Mergers And Acquisitions; Board Of Directors Responsibilities

Board of Directors’ and Key Officers Fiduciary Duties in the Merger Process

Corporate law stipulates that a corporation's business and affairs are typically overseen by its board of directors, and these directors hold a fiduciary duty to the corporation. This duty requires them to act in the best interest of the corporation rather than their personal interests. Similarly, key executive officers are bound by a comparable duty. Courts generally refrain from questioning directors' decisions as long as a proper process is followed by the executives in reaching those decisions. This principle is known as the "business judgment rule," establishing a presumption that, when making business decisions, directors acted with information, good faith, and an honest belief that their actions served the company's best interests. This rule has been cited in various Delaware cases, such as Smith vs. Van Gorkom (488 A.2d 858, Del. 1985).

In specific scenarios, particularly in the context of a merger or acquisition, heightened scrutiny is applied when there is a potential conflict of interest among the board or top executives. This conflict may arise from the divergence between seeking the maximum benefit for the corporation and its shareholders and pursuing personal gains, such as cash or job security. This elevated level of examination is known as the "enhanced scrutiny business judgment rule." It originates from legal precedents like the Unocal and Revlon cases, which dealt with hostile takeovers.

Additionally, a third standard, the "entire fairness standard," comes into play when there is a conflict of interest involving officers, directors, and/or shareholders, especially when directors are involved on both sides of the transaction. Under the entire fairness standard, executives are obligated to demonstrate that the entire transaction is equitable for shareholders, encompassing both the process and the terms, including price. Achieving the entire fairness standard is challenging, and it often results in findings favoring shareholders who raise objections.

In all situations, directors' and executive officers' fiduciary responsibilities to a corporation encompass principles of honesty and good faith, along with specific duties such as care, loyalty, and disclosure. The duty of care entails that directors and officers perform their duties with the same level of care that a reasonable person would employ, aiming to advance the corporation's best interests in good faith, considering the unique circumstances of the particular corporation. The duty of loyalty mandates the absence of conflicts between one's duty and personal interests, while the duty of disclosure obliges directors and officers to provide comprehensive and materially accurate information to the corporation. When a director's duty is to the shareholders, executive officers may have responsibilities to both the board of directors and the shareholders.

In the context of mergers or acquisitions, the responsibilities and obligations of directors and officers are contingent on the specific facts and circumstances. Generally, when a transaction is not deemed material or is only marginally significant to the company, the level of involvement and scrutiny faced by the board of directors or key executives is diminished, and the basic business judgment rule becomes applicable. For example, in cases where a company's growth strategy relies on acquisitions, the board of directors might establish the strategic framework and criteria for potential acquisitions, entrusting the execution largely to C-suite executives and officers. This allows them to exercise their business judgment in carrying out the transactions.

Furthermore, a director's responsibilities are contingent on whether they are involved on the buy or sell side of a transaction. When on the buy side, considerations revolve around securing the best price deal for the company and integrating products, services, staff, and processes. Conversely, when on the sell side, the primary objective is to maximize returns for shareholders, although social interests and considerations, such as job preservation, may also be taken into account.

Legal scrutiny focuses on the process, steps, and considerations undertaken by the board of directors and executive officers, rather than solely on the final decision. The depth of diligence and effort invested in the process is crucial, benefiting both the company and its shareholders and serving as protection for directors and officers facing scrutiny. Courts assess various factors, including attendance at meetings, the number and frequency of meetings, knowledge of the subject matter, time spent deliberating, advice sought from third-party experts, requests for information from management, and the review of documents and contracts.

In fulfilling their obligations and fiduciary responsibilities, both a board of directors and executive officers are encouraged to seek guidance and advice from third-party professionals, including attorneys, investment bankers, and valuation experts. It is considered a prudent practice to obtain a third-party fairness opinion for a transaction. Many investment banking firms specializing in mergers and acquisitions (M&A) also offer fairness opinions. Additionally, numerous firms are willing to prepare a fairness opinion even if they are not directly involved in the transaction.

Obtaining a fairness opinion serves multiple purposes. Firstly, it adds an extra layer of protection for the board of directors and executives, bolstering the defensibility of their decisions. Moreover, fairness opinions play a crucial role for accountants and auditors in assessing or supporting valuations within a transaction, particularly when related parties are involved. Many firms, including this one, maintain relationships with entities providing fairness opinions and actively encourage clients to leverage these services for comprehensive and objective assessments.

