By:  Cydney Posner

Corporate Counsel has identified some recent activity by Nasdaq implementing its previous policy pronouncements. First, Nasdaq has issued a public letter of reprimand, one of the new arrows in its quiver of penalties for noncompliance (see my posting of January 11, 2006). In this instance, Nasdaq issued a letter of reprimand to Paula Financial, which had failed to notify Nasdaq when two of its independent directors resigned, causing it to violate the Nasdaq requirement that the board be composed of a majority of independent directors. However, the company regained compliance, and Nasdaq elected to issue a letter of reprimand rather than a delisting letter.

Remember that, under the new rule, Nasdaq may issue, as a staff determination, a public reprimand letter in circumstances where the Listing Department has determined that the issuer has violated a Nasdaq corporate governance or notification listing standard (other than one required by Rule 10A-3), but that delisting is not an appropriate sanction. In determining whether to issue a public reprimand letter, the Listing Department will consider the following factors:

  • whether the violation was inadvertent;
  • whether the violation materially adversely affected shareholders’ interests;
  • whether the violation has been cured;
  • whether the issuer reasonably relied on an independent advisor and
  • whether the issuer has demonstrated a pattern of violations.
A company that receives a public reprimand letter must make a public announcement through the news media disclosing the receipt of the decision, indicating the rules upon which the decision was based. Paula Financial issued a press release, filed an 8-K and posted the reprimand letter on its website.

In addition, Nasdaq is also apparently continuing to monitor proxy statements for compliance with the independence requirements and challenge companies for potential independence violations. Another company filed an 8-K disclosing that Nasdaq had advised it that, in Nasdaq's view, one of the company's audit committee members was not independent because, prior to joining the board, he had been a consultant and had received an option grant that Nasdaq valued (but not necessarily using Black-Scholes) at more than $60,000. As a result, the director resigned from the Audit Committee, although not from the board.

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