annual report, an issuer must also send a hard copy of the interim report to any shareholder upon request. .

Are the requirements different for a foreign private issuer that does not file interim reports?
Pursuant to Rule 4350(b)(4), all foreign private issuers must publish in a press release, which would also be submitted on a Form 6-K, an interim balance sheet and income statement as of the end of its second quarter. This information, which must be presented in English but does not have to be reconciled to U.S. GAAP, must be provided not later than six months following the end of the issuer's second quarter.

Does a company have to provide NASDAQ with a copy of its interim reports?
Yes, however if the company files its interim report with the SEC via EDGAR, it has fulfilled its filing obligation with NASDAQ and does not need to provide a paper copy to NASDAQ. If the interim report is not filed with the SEC, or is filed with the SEC but not via EDGAR, the company must provide a copy to NASDAQ on or before the date it is required to be filed with the SEC or other appropriate regulator.

Is a NASDAQ-listed company required to disclose the receipt of a "Going Concern" opinion from its independent auditors in the financial statements contained in the Form 10-K (or its equivalent)?
Yes. A company that receives an audit opinion in which the auditor expresses doubt about the company's ability to continue as a going concern for a reasonable period of time must make a public announcement through the news media disclosing the receipt of such qualification. Prior to the release of the public announcement, the company must provide the text of the public announcement to NASDAQ's MarketWatch. The public announcement should be provided to MarketWatch and released to the media not later than seven calendar days following the filing of such audit opinion in a public filing with the SEC (or comparable regulator).

What are the requirements for Transitional Reports?
A Transitional Report occurs when a company changes its fiscal year. The Transitional Report covers the period of time between a company's most recently completed fiscal year end date and the newly determined fiscal year end date. For example, a company's fiscal year end was June 30, 2007. On August 31, 2007, the company determined to change its fiscal year end date to December 31, 2007. The transition period covers July 1, 2007 though December 31, 2007. The next full fiscal year covers January 1, 2008 to December 31, 2008. The timing and content of Transitional Reports must comply with SEC (or comparable regulatory) requirements. Companies with questions concerning these requirements should contact the NASDAQ Listing Qualifications.

Foreign Companies

How do the corporate governance requirements of Marketplace Rule 4350 apply to foreign private issuers?
NASDAQ's corporate governance requirements generally apply to foreign private issuers. However, Marketplace Rule 4350(a)(1) permits foreign private issuers to follow home country governance practices in lieu of certain NASDAQ requirements. A foreign private issuer that elects to follow home country practice in lieu of a requirement of Rule 4350, must submit to NASDAQ a written statement from an independent counsel in its home country certifying that the company's practices are not prohibited by home country law. This letter is required only once, either at the time of initial listing, or prior to the time the company first adopts a non-conforming practice.

All foreign private issuers must comply with those requirements of Rule 4350 that are mandated by U.S. securities laws and regulations. As such, all foreign private issuers are still required to comply with the audit committee requirements of Rule 10A-3 under the Securities Exchange Act of 1934. All foreign private issuers must also continue to comply with the listing agreement requirement, the requirement to promptly notify NASDAQ of material non-compliance, and the requirement to disclose receipt of a going concern opinion.

A foreign private issuer relying on an exemption must disclose in its annual reports filed with the Securities and Exchange Commission, or on its website, each requirement of Rule 4350 that it does not follow and the alternative home country practice it does follow. In addition, a foreign private issuer making its initial public offering or first U.S. listing on NASDAQ must disclose any such practices in its registration statement. If the disclosure is made only on the website, the annual report and registration statement should so state and provide the web address at which the information may be obtained.

How do the corporate governance requirements of Marketplace Rule 4350 apply to foreign companies that are not foreign private issuers?
Foreign companies that are not foreign private issuers are not eligible to receive exemptions from NASDAQ's corporate governance requirements and must comply with all provisions of Marketplace Rule 4350.

What is the definition of "home country"?
The term, "home country", is defined in the General Instructions of Form 20-F. Thus, "home country" means the jurisdiction in which the company is legally organized, incorporated or established and, if different, the jurisdiction where it has its principal listing.

How does a foreign private issuer utilize the provisions of Marketplace Rule 4350(a)?
A foreign private issuer that elects to follow home country practice in lieu of a requirement of Rule 4350 must submit to NASDAQ a written statement from an independent counsel in such company's home country, certifying that the company's practices are not prohibited by the home country's laws. This letter is required only once. In the case of new listings, this certification is required at the time of listing. For companies that are currently listed, the certification is required no later than the time the company seeks to adopt its first non-compliant practice. The letter to NASDAQ does not have to be specific with regard to the particular subparagraph of Rule 4350 for which the exemption will be utilized, however, the required disclosure must be specific.

Can NASDAQ provide an example of the letter that should be sent to NASDAQ from the Company's home country counsel?
Here is a sample letter:

Dear:

We are HOME COUNTRY independent counsel to COMPANY, which is incorporated in HOME COUNTRY. Pursuant to Marketplace Rule 4350(a)(1), we hereby inform you that COMPANY has elected to follow HOME COUNTRY practices in lieu of the requirements of Marketplace Rule 4350 with the exception of those rules which are required to be followed pursuant to the provisions of Rule 4350(a)(1). COMPANY's practices with regard to these requirements are not prohibited by HOME COUNTRY law.

As required by Rule 4350(a)(1), COMPANY will disclose in its Form 20-F, or on its website, each requirement of Rule 4350 that it does not follow and describe the home country practice followed in lieu of such requirements.

Sincerely,

If a foreign private issuer received an exemption from NASDAQ under NASDAQ's prior exemptive rules, is it required to submit a letter relating to its non-conforming practices?
No. Such a company may continue to rely on previously granted exemptions and need not submit a letter, unless it determines to adopt another non-conforming practice. A company may not, however, rely on a previously granted exemption if the listing requirement to which the exemption applies was changed after the exemption was provided.

A company relying on a prior exemption from NASDAQ is still required to disclose in its annual reports filed with the Securities and Exchange Commission each requirement of Rule 4350 that it does not follow and the alternative home country practice it does follow.

If a foreign company that is not a foreign private issuer was previously granted an exemption, can it continue to rely on the exemption?
Any such exemption is valid only through July 31, 2005, by which time the company must be in full compliance with Marketplace Rule 4350.

