Mergers And Acquisitions: Types Of Transactions

Types of Mergers and Acquisitions

A merger or acquisition (M&A) transaction involves the combination of two companies, resulting in either a single corporate entity or a structure with a parent holding company and subsidiary. Mergers can be classified based on the competitive relationship between the parties and the legal structure of the transaction.

Regarding the competitive relationship, there are three main types of mergers:

Horizontal Merger: In this type, one company acquires another that operates in the identical or substantially similar industry. The goal is often to eliminate a competitor and strengthen the acquiring company's market position.
Vertical Merger: In a vertical merger, one company acquires either a customer or a supplier. The aim is to integrate different stages of the production or distribution process, enhancing efficiency and control.
Conglomerate Merger: This category encompasses all other transactions where there is no direct competitive or vertical relationship between the merging parties. It often leads to the creation of a conglomerate, a diversified entity with varied business interests.

From a legal structure perspective, M&A transactions can take various forms:

Asset Purchase: The acquiring company purchases the assets of the target company.
Stock Purchase: The acquiring company buys the shares or equity of the target company.
Forward Merger: The target company merges into the acquiring company, and the acquiring company continues to exist.
Forward or Reverse Triangular Merger: These involve the creation of a new entity (triangular) where the acquiring company may gain control. In a reverse triangular merger, the target company shareholders and management may gain control of the acquiring company.

Each type of merger or acquisition structure has its own implications and considerations, and the choice depends on the strategic goals, financial arrangements, and regulatory environment of the parties involved.

In an asset purchase transaction, the acquiring company has the flexibility to selectively choose the assets it wishes to acquire and the liabilities it is willing to assume. This type of transaction allows for a more tailored acquisition where the acquirer can specify the assets it desires, including tangible and intangible rights, and precisely define the liabilities it is willing to take on. Asset purchases can be intricate, requiring careful drafting to ensure the inclusion of desired assets and the assumption of specified liabilities. Additionally, obtaining third-party consents may be necessary to achieve the intended outcome.

In a stock acquisition, the acquiring company purchases the stock directly from the shareholders of the target company. The result of a stock acquisition can be categorized as either a forward or reverse acquisition, depending on the control retained by the target company shareholders after the transaction closes. In a stock acquisition, the operations, assets, and liabilities of the target company remain unchanged; only the ownership structure is altered. However, complexities may arise if certain target company shareholders refuse to participate, leading to the presence of unfriendly minority shareholders. Often, stock acquisitions are structured with closing contingent upon a specified percentage of shareholder participation, such as 90% or even 100%. This approach ensures a more cohesive ownership structure and mitigates challenges posed by dissenting minority shareholders.

In a forward merger or a forward or reverse triangular merger, two companies join forces, resulting in the creation of a single corporate entity or a structure with a parent holding company and subsidiary. In this type of merger, the shareholders of the target company typically receive compensation in the form of stock of the acquiring company, cash, or a combination of both. All assets and liabilities of the target company are included in the M&A transaction. A triangular merger involves the formation of a new acquisition subsidiary to facilitate the transaction, leading to the establishment of a parent-subsidiary relationship.

As mentioned earlier, a reverse merger involves a change in control of the acquiring company. In a reverse or reverse triangular merger, the shareholders of the target company exchange their shares for either new or existing shares of the acquiring company. This results in a scenario where, at the conclusion of the transaction, the shareholders of the target company hold a majority of the shares of the acquiring company. The target company may become a wholly owned subsidiary of the acquiring company or merge into a newly formed acquisition subsidiary. Reverse mergers are commonly employed as a means for a private target company to transition into a public entity, especially when the acquiring company is already publicly traded.

The chosen structure should align with the broader goals of the transaction and optimize the overall outcome for the parties involved. This strategic decision-making process involves evaluating the financial, legal, and operational aspects to ensure that the selected form meets the specific needs and priorities of the entities undergoing the merger or acquisition.

Refresher on Other Aspects of the Transaction

An Outline of the Transaction Documents

In the typical M&A process, the initial steps involve the execution of a confidentiality agreement and a letter of intent, followed by the merger agreement itself. Here's a breakdown of these key documents and their purposes:

1. Confidentiality Agreement:

Objective: The primary goal is to protect sensitive information shared during the negotiation and due diligence process.
Content: The agreement outlines the terms under which both parties agree to keep information confidential. This includes restrictions on internal and external disclosure.
Additional Provisions: Confidentiality agreements may include non-competition clauses, prohibitions against solicitation of customers or employees, standstill provisions (limiting certain actions by one party), and exclusivity provisions.

