Proposed New Nasdaq Exemption to Shareholder Approval Requirements

By: Cydney Posner

The SEC has now posted a proposed new de minimis exception from the shareholder approval requirements for sales to officers, directors, employees or consultants as participants in a discounted private placement.

Currently, under rule 4350(i)(1)(A), shareholder approval is required for the establishment or material amendment of a stock option or purchase plan or other equity compensation arrangement pursuant to which options or stock may be acquired by officers, directors, employees or consultants, except in specified circumstances. Nasdaq believes that discounted private placements made to officers, directors, employees or consultants of the company are to be considered "compensation" for purposes of Rule 4350(i)(1)(A) and would therefore require shareholder approval. Nasdaq is proposing to add a new de minimis exception to this shareholder approval requirement.

Under the proposal, shareholder approval would not be required for:

"(v) sales by the issuer to officers, directors, employees or consultants as part of, or in connection with, sales to third parties that do not involve any public offering, where

a. the sales are at prices less than the greater of book or market value of the company’s stock ('discounted sales');

b. the sales to officers, directors, employees or consultants are at the same price and on the same terms as the sales made to the third parties in the transaction;

c. the total number of shares sold or to be sold to all such officers, directors, employees or consultants, either individually or in the aggregate, is less than five percent of the total number of shares issued or to be issued in the transaction; and

d. the total number of shares issued or to be issued to all officers, directors, employees, or consultants in the transaction, aggregated with all other discounted sales to officers, directors, employees, or consultants during the preceding 12-month period, does not exceed one percent of the total number of shares outstanding at the beginning of the 12-month period."

Nasdaq views the exception to be applicable only in limited circumstances and states its intention that the exception be used solely in the situation where third parties that are considering investing in a company require a minimum level of participation in the company by officers, directors, employees or consultants as a condition to their investment. To alert companies to self-dealing concerns and to remind them of their obligations in related-party transactions, Nasdaq proposes to include cross-references to NASD Rule 4350(h), regarding related-party transactions, and to IM-4350-7, regarding codes of conduct.

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