What if a company that is relying on an exemption or is utilizing the non-conforming practices provision of Marketplace Rule 4350(a) does not provide the required disclosure?
A company that fails to comply with the disclosure requirement would not be in compliance with NASDAQ's listing requirements and would be subject to delisting unless the failure is promptly cured. Generally, this deficiency could be cured by making the required disclosure in an amended Form 20-F or Form 40-F. Disclosure by means of a press release or Form 6-K does not satisfy this requirement.

Are there provisions of Marketplace Rule 4350 with which a foreign private issuer must comply?
Yes. A foreign private issuer must comply with those requirements of Rule 4350 that are mandated by U.S. securities laws and regulations. Thus, all foreign private issuers are required to comply with the audit committee requirements of Rule 10A-3 under the Securities Exchange Act of 1934. All foreign private issuers must also comply with the listing agreement requirement, the requirement of prompt notification of material non-compliance, and the requirement to disclose receipt of a going concern opinion.

Are foreign private issuers required to comply with NASDAQ's voting rights requirements, set forth in Marketplace Rule 4351 and Interpretative Material 4351?
In accordance with Marketplace Rule 4351 and IM-4351, NASDAQ will accept any action or issuance relating to the voting rights structure of a non-U.S. company that is either in compliance with The NASDAQ Stock Market's requirements for domestic companies or that is not prohibited by the company's home country law.

How does NASDAQ evaluate the security-specific initial and continued inclusion requirements with respect to American Depositary Receipts or American Depositary Shares (ADRs or ADS)?
Pursuant to Marketplace Rule 4320(e), NASDAQ will look to the underlying security when determining whether the ADRs or ADS qualify for initial or continued listing. For example, in calculating the market value of listed securities, NASDAQ will include the value of all ordinary securities listed on the company's home market, not just the value of the ADRs or ADS.

Independent Directors & Audit Committee Composition

Must a company obtain approval from NASDAQ in order to utilize the "exceptional and limited circumstances" according to Marketplace Rule 4350(d)(2)(B)?
No, a company may choose to rely on the exception without getting NASDAQ's approval. Of course, the company must make the disclosure required by the Rule in its next proxy statement.

What notification is required to be given to NASDAQ if a company no longer complies with the audit committee requirement of Marketplace Rule 4350(d)?
Marketplace Rule 4350(m) requires that a company provide NASDAQ with "prompt notification" after an executive officer of the company becomes aware of any material noncompliance by the company with the requirements of Rule 4350. In addition, the listing agreement that all NASDAQ listed companies have signed requires a company to "promptly notify NASDAQ in writing of any corporate action or other event which will cause the company to cease to be in compliance with the NASDAQ … eligibility requirements.

Does an option awarded for consulting service contribute to the $100,000 limit in Rule 4200(a)(15)(B)?
Yes. The option would have to be valued using a commonly accepted option pricing formula, such as the Black-Scholes or binomial model at the time of grant. This valuation is considered a payment upon grant even if the option does not immediately vest or if there are conditions to vesting or exercise.

Quorum

What is NASDAQ's minimum quorum requirement?
Under Rule 4350(f), each company must provide for a quorum as specified in its by-laws for any meeting of the holders of common stock; provided, however, that in no case can such quorum be less than 33 1/3 percent of the outstanding shares of the company's common voting stock.

In the case of a company having multiple classes of voting common stock, should the quorum be based on the number of shares or the number of votes present?
In the case of a company having multiple classes of voting common stock, NASDAQ will accept a quorum based on the presence of either a percentage of the outstanding shares or a percentage of the outstanding votes.

Proxy Filing & Solicitation

Are NASDAQ-listed companies required to solicit proxies for shareholder meetings?
Yes. Under Marketplace Rule 4350(g), each company is required to solicit proxies and provide proxy statements for all shareholder meetings. It must also provide copies of its proxy solicitation to NASDAQ. If the company files its proxy statement via EDGAR, it has fulfilled its notification requirement with NASDAQ. However, an exception is available to non-U.S. companies when the proxy solicitation requirement is contrary to law, rule, regulation or generally accepted business practice in the company's home country. See Foreign Companies FAQs.

Can a company provide an information statement instead of a proxy statement in connection with its annual shareholder meeting?
Yes, a company may provide an information statement instead of a proxy statement in connection with its annual shareholder meeting, provided it is in full compliance with any applicable law, rule or regulation, including SEC regulations 14A and 14C. The company is still required to hold an annual meeting pursuant to Rule 4350(e).

Does a company need to file a hard copy of its proxy statement with NASDAQ?
A company that files proxy statements via EDGAR does not need to provide a hard copy to NASDAQ. A company that does not file via Edgar must send a hard copy of its proxy statement to NASDAQ Listing Qualifications.

Does NASDAQ permit the use of Electronic Media to solicit proxies?
Yes, a company can use Electronic Media to solicit proxies subject to the requirements of the SEC. .

Related Party Transactions

What is a related party transaction?
A related party transaction is a transaction required to be disclosed pursuant to SEC Regulation S-K, Item 404, Regulation S-B, Item 404, or Form 20-F, Item 7.B, as applicable.

What is NASDAQ's requirement regarding related party transactions?
Under Rule 4350(h), each company must conduct appropriate review and oversight of all related party transactions for potential conflict of interest situations on an ongoing basis by the audit committee or another independent body of the board of directors.

Do related party transactions have to be approved by the audit committee or a comparable body?
Related party transactions must be reviewed, but the rule does not require such transactions to be approved by the audit committee or a comparable body. Please note that SEC rules relating to executive compensation and related party disclosure require a company to disclose its policies and procedures regarding related party transactions.

Do related party transactions have to be reviewed in advance?
The rule does not require that the review take place prior to the transaction. Accordingly, subsequent review is acceptable.

What is considered a "comparable body of the board of directors" for review of related party transactions?
NASDAQ considers a "comparable body of the board of directors" to be any committee comprised solely of independent directors. For example, a company might have a "conflicts" committee.

Shareholder Approval - Acquisitions

Is shareholder approval required for an acquisition of stock or assets of another company?
Yes. Pursuant to Marketplace Rule 4350(i)(1)(C), shareholder approval may be required if any director, officer or 5% or greater shareholder has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction(s) and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in outstanding common stock or voting power of 5% or more.