2. **Letter of Intent (LOI):**

Nature: Generally non-binding, the LOI serves as an initial agreement outlining the fundamental terms and conditions of the proposed transaction.
Purpose: The LOI helps identify and address key issues early in the negotiation process. It aims to streamline the due diligence phase and focus efforts on resolving critical matters.
Key Points: The LOI may cover aspects such as the purchase price or price range, parameters for due diligence, pre-deal recapitalizations, confidentiality, exclusivity, and specific time frames for each step in the process.
Transaction Checklist: Alongside the LOI, the parties' attorneys often create a transaction checklist. This checklist serves as a guide, outlining tasks and responsibilities, helping ensure a structured and efficient process.

These early documents lay the groundwork for the subsequent phases of the M&A deal, providing a framework for negotiations and establishing the key parameters for moving forward.

In the realm of M&A negotiations, exclusivity clauses are often present in letters of intent, known as "no shop" or "window shop" provisions. A "no shop" clause bars one or both parties from engaging in discussions with third parties that might adversely impact the potential deal within a specified timeframe. Conversely, a "window shop" provision permits some level of negotiation with third parties, such as considering unsolicited proposals.

A distinct provision is the "go shop" clause, which serves a dual purpose by addressing the fiduciary duty of the target company's board of directors and potentially maximizing shareholder value. In a "go shop" scenario, the potential acquirer allows the target company to actively seek better offers upfront, providing a controlled mechanism for testing the market before significant resources are invested. This provision is often sought when the board's "Revlon Duties" are activated, indicating a change of control.

A standstill provision functions to restrict a party from making significant business alterations beyond regular operations throughout the negotiation period. This includes constraints on actions like selling substantial assets, incurring exceptional debts, divesting subsidiaries, making changes to the management team, and similar activities. Additionally, companies often safeguard their interests in the letter of intent (LOI) stage by stipulating lock-up agreements for major stockholders. These agreements may entail commitments to vote in favor of the deal and refraining from transferring or disposing of their shares until the deal is finalized.

The Merger Agreement

In summary, the merger agreement delineates the financial specifics of the transaction and outlines the legal rights and responsibilities of the involved parties. It furnishes the buyer with a comprehensive overview of the acquired business, including provisions for rights and remedies in case of significant inaccuracies. The agreement specifies closing procedures, conditions precedent, and post-closing commitments, while also detailing the representations and warranties made by all parties and the corresponding rights and remedies in the event of inaccuracies in these representations and warranties.

The key elements of the merger agreement, along with brief explanations, are outlined below:

1. Representations and warranties: These statements offer a snapshot of the factual status as of the closing date. Sellers typically represent facts about the business, such as asset ownership, absence of undisclosed liabilities, and legal compliance. Buyers make representations regarding legal capacity and authority to enter into a binding contract, among other things. Both parties confirm the accuracy of public filings, financial statements, material contracts, tax matters, and the organization and structure of the entity.

2. Covenants: These provisions govern the actions of the parties before and after closing. For instance, a covenant may require the seller to continue operating the business in the ordinary course and maintain assets until closing. All covenants mandate good faith compliance.

3. Conditions: Conditions pertain to prerequisites for closing, including approvals from shareholders and the board of directors, obtaining certain third-party consents, and the execution of necessary documents. If these conditions are not met, the parties typically have the right to cancel the transaction.

4. Indemnification/remedies: These sections outline the rights and remedies available to the parties in the event of a breach, such as a material inaccuracy in representations and warranties or unforeseen third-party claims related to the agreement or the business.

5. Deal protections: Similar to the LOI, the merger agreement includes deal protection terms. These can involve provisions like no-shop or window-shop clauses, requirements for business operations leading up to closing, breakup fees, and voting agreements.

6. Schedules: Schedules provide detailed information on what the seller is selling, including a comprehensive list of customers, contracts, equity holders, individual creditors, and the terms of obligations. Schedules offer in-depth details about the transaction.

If the parties haven't previously established a letter of intent or confidentiality agreement outlining the due diligence process, the merger agreement might incorporate due diligence provisions. Due diligence involves the comprehensive legal, business, and financial examination of a business before entering into a transaction. While the specific procedures of due diligence can vary based on the transaction's nature, whether it's a small acquisition or a reverse merger for going public, it is widely considered a crucial aspect of any transaction, potentially on par with the importance of documentation.

Board of Directors’ Fiduciary Duties in the Merger Process

In accordance with state corporate law, the governance of a corporation's business and affairs typically falls under the direction of its board of directors. Board members are bound by a fiduciary relationship to the corporation, necessitating that their actions prioritize the corporation's best interests over their personal interests. Courts generally refrain from scrutinizing directors' decisions provided that the board has followed an appropriate decision-making process. This principle is known as the "business judgment rule," establishing a presumption that "in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company." This concept is echoed in various Delaware cases, including the notable Smith vs. Van Gorkom decision (488 A.2d 858, Del. 1985).

