By: Cydney Posner

Under Nasdaq Rule 4350(b)(1)(A), each Nasdaq issuer is currently required to distribute to shareholders a copy of an annual report containing audited financial statements. Nasdaq has now proposed to modify its rules to permit a company to distribute its annual report electronically, similar to the manner permitted in the rule adopted by the NYSE, described in an earlier post. The proposed rule would allow a company to comply with the annual report requirement either:

  • by mailing the report to shareholders, or
  • by posting the annual report to shareholders on or through the company's publicly accessible website (or, if the company does not maintain its own website, on another permitted website), along with a prominent undertaking (in English) to provide shareholders, upon request, with a paper copy of the company's annual report free of charge. If the company chooses the electronic alternative, it must, simultaneously with the website posting, issue a press release stating that its annual report has been filed with the SEC and that the annual report is available on the company’s website. The press release must also include the website address and state that shareholders may receive a paper copy free of charge upon request. The company must provide paper copies within a reasonable period of time following the request.
Currently, this proposal would have minimal impact on most companies, which are required to distribute paper copies of their annual reports to shareholders unless they have received a shareholder’s prior consent to electronic delivery. At the present time, it would affect primarily foreign private issuers, which are exempt from the SEC’s proxy solicitation rules. However, once the SEC's new electronic proxy rules become effective on July 1, 2007, domestic companies will be able to take advantage of permitted electronic distribution.

Nasdaq also proposes to make clear that the annual report requirement may be satisfied by providing the company’s annual report filed with the SEC, such as the Form 10-K, 20-F or 40-F. Under the proposal, the annual report requirement is applicable only to issuers of common stock and voting preferred stock (and their equivalents). Further, Nasdaq proposes to remove a provision related to the timing of delivery of the annual report, which is already governed by the SEC's proxy rules.

Nasdaq is also proposing to allow foreign private issuers to disclose non-conforming governance practices on their publicly accessible websites.

Currently, Nasdaq requires that foreign private issuers disclose all non-conforming governance practices only in their Forms 20-F or 40-F.

Nasdaq is also proposing to make certain technical corrections to its rules.

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