In addition, shareholder approval is required for an acquisition of stock or assets of another company if the present or potential issuance of common stock or securities convertible into or exercisable for common stock, other than a public offering for cash, may exceed 20% of the voting power or the total shares outstanding on a pre-transaction basis.

Would NASDAQ consider the effect of an "earn-out" or similar provision when calculating the maximum potential share issuance in connection with the acquisition of stock or assets of another company?
Yes. Since "earn-out" provisions can result in future issuances of shares if certain targets are met, such as earnings or revenue, NASDAQ will include the shares which could be issued under such provisions in determining whether the potential share issuance associated with an acquisition can exceed the shareholder approval thresholds.

What factors does NASDAQ consider when determining whether to aggregate the shares issued in separate acquisition transactions for purposes of determining whether the threshold for shareholder approval has been triggered?
NASDAQ will consider factors including, but not limited to, the following when determining whether acquisitions should be aggregated for purposes of the shareholder approval requirement:

• Timing of the acquisitions;
• Commonality of ownership of the target companies;
• Commonality of officers and directors in target companies; and,
• Existence of any contingencies between or among the transactions.

When a company completes a private placement to finance an acquisition, is the analysis of whether shareholder approval is required made, pursuant to Rule 4350(i)(1)(D), the private placement rule, or Rule 4350(i)(1)(C), the acquisition rule?
If a private placement is consummated in close proximity to the acquisition of stock or assets, NASDAQ may determine that the private placement financed the acquisition, and thus the private placement shares would be aggregated with any other shares issued in connection with the acquisition in determining whether the threshold has been or will be exceeded. In making this determination, NASDAQ will consider the particular facts and circumstances including, but not limited to:

• The proximity of the financing to the acquisition;
• The stated use of the proceeds;
• The timing of board authorization for the financing and the acquisition, respectively; and
• Any stated contingencies in the financing or acquisition documents, which relate the transactions to one another.

However, any portion of the private placement proceeds specifically designated for uses other than the acquisition would be evaluated under the private placement rule.

Does NASDAQ require a company to file a Listing of Additional Shares Form in connection with an acquisition?
A company is required to file a Listing of Additional Shares ("LAS") Form when issuing any common stock (or securities convertible into common stock) in connection with acquisition of stock or assets of another company if any officer or director or substantial shareholder of the company has a 5% or greater interest (or if such persons collectively have a 10% or greater interest) in the company to be acquired or in the consideration to be paid.

Additionally, companies are required to file an LAS Form when entering into any transaction that may result in the potential issuance of common stock (or securities convertible into common stock) greater than 10% of either the total shares outstanding or the voting power outstanding on a pre-transaction basis.

If the shares issued in connection with the acquisition are priced at or above the market value on the date the agreement is entered into, does the company still need shareholder approval?
Yes. There is no pricing test under the acquisition rule. Therefore, if the potential share issuance will exceed the shareholder approval thresholds, shareholder approval is required regardless of the price at which the shares are issued.

Shareholder Approval - Alternative Outcomes & Defective Share Caps

What is an alternative outcome?
Pursuant to IM-4350-2, an alternative outcome is a change in a transaction that occurs as a result of the outcome of a shareholder vote. For example, a company issues a convertible preferred stock or debt instrument that provides for conversions of up to 20% of the total shares outstanding with any further conversions subject to shareholder approval. However, the terms of the instrument provide that if shareholders reject the transaction, the coupon or conversion ratio will increase or the company will be penalized by a specified monetary payment. Likewise, a transaction may provide for improved terms if shareholder approval is obtained. Generally, any change in the terms of transaction that occurs as a result of a shareholder vote is considered to be an alternative outcome.

What is the effect of a transaction containing an alternative outcome?
If a transaction contains an alternative outcome, no common shares can be issued prior to the shareholder vote even if there is a cap such that the issuance cannot exceed 19.9% without shareholder approval. Such a share cap would be considered defective.

Is a rescission an alternative outcome?
Yes. Any change based on the outcome of the shareholder vote is an alternative outcome, including a rescission where the funds are returned to the investor if shareholder approval is not obtained. This is because the company may be unable to complete a rescission without facing a financial burden. Other examples of an alternative outcome include changes to the interest and/or dividend rates, changes to maturity dates, and changes to investment amounts, even if these changes may benefit the company.

Can a convertible security be issued prior to a shareholder vote, if the transaction involves an alternative outcome?
A convertible security can be issued prior to the vote even if the transaction contains an alternative outcome, provided that no common shares are issued prior to the vote. After the vote, the securities can fully convert if approved by the shareholders, or if shareholders disapprove the proposal, conversions can take place up to but not reaching an amount that would require shareholder approval.

Must a conversion cap apply for the life of the transaction?
Yes. A cap must apply for the life of the transaction or until shareholder approval is obtained. Thus, as stated in IM-4350-2, caps that do not apply if a company is no longer listed on NASDAQ do not obviate the need for shareholder approval of the transaction. Otherwise, shareholders could face dilution from a transaction that occurred while the security was listed on NASDAQ without the ability to approve such dilution.

Shareholder Approval - Equity Compensation

General

Does NASDAQ require shareholder approval of equity compensation plans?
Yes. Rule 4350(i)(1)(A) requires that a NASDAQ listed company seek shareholder approval when it establishes or materially amends a stock option or purchase plan or other arrangement pursuant to which stock may be acquired by officers, directors, employees or consultants. This includes any sale of securities at a discount to the market value to an officer, director, employee or consultant, even if part of a larger financing transaction.

In addition, please see Interpretative Material 4350-5, which focuses on those corporate actions that would be considered material amendments to existing plans and/or arrangements, and thus, require shareholder approval. IM 4350-5 also discusses circumstances under which shareholder approval is not required pursuant to Rule 4350(i)(1)(A).

How does a company request an interpretation of NASDAQ's rules?
Issuers or their representatives are encouraged to contact Listing Qualifications with any questions regarding the applicability of the rules. Any guidance provided by staff by telephone is not definitive. To request a definitive interpretation, the company or its representative must submit a written request, identifying the NASDAQ-listed company and providing the relevant facts. Pursuant to Rule 4550, a company is required to submit to NASDAQ a non-refundable fee in connection with the request. Please see Staff Interpretative Letters for more details regarding the submission of the request and the applicable fees.