Delaware Case Law

In the realm of corporate law, adherence to standards often involves referencing both Delaware statutes and court decisions.

Arising from the case of Revlon, Inc. vs. MacAndrews & Forbes Holdings, Inc. (506 A.2d 173, Del. 1986), a significant set of duties and responsibilities, commonly known as the "Revlon Duties," comes into play once a board of directors decides to sell or merge the company. The Revlon Duties mandate that, upon making such a decision, the board must explore all available alternatives and concentrate on securing the highest value and return for the shareholders. It's important to note that the Revlon case is particularly focused on duties in the context of a sale or breakup of a company, as opposed to a forward growth acquisition. In a Revlon situation, the board essentially acts as an auctioneer striving to achieve the optimal return.

While the fundamental principle of Revlon endures, subsequent decisions acknowledge that the highest return for shareholders is not strictly confined to monetary considerations. This recognition reflects an understanding that value can encompass various forms beyond just dollars received.

The decision by company executives to sell is not automatic, even in the face of an offer. Prior to the Revlon case, the Unocal vs. Mesa Petroleum (493 A.2d 946, Del. 1985) ruling established that a board of directors could take defensive measures in response to a hostile takeover attempt. In such situations, the board was permitted to consider factors such as preserving corporate policy and ensuring the effectiveness of business operations. However, once the board determines that a sale or breakup is imminent, the Revlon Duties come into effect, and considerations like the preservation of corporate policy and operations are no longer primary factors.

In the Smith vs. Van Gorkom case (488 A.2d 858, Del. 1985), the court found the board grossly negligent for approving the sale of the company with only a few hours of deliberation. The board failed to inform itself adequately about the chairman's role and benefits in the sale and did not seek advice from external legal counsel. Similarly, in Cede & Co. vs. Technicolor, Inc. (634 A.2d 345, Del. 1993), the court determined that the board was negligent in approving the sale of a company. The board did not explore real alternatives, failed to seek a better offer, and lacked sufficient knowledge of the terms of the proposed merger agreement. These cases underscore the importance of thorough consideration and due diligence by boards of directors in transactions of such significance.

In the case of In re CompuCom Sys., Inc. Shareholders Litigation (2005 Del. Ch. LEXIS 145, Del. Ch. Sept. 29, 2005), the court upheld the business judgment of the board of directors, even though the transaction price per share was lower than the market value. The board demonstrated that it was adequately informed, acted rationally, and actively sought better deals, leading the court to support their decision.

Similarly, in Family Dollar Stores, Inc. Stockholder Litigation (C.A. No. 9985-CB, Del. Ch. Dec. 19, 2014), the court maintained the application of the Revlon Duties but approved Family Dollar Stores' choice to reject Dollar General Corp.'s higher dollar offer in favor of pursuing a shareholder vote on Dollar Tree, Inc.'s offer. The court determined that the board had appropriately considered all relevant factors, including an assessment of the antitrust risks associated with each potential acquirer. It endorsed the board's process in determining the maximum value for shareholders, emphasizing that such a determination is not solely based on the price per share but involves a comprehensive evaluation of various factors. This underscores the court's recognition that the decision-making process and the pursuit of the best overall value for shareholders are critical considerations in these situations.

Cleansing Through Shareholder Approval

The 2015 Delaware Supreme Court case of Corwin v. KKR Financing Holdings established a significant shift in the legal landscape. It ruled that a transaction subject to enhanced scrutiny under the Revlon standard would instead be reviewed under the deferential business judgment rule if approved by a majority of disinterested, fully informed, and uncoerced stockholders. This decision, commonly known as the Corwin doctrine, creates a powerful incentive for companies to ensure full disclosure when seeking stockholder approval.

In addition to the federal securities law requirements applicable to public companies, Delaware law mandates the disclosure of all material facts when stockholders are asked to vote on a merger. The Corwin decision encourages companies to adhere to stringent disclosure standards. However, it's important to note that, as highlighted in the case of In re Xura, Inc. Stockholder Litigation, the failure to provide such disclosure may jeopardize the otherwise strong defense provided by the Corwin doctrine.