In specific situations, particularly in the context of a merger and acquisition transaction where a board might confront a conflict of interest (e.g., balancing the corporation's financial benefit against personal gains in terms of cash or job security), the actions of the board of directors undergo heightened scrutiny. This is known as the "enhanced scrutiny business judgment rule," originating from legal precedents such as Revlon, Inc. vs. MacAndrews & Forbes Holdings, Inc. (506 A.2d 173, Del. 1986) and Unocal vs. Mesa Petroleum (493 A.2d 946, Del. 1985).

The "entire fairness standard," a third criterion, becomes relevant when a conflict of interest arises involving directors and/or shareholders, such as when directors are involved on both sides of a transaction. Under this standard, directors are obligated to demonstrate that the entire transaction is equitable for the shareholders, encompassing both the procedural aspects and the substance, including price and terms.

In all instances, directors' fiduciary duties to a corporation encompass honesty and good faith, along with the duty of care, duty of loyalty, and duty of disclosure. Specifically, the duty of care mandates that directors perform their duties with the same level of care a reasonable person would employ, acting in the best interests of the corporation and exercising good faith within the unique circumstances of that particular corporation. The duty of loyalty necessitates the absence of conflicts between duty and self-interest, while the duty of disclosure obliges directors to furnish comprehensive and materially accurate information to the corporation.

In the realm of mergers or acquisitions, a director's duties and responsibilities hinge on the specific circumstances of the transaction. In broad terms, if a transaction is deemed immaterial or only marginally affects the company, the scrutiny faced by the board of directors is lessened, and the basic business judgment rule prevails. For instance, in situations where a company's growth strategy relies on acquisitions, the board might outline the strategy and acquisition parameters while leaving the execution largely to C-suite executives.

The director's obligations also vary based on their position in the transaction, whether on the buying or selling side. On the buy side, considerations involve securing the best deal for the company and integrating various aspects like products, services, staff, and processes. Conversely, on the sell side, the primary goal is maximizing returns for shareholders, with social considerations such as job loss factoring into the decision-making process.

Importantly, the law emphasizes the process, steps, and considerations taken by the board of directors rather than the final decision itself. The diligence and effort invested in the process, benefiting both the company and its shareholders, contribute to the protection of directors amid scrutiny. Courts evaluate factors like meeting attendance, frequency, knowledge of the subject matter, deliberation time, guidance from third-party experts, information requests from management, and document review. In the performance of their obligations and fiduciary responsibilities, a board of directors may, and should, seek the advice and counsel of third parties, such as attorneys, investment bankers, and valuation experts. Moreover, it is generally good practice to obtain a third-party fairness opinion on a transaction.

Dissenter and Appraisal Rights

Shareholders of a company involved in a merger transaction typically possess what is known as "dissenters" or "appraisal rights," unless they are active participants in the transaction, such as in the case of a share-for-share exchange agreement. Appraisal rights grant shareholders who dissent from a specific transaction the statutory entitlement to receive the fair value of their stock ownership. This fair value determination may occur through a judicial or court proceeding or an independent valuation. Appraisal rights and the associated valuation processes often lead to extensive litigation in mergers and acquisitions.

While the specifics of the appraisal rights process can differ significantly from state to state, with Delaware serving as a prominent example, the Delaware Chancery Court holds a leading position in judicial precedence regarding this area of corporate law. Given that over half of U.S. public companies and more than two-thirds of Fortune 500 companies are incorporated in Delaware, the state's corporate laws set a significant standard.

The Delaware General Corporation Law (DGCL), particularly Section 262, which governs appraisal rights, imposes strict procedural requirements on both petitioning stockholders and the company involved. Section 262 of the DGCL grants any stockholder of a Delaware corporation the right to seek an appraisal if they meet specific criteria. This includes being the record holder of shares on the appraisal rights demand date, maintaining continuous ownership through the effective date of the merger, following the procedures outlined in Section 262, and abstaining from voting in favor of or consenting to the merger.

Appraisal proceedings commonly involve four recurring valuation techniques: (i) discounted cash flow (DCF) analysis; (ii) comparable company analysis; (iii) comparable transactions analysis; and (iv) the merger price itself. The merger price typically reflects the outcome of the transaction process, contrasting with the more academic and subjective valuation methods employed in litigation challenging the price.

In recent cases, the Delaware court has affirmed the merger price as the most dependable indicator of fair value, particularly when the merger price results from a fair and thorough process in an arm's-length transaction. If there are concerns about the process leading to the final merger price, Delaware courts typically consider the Discounted Cash Flow (DCF) analysis as the next best measure of fair value.

Gayatri GuptaDecember 21, 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.

Securities Lawyer Blog

Mergers And Acquisitions: Types Of Transactions

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

Licensed in District of Columbia, State of Colorado, US District Court for the District of Columbia, US District Court for the District of Colorado, with pro hac vice Admission for the State of Maryland and Virginia.

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