Is a company required to notify NASDAQ of equity compensation plans and arrangements pursuant to the Listing of Additional Shares process?
Under Rule 4310(c)(17), the company is required to notify NASDAQ by the filing of a Notification for Listing of Additional Shares no later than 15 calendar days prior to establishing or materially amending a stock option or purchase plan or other arrangement, pursuant to which stock may be acquired by officers, directors, employees or consultants. However, this notification is not required if the company has obtained shareholder approval for the action. The requirement to notify NASDAQ includes those issuances which are not subject to shareholder approval under Rule 4350(i)(1)(A).

Are foreign companies required to notify NASDAQ of equity compensation plans and arrangements pursuant to the Listing of Additional Shares process?
Under Rule 4320(c)(15), companies that list common stock or ordinary shares are required to notify NASDAQ of equity compensation plans and arrangements unless the company has obtained shareholder approval. This notification requirement does not apply to companies that only list American Depositary Receipts on NASDAQ.

For more information, please click on the applicable link below:

• Applicability
  
• Formula & Evergreen Plans
• Materiality of Amendments
• Exceptions - General
• Exceptions - Tax Qualified Plans
• Exceptions - Mergers & Acquisitions
• Exceptions - Inducement Grants

Applicability

NASDAQ adopted its current rules regarding shareholder approval of equity compensation plans on June 30, 2003. Do plans adopted prior to that date require additional shareholder approval?
Plans that were adopted in compliance with the prior rule were grandfathered when NASDAQ adopted the current rules. However, any material amendment to such a plan effected on or after June 30, 2003, requires shareholder approval. In addition, if a grandfathered plan contains an evergreen provision, the plan cannot have a term in excess of ten years unless shareholder approval is obtained every ten years. Shareholder approval for a grandfathered plan with an evergreen provision would initially need to be obtained within ten years after the effective date of the plan. For more information, please see the final approval order.

Is there an exception for de minimis issuances under Rule 4350(i)(1)(A)?
No. The rule requires shareholder approval whenever the company establishes or materially amends a stock option or purchase plan or other arrangement pursuant to which stock may be acquired by officers, directors, employees or consultants. Unlike the prior rule, there is no exception for de minimis issuances or "broadly- based" plans.

Are issuances of treasury shares subject to the Rule?
The fact that shares will be issued from the company's treasury or repurchased shares has no impact on the analysis of whether shareholder approval is required under the Rule. Such shares are subject to the Rule.

Who is considered to be a consultant for purposes of the Rule?
A "consultant" is anyone for whom the company is eligible to use a Form S-8. The instructions for the Form S-8 state that: "Form S-8 is available for the issuance of securities to consultants or advisors only if: (i) they are natural persons; (ii) they provide bona fide services to the registrant; and (iii) the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the registrant's securities."

Can a company establish and issue shares from an equity compensation plan or arrangement before seeking shareholder approval?
A company may adopt an equity plan or arrangement, and grant options (but not shares of stock) thereunder, prior to obtaining shareholder approval provided that: (i) no options can be exercised prior to obtaining shareholder approval and (ii) the plan can be unwound, and the outstanding options cancelled, if shareholder approval is not obtained. Companies should be aware of any accounting issues that may arise under these circumstances.

May a company grant stock awards subject to obtaining subsequent shareholder approval?
No. Unlike a situation where the exercise of stock options is contingent on obtaining shareholder approval, a company may not grant shares of stock prior to obtaining shareholder approval.

Does NASDAQ's shareholder approval requirement for equity compensation plans or arrangements apply to foreign private issuers?
Yes. NASDAQ's shareholder approval requirement for equity compensation plans or arrangements applies to foreign private issuers. However, a foreign private issuer may follow its home country practice in lieu of this requirement if it follows the process described in Rule 4350(a). Please see Corporate Governance - Foreign Companies for additional information regarding this process.

Is NASDAQ's requirement for shareholder approval of equity compensation plans or arrangements applicable to initial listings?
Generally, shareholder approval is not required of plans or arrangements that are in place at the time of a company's listing on NASDAQ. Shareholder approval is required, however, for any material amendment to such plans after listing. In addition, if the plan contains an evergreen provision, the plan cannot have a term in excess of ten years unless shareholder approval is obtained every ten years as set forth in IM-4350-5.

Formula & Evergreen Plans

What is a formula plan?
A formula plan provides for automatic grants pursuant to a formula. Examples include restricted stock grants based on a certain dollar amount and/or matching stock contributions based on the amount of compensation a participant elects to defer.

What is an evergreen plan?
An evergreen plan is one that contains a formula for the automatic increase in the number of shares available under the plan.

When is shareholder approval required of formula or evergreen plans?
Formula and evergreen plans cannot have a term in excess of ten years unless shareholder approval is obtained every ten years. Plans that do not contain a formula and do not impose a limit on the number of shares available for grant would require shareholder approval of each grant under the plan.

Materiality of Amendments

What is considered a "material" amendment to an existing equity compensation plan or arrangement?
As set forth in IM-4350-5, a "material" amendment includes, but is not limited to, the following:

• any material increase in the number of shares to be issued under the plan (other than to reflect a reorganization, stock split, merger, spinoff or similar transaction);
• any material increase in benefits to participants, including any material change to: (i) permit a repricing (or decrease in exercise price) of outstanding options, (ii) reduce the price at which shares or options to purchase shares may be offered, or (iii) extend the duration of a plan;
• any material expansion of the class of participants eligible to participate in the plan; and,
• any expansion in the types of options or awards provided under the plan.

While general authority to amend a plan would not obviate the need for shareholder approval, if a plan permits a specific action without further shareholder approval, then no such approval would generally be required. In that regard, absent specific authorization in the plan, a repricng, or a similar action, would not be permitted without shareholder approval.

What is considered to be a "repricing"?
Generally, "repricing" means any of the following or any other action that has the same effect:

• Lowering the strike price of an option after it is granted.
• Any other action that is treated as a repricing under generally accepted accounting principles. or
• Canceling an option at a time when its strike price exceeds the fair market value of the underlying stock, in exchange for another option, restricted stock, or other equity, unless the cancellation and exchange occurs in connection with a merger, acquisition, spin-off or other similar corporate transaction.