Following the Corwin decision, subsequent rulings by several Delaware courts have further clarified and expanded its scope. Key points include the business judgment rule becoming irrebuttable if invoked due to a stockholder vote, the applicability of Corwin not being limited to one-step mergers but extending to cases where a majority of shares tender into a two-step transaction. The ability of plaintiffs to pursue a "waste" claim is deemed exceedingly difficult under Corwin, and even interested officers and directors can rely on the business judgment rule following the Corwin doctrine if stockholder approval is obtained. Furthermore, if directors are protected under Corwin, claims of aiding and abetting against their advisors may also be dismissed. These developments reinforce the significance of obtaining stockholder approval and ensuring proper disclosure to benefit from the protections afforded by the Corwin doctrine.

Once the business judgment rule is invoked, shareholders typically have a limited claim for waste, which is challenging to prove. The Corwin doctrine makes it difficult for plaintiffs to pursue post-closing claims, including those with only nuisance value, as defendants can often dismiss complaints at the pleading stage based on the stockholder vote. This is expected to contribute to a reduction in M&A-related litigation, which has been perceived as increasingly abusive over the years, imposing costs on companies, their stockholders, and the broader marketplace.

It's important to consider Corwin in conjunction with the Delaware Supreme Court's 2014 decision in Cornerstone Therapeutics Inc. Shareholder Litigation. In Cornerstone, the court ruled that directors can seek dismissal even in an entire fairness case unless the plaintiff sufficiently alleges non-exculpated conduct, such as disloyal conduct or bad faith. Cornerstone generally allows an outside, independent director to be dismissed from litigation challenging an interested transaction unless there are allegations of a breach of the duty of loyalty against that director individually. Corwin goes a step further by stating that with an informed stockholder vote, interested or non-independent directors can obtain dismissal without having to defend the fairness of the transaction.

While a series of cases following Corwin has strengthened and expanded its doctrine, a December 2018 case, In re Xura, Inc. Stockholder Litigation, serves as a reminder that for Corwin to provide its protections, stockholder approval must be fully informed. In Xura, the court found that the disclosures made by the CEO to the board of directors and shareholders, which were included in the company's proxy statement, were deficient enough to prevent a fully informed, uncoerced decision. The lesson from Xura is that, despite growing protections for officers and directors in M&A transactions, the foundation of any defense lies in the quality of the process and disclosure.

Conflicts of Interest – the Entire Fairness Standard

The duty of loyalty mandates that officers or directors must not allow conflicts between their duty to the corporation and their personal interests. In essence, an officer or director should not act for personal or non-corporate purposes, including actions taken to preserve their job or position within the company. If a transaction is not cleansed using the Corwin doctrine, and an officer or director is involved in the transaction, the entire fairness standard of review will be applied. Successfully defending against a claim is challenging when a transaction is subject to the entire fairness standard.

In some states, such as Delaware, the duty of loyalty is statutorily codified, particularly concerning its impact on certain transactions. Delaware's General Corporations Law Section 144 outlines that a contract or transaction in which a director has an interest is not void or voidable if: (i) the director discloses their personal interest in a timely manner; (ii) a majority of shareholders approve the transaction after being informed of the director's involvement; or (iii) the transaction is entirely fair to the corporation and has been approved by disinterested board members. This statutory provision provides a framework for addressing potential conflicts of interest and emphasizes the importance of disclosure, shareholder approval, and fairness in such transactions.

The third element outlined in the Delaware statute, emphasizing that a transaction involving an interested executive must be entirely fair to the corporation as a whole, has emerged as a crucial point of focus for judicial review. In this context, "entirely fair" means that the fairness of the transaction extends beyond the aspect dealing with the interested executive and encompasses the overall impact on the corporation. Courts evaluating the fairness of a transaction consider both the process (fair dealing) and the price, examining all aspects of the transaction as a whole.

The entire fairness standard presents a formidable hurdle and is frequently invoked by minority shareholders seeking to challenge a transaction when there is a potential breach of loyalty or when they perceive the transaction as unfair to them, especially in cases where controlling shareholders receive a premium.