Does a "value for value" exchange require shareholder approval?
Yes, unless the plan authorizes it, such an exchange would be considered a material amendment that requires shareholder approval. An example of the this type of exchange is where outstanding options are valued according to a pricing model, and the optionees receive, in exchange for their options, shares of stock equal in value to the calculated value of the stock options.

Would it be a material amendment to change the method of determining the exercise price for newly granted stock options?
NASDAQ would not consider it to be a material amendment to change the method of determining the exercise price for newly granted stock options to the closing market price on the date of the award when a plan provides for an exercise price of, for example: (i) the closing market price on the day prior to the grant date; (ii) the average of the high and low market price on the date of grant; or (iii) the average of the high and low market price on the date prior to the date of grant.

Would it be a material amendment for a company to buy back outstanding awards for cash?
The rule applies to equity awards and not to a payment of cash. As such, buying back outstanding awards for cash would not require shareholder approval under Rule 4350(i)(1)(A) unless, based on the specific facts and circumstances, it is treated as a repricing under Generally Accepted Accounting Procedures ("GAAP").

Is a provision in a plan that generally allows for a plan administrator to "modify or amend" an award sufficient to permit a repricing or option exchange without shareholder approval absent any additional, specific authority?
No. An option repricing or exchange based merely on the authority to modify or amend outstanding awards would not be permitted without shareholder approval. This is the type of general authority that IM-4350-5 indicates would not obviate the need for shareholder approval.

Generally, when preparing plans and presenting them for shareholder approval, companies should strive to make plan terms easy to understand. In that regard, it is recommended that plans meant to permit repricing use explicit terminology to make this clear.

Is an increase in the number of shares available under a plan considered a material amendment?
Yes, an increase in the number of shares available under a plan would generally be considered to be material because it could result in additional dilution to the shareholders.

Consider a plan that provides for periodic automatic awards of specific number of options, for example, annual awards of 10,000 options. Is it a material amendment to increase the awards to 15,000?
Generally, increasing the size of awards is not a material amendment provided that the maximum number of shares available under the plan is not increased.

Does a change in the vesting schedule of stock option or other equity awards require shareholder approval?
Generally, a change in the vesting terms for an award is not a material amendment, provided that the change does not result in either an extension in the term of the award beyond the maximum allowable term under the plan or in an addition to the aggregate shares available under the plan.

Is an amendment to a plan to extend the term of an option considered a material amendment?
Generally, extending the term of an option is not considered a material amendment, provided that the extension is not beyond the maximum term permissible under the plan. For example, consider a plan that authorizes the plan administrator to grant awards with a term of up to ten years. If an option is granted with a term of 5 years, and the plan administrator subsequently changes the term to 10 years, it is not a material amendment to the plan. The same analysis would also apply to the extension of a post-termination exercise period.

Is shareholder approval required of a plan or arrangement that permits an employee or director to use cash payments from the company to purchase stock at market price?
A plan that permits the purchase of stock for cash does not require shareholder approval if such purchase is at the discretion of the participant and is at or above market value. This is permissible under Rule 4350(i)(1)(A)(ii), which provides an exemption from NASDAQ's shareholder approval rules for equity compensation plans or arrangements that merely provide a convenient way to purchase shares on the open market or from the company at fair market value. Such purchases can be made on an immediate or deferred basis.

Is shareholder approval required to add stock-settled Stock Appreciation Rights ("SARs") to a plan that provides only for stock options?
No. The addition of SARs will not constitute an expansion of the types of awards available, since the SARs are substantially equivalent to stock options.

Are cash settled SARs subject to Rule 4350(i)(1)(A)?
No. Because cash settled SARs do not involve an issuance of equity, they are not subject to the requirements of the Rule.

Is shareholder approval required to add Restricted Stock Units ("RSUs") to an equity compensation plan that allows for the issuance of restricted stock?
An award of a RSU typically results in the issuance of restricted stock on a deferred basis after vesting requirements are met. As such, this type of award is substantially equivalent to the award of restricted stock, and if the plan allows for the award of restricted stock, the addition of RSUs is not a material modification that requires shareholder approval under NASDAQ's rules. Shareholder approval would be required, however, to add RSUs to a plan that does not provide for restricted stock awards because the revision would expand the types of awards available.

Is the addition of a "cashless exercise" feature to an option plan a material amendment?
No. Adopting a provision permitting a cashless exercise does not materially increase the benefits available under the plan.

What is considered to be a material expansion of the class of participants?
The classes of participants specified in the rule are officers, directors, employees, and consultants. As such, an amendment to extend eligibility to any of these classes not already authorized under the plan would be a material amendment requiring shareholder approval. In addition, if a class of participants is specifically excluded from a plan (e.g., employee-directors from a director plan), it would be a material expansion of the class to amend the plan to include those participants.

Exceptions - General

Are there any exceptions to NASDAQ's shareholder approval requirement for equity compensation?
Yes. Pursuant to Marketplace Rule 4350(i)(1)(A), shareholder approval is not required for:

• warrants or rights issued to all security holders on equal terms;
• stock purchase plans available to all security holders on equal terms (e.g., a dividend reinvestment plan);
• tax qualified, non-discriminatory employee benefit plans or parallel nonqualified plans which are regulated under the Internal Revenue Code and Treasury Department regulations, provided such plans are approved by the issuer's independent compensation committee or a majority of the issuer's independent directors. A similar plan for the company's non-U.S. employees, which provides features necessary to comply with applicable foreign tax laws, is also exempt from the shareholder approval requirement;
• plans that provide a convenient way to purchase shares on the open market or from the issuer at fair market value;
• certain plans relating to mergers and acquisitions; or
• inducement grants.

Exceptions - Tax Qualified Plans

Does NASDAQ require shareholder approval of "tax qualified, non-discriminatory employee benefit plans"?
No. Rule 4350(i)(1)(A)(ii) states that shareholder approval is not requirement for tax qualified, non-discriminatory employee benefit plans (e.g., plans that meet the requirements of Section 401(A) or 423 of the Internal Revenue Code) or parallel nonqualified plans. Please note that these plans are subject to approval by either the company's independent compensation committee or a majority of the issuer's independent directors. Similar plans for the company's non-U.S. employees, which provide features necessary to comply with applicable foreign tax laws, are also exempt from shareholder approval.

What is a "parallel nonqualified plan"?
For purposes of Rule 4350(i)(1)(A) and IM-4350-5, the term "parallel nonqualified plan" means a plan that is a "pension plan" within the meaning of the Employee Retirement Income Security Act ("ERISA"), 29 U.S.C. §1002 (1999), that is designed to work in parallel with a plan intended to be qualified under Internal Revenue Code Section 401(a), to provide benefits that exceed the limits set forth in Internal Revenue Code Section 402(g) (the section that limits an employee's annual pre-tax contributions to a 401(k) plan), Internal Revenue Code Section 401(a)(17) (the section that limits the amount of an employee's compensation that can be taken into account for plan purposes) and/or Internal Revenue Code Section 415 (the section that limits the contributions and benefits under qualified plans) and/or any successor or similar limitations that may thereafter be enacted.

However, a plan will not be considered a "parallel nonqualified plan" unless: (i) it covers all or substantially all employees of an employer who are participants in the related qualified plan whose annual compensation is in excess of the limit of Code Section 401(a)(17) (or any successor or similar limitation that may hereafter be enacted); (ii) its terms are substantially the same as the qualified plan that it parallels except for the elimination of the limitations described in the preceding sentence; and, (iii) no participant receives employer equity contributions under the plan in excess of 25% of the participant's cash compensation.

Does NASDAQ require shareholder approval of "parallel nonqualified plans"?
No. Rule 4350(i)(1)(A) specifically grants an exception to the shareholder approval requirement for parallel nonqualified plans. Please note that these plans are subject to approval by either the company's independent compensation committee or a majority of the company's independent directors. Similar plans for the company's non-U.S. employees, which provides features necessary to comply with applicable foreign tax laws, are also exempt from shareholder approval.

Exceptions - Mergers & Acquisitions

Do plans or arrangements involving a merger or acquisition require shareholder approval under Rule 4350(i)(1)(A)?
Under IM-4350-5, plans or arrangements involving a merger or acquisition do not require shareholder approval under Rule 4350(i)(1)(A) in two situations.

First, shareholder approval will not be required to convert, replace or adjust outstanding options or other equity compensation awards to reflect the transaction.

Second, shares available under certain plans acquired in acquisitions and mergers may be used for certain post-transaction grants without further shareholder approval. This exception applies to situations where the party which is not a listed company following the transaction has shares available for grant under pre-existing plans that meet the requirements of this Rule 4350(i)(1)(A). The assumed plans of the target must have been approved by the target's shareholders. The shares may be used for post-transaction grants of options and other equity awards by the listed company (after appropriate adjustment of the number of shares to reflect the transaction), either under the pre-existing plan or arrangement or another plan or arrangement, without further shareholder approval, provided: (i) the time during which those shares are available for grants is not extended beyond the period when they would have been available under the pre-existing plan, absent the transaction, and (ii) such options and other awards are not granted to individuals who were employed by the granting company or its subsidiaries at the time the merger or acquisition was consummated. NASDAQ would view a plan or arrangement adopted in contemplation of the merger or acquisition transaction as not pre-existing for purposes of this exception.

Are the shares that are issuable as a result of the conversion of the target's outstanding awards and the assumption of the target's equity plans included in determining whether shareholder approval is required under Rule 4350(i)(1)(C)?
Yes. In determining whether shareholder approval is required of the acquisition under Rule 4350(i)(1)(C), the shares issuable to adjust, replace, or convert the target's outstanding awards are included as are any additional shares that would be available under an assumed plan or arrangement of the target. The shares would not be included, however, to the extent they come from a shareholder approved plan of the acquiring company, provided that there is no increase in the number of shares available under such plan.

Would a plan or arrangement adopted in contemplation of a merger or acquisition be considered as a pre-existing plan for purposes of the exception from the shareholder approval requirement?
No. Such a plan or arrangement would not be exempt from the shareholder approval requirement.

If the target of a merger or acquisition has a pre-existing evergreen plan that is assumed in the transaction, when will shareholder approval be required for that plan?
An assumed evergreen plan is subject to the limitation in IM-4350-5 that an evergreen plan cannot have a term in excess of ten years unless shareholder approval is obtained every ten years. The initial ten-year period is measured from the date the target company established the plan.

Exceptions - Inducement Grants

Is shareholder approval required of an equity award to a new employee?
Under Rule 4350(i)(1)(A)(iv) shareholder approval is not required of an issuance to a person not previously an employee or director of the company, or following a bonafide period of non-employment, as an inducement material to the individual's entering into employment with the company, provided that such an issuance is approved by the company's compensation committee or a majority of the company's independent directors.

Is the inducement exemption available to induce a member of the board of directors to enter into employment?
No. Rule 4350(i)(1)(A) provides that the exemption is available only for a "person not previously an employee or director."

Is the inducement exemption available to induce someone to become a consultant to the company?
No, pursuant to Rule 4350(i)(1)(A), the exemption applies to issuances to induce someone to enter into employment. Because a consultant is not an employee, the exemption is not available.

Is the inducement exemption available to induce a consultant to become an employee?
Provided the consultant was not already acting as an employee, the exemption would be available to induce a consultant to become an employee. This determination would be made based on an examination of the applicable facts and circumstances.

What is "bonafide period of non-employment"?
A "bonafide period of non-employment" is determined on a case-by-case basis. This analysis is not based on time alone. Additional factors in the analysis include:

• Whether there was a relationship between the former employee and the company during the time of non-employment;
• Whether the former employee received payments from the company during the period of non-employment;
• The reasons for ending the employment relationship;
• Whether the former employee was employed elsewhere after leaving the company and; and
• Whether there was an agreement or understanding that the former employee would return to the company.

What is required for a company to rely on the exception from the shareholder approval requirement for an equity compensation inducement award?
In order to rely on the exception from the shareholder approval requirement for an equity compensation awarded as an inducement material to the individual's entering into employment with the company, the issuance must be approved by the company's compensation committee or a majority of the company's independent directors. In addition, the company must issue a press release promptly following the grant, which discloses the material terms of the award.

For purpose of the required disclosure of inducement awards, what is meant by "promptly"?
As a safe-harbor, NASDAQ will consider disclosures made within four business days after the award to have been made "promptly."

What details must a company include in the press release disclosing its reliance upon the shareholder approval exception for an inducement grant?
A company is required to disclose the material terms of the inducement grant, including the recipient(s) of the grant and the number of shares involved.