To safeguard a transaction involving an interested executive, it is imperative for all officers and directors to play an active role in the merger or acquisition process. The interested executive should transparently disclose the conflict to the board and, ultimately, the shareholders. The transaction should resemble an arm's-length negotiation, exhibit fairness in its entirety, and involve diligent and active negotiations. Seeking the advice and counsel of independent third parties, such as attorneys and accountants, is crucial in establishing a robust defense against claims of impropriety and ensuring that the transaction adheres to high standards of fairness and transparency.

Delaware courts underscore the significance of involvement by disinterested, independent directors, emphasizing that such involvement enhances the likelihood that a board's decisions will benefit from the protection afforded by the business judgment rule. This is particularly important in justifying board actions under more stringent standards of review, such as the entire fairness standard. The determination of independence is based on a comprehensive evaluation of all relevant facts and circumstances. Directors are considered not independent if they have a personal financial interest in the decision or if their actions are influenced by motives other than the merits of the transaction. The greater the degree of independence, the stronger the protection.

As previously mentioned, many companies opt to obtain third-party fairness opinions concerning the transaction. These opinions provide an additional layer of protection by offering an independent assessment of the fairness of the deal. This practice further supports the board's diligence and efforts to ensure a fair and transparent transaction, reducing the likelihood of legal challenges and enhancing the defensibility of their decisions under various legal standards.

Exculpation and Indemnification

Many states' corporate laws permit entities to incorporate provisions in their corporate charters allowing for the exculpation and/or indemnification of directors. Exculpation involves a complete elimination of liability, while indemnification allows for the reimbursement of expenses incurred by an officer or director. In Delaware, for example, companies can include a provision in the certificate of incorporation that eliminates personal liability for directors in stockholder actions for breaches of fiduciary duty, with the exception of breaches of the duty of loyalty that result in personal benefit for the director to the detriment of the shareholders. Indemnification is generally only available when the director has acted in good faith, and it is applicable to both officers and directors.

To demonstrate that a director acted in good faith, the director must satisfy the general test of showing that they met their duties of care, loyalty, and disclosure. Being fully informed and actively participating in the decision-making process, whether related to a merger, acquisition, or another business transaction, is the most effective way to meet these requirements. As mentioned earlier, courts consider various factors, including attendance at meetings, knowledge of the subject matter, time spent deliberating, advice sought from third-party experts, requests for information from management, and the review of documents and contracts when evaluating whether directors have fulfilled their duties. These practices not only contribute to effective corporate governance but also strengthen the director's position in asserting good faith and, consequently, eligibility for indemnification.

Conclusion

In advising the board of directors and executive officers, legal counsel should emphasize the importance of the executive's active involvement in the business decision-making process. Executives should diligently review documents and files, ask pertinent questions, and strive to become fully informed about the matter at hand. The higher the level of diligence demonstrated, the stronger the protection afforded. Additionally, executives must ensure that they fully and transparently inform their fellow executives, board members, and shareholders of all relevant facts and circumstances, including any potential self-interest.

Crucially, the ultimate outcome of the decision—whether it proves to be good or bad—is not the determining factor. The protection sought through mechanisms like the business judgment rule, exculpation, and indemnification is based on the earnest effort and due diligence put forth in the decision-making process. It recognizes that hindsight can be 20/20, and what matters most is that executives make their best efforts to act in the best interests of the corporation and its stakeholders. This proactive and informed approach is essential for establishing a strong defense and seeking protection under applicable legal standards.

Gayatri GuptaDecember 15, 2023

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Requirements	Equity Standard	Market Value of Listed Standard	Net Income Standard
Listing Rules	5505(a) and 5505(b)(1)	5505(a) and 5505(b)(2)	5505(a) and 5505(b)(3)
Stockholders Equity	$5 million	$4 million	$4 million
The market value of publicly held shares	$15 million	$15 million	$ 5 million
Operating History	Two years	N/A	N/A
The market value of listed securities	N/A	$50 million	N/A
Net income from continuing operations (in the latest fiscal a year or in two of the last three fiscal years)	N/A	N/A	$750,000
Publicly held shares	1 million	1 million	1 million
Bid Price	$4	$4	$4)
Closing Price	$3	$2	$43
Corporate Governance	Yes	Yes	Yes
Total Shareholders	300	300	300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

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