Can a company disclose the combined size of inducement awards made to a number of employees?
For individually negotiated awards and awards to executive officers, aggregated disclosure of multiple awards is not permitted. Otherwise, aggregation is permitted: (i) over a period up to two weeks for a company that typically grants equity awards as inducements to new employees, and (ii) when a company makes inducement awards to employees of a target company in connection with a merger or acquisition. Aggregated disclosure must include the material terms of the awards, including the number of employees and the number of shares involved.

May a company use a Form 8-K to disclose an inducement grant in lieu of a press release?
No. If the company is relying on the exemption from shareholder approval contained in Rule 4350(i)(1)(A)(iv), the rule specifically requires disclosure through a press release.

May a company rely on the inducement exception for a grant made immediately after an individual is hired if the grant was not discussed or negotiated in connection with the hiring process?
No, such an award would not be considered a material inducement to the individual entering into employment with the company. Only grants made in connection with an offer of employment are eligible for this exception.

May a company adopt a plan without shareholder approval that would be used solely for inducement awards?
Yes, provided that all awards made under the plan meet the requirements of the Rule 4350(i)(1)(A) and IM-4350-5.

Is shareholder approval required to amend an inducement award for which the company did not receive shareholder approval?
A material amendment to an equity compensation award would require shareholder approval, even if the initial grant did not require approval because it was an inducement grant. The materiality of the amendment would be assessed according to IM-4350-5.

Shareholder Approval - Financial Viability Exception

Is an exception from the shareholder approval requirements available for a company in financial distress?
Yes. Pursuant to Rule 4350(i)(2), an exception for a specified issuance of securities may be made upon prior written application to NASDAQ when the delay in securing stockholder approval would seriously jeopardize the financial viability of the company. Generally, this is a difficult standard to meet. A company must convincingly demonstrate that the delay in closing a transaction due to the time that it would take to seek shareholder approval would have a significant detrimental impact on its financial viability.

How does a company request a financial viability exception?
A company must submit a written request for a financial viability exception, directed to Listing Qualifications. NASDAQ will provide a written response to the request. The company must obtain NASDAQ's approval to rely upon the financial viability exception prior to proceeding with the transaction.

What should the company include in its request for a financial viability exception?
A company should thoroughly address all relevant issues focusing on how a delay resulting from seeking shareholder approval would seriously jeopardize its financial viability and how the transaction would benefit the company. The letter should describe the proposed transaction in detail and should include the identity of the investors.

What are examples of factors the company should address?
Examples of factors that the company should address include:

• Would the company be required to file for bankruptcy protection due to the time that it would take to get shareholder approval?
• What would be the impact on the company's operations due to the time that it would take to get shareholder approval?
• How long will the company be able to meet its current obligations,such as payroll, lease payments, and debt service, if it does not complete the proposed transaction?
• What are the company's cash position and burn rate, both current and projected?
• Is the proposed transaction the last alternative, or nearly the last alternative, available to the company?
• What facts and circumstances led to the company's predicament?
• Why didn't the company enter into a transaction when it still had the time to get shareholder approval?
• What other alternatives has the company pursued to obtain financing on other terms?
• Will the proposed financing rescue the company? The company should provide financial forecasts for several months illustrating whether the transaction will significantly strengthen the company's finances.
• Will the company meet NASDAQ's continued listing requirements over the next several months?
• Why can't the company structure a transaction that would satisfy the shareholder approval requirements? For example, where the applicable rule is Rule 4350(i)(1)(D), could the company limit the initial issuance to 19.9% of the pre-transaction outstanding shares and issue any remainder only after obtaining shareholder approval?
• If the investors will have higher voting power than the existing shareholders, then why is such voting power necessary? An example of higher voting power is preferred stock which converts at a discount and votes on an as-converted basis.

Is the company's audit committee required to approve reliance on a financial viability exception?
Reliance by the company on a financial viability exception must expressly be approved by the audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors. The company should submit to NASDAQ a copy of the committee resolution approving such reliance.

What disclosure is required of a company that receives a financial viability exception?
A company that receives a financial viability exception must mail to all shareholders not later than ten calendar days before issuance of the securities, a letter alerting them to its omission to seek the shareholder approval that would otherwise be required. Such notification shall disclose the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received), the fact that the issuer is relying on a financial viability exception to the stockholder approval rules, and that the audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors has expressly approved reliance on the exception. The issuer shall also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days before the issuance of the securities.

Can a company that receives a financial viability exception issue any securities in the transaction prior to the end of the ten-day notice period?
The rule requires that the notice be sent at least ten days before the issuance of the securities. This means that until the end of the ten-day notice period, a company could not issue any common stock or any other securities that are, or could become, convertible into or exercisable for common stock. For example, convertible debt could not be issued prior to the end of the notice period even if no conversion could take place until after the end of the period.

Can NASDAQ waive or shorten the notice period?
No. The rule requires at least 10 days and contains no provision allowing for a shorter period.

Can a company initiate the 10-day notice period by mailing the notice to shareholders prior to receiving approval of its exception request from NASDAQ?
No. The mailing and the press release must state that the company is relying on the exception. Such a statement can be made only after the exception is granted. Accordingly, the mailing and the press release must occur after the exception is granted and at least 10 days prior to the issuance of the securities.

Shareholder Approval - Private Placements

For purposes of NASDAQ's shareholder approval rules, what is "market value"?
For purposes of the shareholder approval requirements, "market value" is the closing bid price immediately preceding the entering into of the binding agreement to issue the securities. That is, if the transaction is entered into during market hours before the close of the regular session at 4 PM Eastern Time, the previous trading day's closing bid price is used. If it is after the close of the regular session, then that day's closing bid price is used. See Rule 4200(a)(22). Please note that an average price over a period of time is not acceptable as "market value" for purposes of the shareholder approval rules.

How can I find the appropriate closing bid price?
For purposes of determining "market value" under the shareholder approval requirements, NASDAQ looks to the closing consolidated bid price as of 4 PM Eastern time. To get this information, NASDAQ issuers may call their representative at NASDAQ's Market Intelligence Desk. Issuers can find the telephone number for their representative by logging into NASDAQ Online and clicking on "My NASDAQ". Others may call the Market Intelligence Desk at 646.344.7800 or NASDAQ MarketWatch at 800.537.3929. When requesting the closing bid price, please be sure to specify the "consolidated" closing bid price.

For purposes of NASDAQ's shareholder approval rules, what is "book value"?
"Book value" is the stockholders' equity from the company's most recent public filing with the SEC. Book value per share is the stockholders' equity divided by the total shares outstanding. Goodwill and other intangible assets are included in a company's book value.

Can a book value be used which is more recent than that reflected in the last SEC periodic filing?
A more recent book value may be used if the company files a document with the SEC, such as a Form 8-K or 6-K, reflecting the company's stockholders' equity and shares outstanding to allow for the calculation of an updated book value.

Does a sale of securities in a private placement at a discount to the market value to officers, directors, employees, or consultants require shareholder approval under Rule 4350(i)(1)(A)?
Yes. The issuance of common stock or securities convertible into or exercisable for common stock by the company to its officers, directors, employees, or consultants, or an Affiliated Entity of such a person, in a private placement at a price less than the market value of the stock is considered a form of "equity compensation" and requires shareholder approval. For this purpose, market value is the closing bid price immediately preceding the time the company enters into a binding agreement to issue the securities. An Affiliated Entity is any entity where an officer, director, employee or consultant of the company: (i) is a partner, executive officer, or controlling shareholder, or (ii) would be the beneficial owner of or have a pecuniary interest in the securities issued by the company.

How is it determined whether securities that are convertible into or exercisable for common stock are issued at a discount to market value?
To determine whether securities that are convertible into or exercisable for common stock are issued at a discount to market value, the conversion or exercise price is compared to the market value of the common stock. If the conversion or exercise price is less than the market value immediately preceding the entering into of the binding agreement, then the issuance is at a discount.

What is the effect of an anti-dilution provision for purposes of determining whether an issuance is at a discount?
The presence of any provision, including an anti-dilution provision (except for stock splits or similar changes to the company's capitalization), which could cause the conversion price to be reduced to below the market value immediately before the entering into of the binding agreement, will cause the transaction to be viewed as a discounted issuance.

When an issuance includes common stock (or the equivalent) issued at a discount and warrants, are the shares underlying the warrants aggregated with the common stock portion?
Generally, shares underlying warrants are aggregated with an accompanying issuance of common stock (or the equivalent) at a discount unless the warrants: (i) are not exercisable for at least six months following closing, and (ii) are not exercisable for less than the greater of book or market value. Please refer to the Staff Interpretative Letters for additional guidance on this issue.

When an issuance includes common stock (or the equivalent) and warrants, is it necessary to attribute a value to warrants for purposes of determining whether the common stock portion is at a discount?
Yes. A value of $0.125 (plus any amount that the warrant in the money) is attributed to each warrant. For example, consider a company with a market value of common stock of $10 per share. In the transaction, the company will issue units consisting of one share of common stock and one warrant exercisable at $10 per share. NASDAQ will consider the common stock to be issued at a discount unless the issuance price of the units is at least $10.125. This is without regard to whether the warrants are immediately exercisable.

Voting Rights

Does NASDAQ have a voting rights rule?
Yes. Under Marketplace Rule 4351, a company cannot disparately reduce or restrict existing shareholders' voting rights. Examples of such corporate action or issuance include the adoption of "time-phased" or "capped" voting rights plans, the creation of a new class of super-voting stock, or the issuance of stock with voting rights less than the per share voting rights of the existing common stock through an exchange offer.

Does convertible preferred stock that votes on an "as converted basis" comply with the NASDAQ Voting Rights Policy?
The issuance of preferred stock that may convert at a discount to the market price of the common stock at the date of issuance and votes accordingly is a violation of the NASDAQ Voting Rights rule, since such preferred shares would have greater voting rights than the existing common shares. This potential problem can be addressed by limiting the voting power, such that the preferred shares would vote as if converted at market value on the date of issuance.

Can a company continue to issue additional amounts of higher voting stock under a dual class structure?
Under the NASDAQ Voting Rights Policy set forth in IM-4351, companies with existing dual structures are generally permitted to issue additional shares of the existing class of higher voting stock in a capital-raising transaction, via a stock dividend, through the issuance of stock options, or in a stock split without conflict with the Voting Rights Policy.

What is "an existing dual class structure"?
A dual class structure is considered to be existing if it was in place prior to a company's being subject to the Voting Rights rule. A dual class structure implemented at a time when a company is subject to the Voting Rights rule is not "existing" for purposes of the Voting Rights Policy. Accordingly, additional issues of the higher voting stock would be subject to the approval of NASDAQ.

What is the effect of shareholder approval on a transaction, which violates the voting rights rule?
Shareholders may not vote to disenfranchise themselves or to disparately reduce their voting rights. Thus, shareholder approval for the transaction that led to a violation of the voting rights rule will not remedy the violation.

What happens if a company violates NASDAQ's Voting Rights Rule and Policy?
Violation of the NASDAQ Voting Rights Rule and Policy could result in the company being delisted by NASDAQ and becoming ineligible to list on other markets. Accordingly, it is extremely important that NASDAQ companies contemplating transactions, which may implicate the Rule and the Policy contact NASDAQ as early as possible. Copies of preliminary proxies or other material concerning matters that may implicate the voting rights rule and policy should be furnished to NASDAQ for review prior to formal filing, and companies may request a formal interpretation from the Staff of whether a proposed transaction will be consistent with the rule and policy.

Does NASDAQ review a company's voting structure during the initial listing review process?
For an initial public offering, NASDAQ will generally accept any proposed voting structure. However, if a public company takes an action in contemplation of listing and such action would have been a violation of the Voting Rights Policy had the company already been listed, then the company's application may be denied. Based on NASDAQ's review of the voting structure and past corporate actions, NASDAQ may take any appropriate action including the denial of the application or the placing of restrictions on such qualification for inclusion. A company seeking inclusion of a security on NASDAQ should also disclose if it has requested a ruling or interpretation from another market regarding the application of that market's voting rights policy to the proposed transaction.

Do the voting rights requirements of Rule 4351 apply to NASDAQ foreign issuers?
Pursuant to IM-4351, NASDAQ will accept any action or issuance relating to the voting rights structure of a non-U.S. issuer that is in compliance with NASDAQs requirements for domestic companies or that is not prohibited by the issuer's home country law.