Co-authored by Jan Davidson

On May 24, 2002, The Nasdaq Stock Market, Inc. ("Nasdaq") announced that a series of modifications to its corporate governance standards were approved by Nasdaq’s board of directors. The modifications will become final after approval by the Securities and Exchange Commission. The following is a short summary of the proposed changes.

  • Stock Option Plans. Nasdaq generally requires shareholder approval of stock option plans in which officers and directors participate. However, the rules contained an exemption for broadly based plans (i.e., plans in which the majority of participants are not officers and directors). The modifications announced by Nasdaq would eliminate this exemption. An exception for Employee Stock Ownership Plans and rights and warrants offered generally to all shareholders was retained. The board also preserved an exemption for inducement grants to new executive officers, but such grants must be approved by an independent compensation committee or a majority of the company’s independent directors.

  • Independent Directors. The Nasdaq board has approved a modification to the definition of independent director. The new definition will extend the prohibition on the payment of compensation of $60,000 or more to any payments, including political contributions, and payments to a family member of a director. Additionally, the definition will be extended so that a director will not be considered independent if the company makes payments to a charity where the director is an executive officer and such payments exceed the greater of $200,000 or five percent (5%) of either the company’s or the charity’s gross revenues.

  • Related Party Transactions. The Nasdaq board has modified the rules regarding related party transactions by mandating that such transactions must be reviewed and approved by a company’s audit committee, or a comparable body of the board of directors.

  • Misrepresentations to Nasdaq. The modifications approved by Nasdaq’s board have clarified the rules regarding intentional misrepresentations and omissions of material information made by an issuer in a communication to Nasdaq. Any such misrepresentation, omission or failure to provide information may result in an issuer being delisted.

  • Disclosure of Audit Opinions with Going Concern Qualifications. The modifications proposed by Nasdaq will require that a listed company that receives an audit opinion with a going concern qualification issue a press release announcing such opinion.

  • Disclosure of Material Information. Nasdaq rules require that companies, except in certain unusual circumstances, promptly disclose to the public through the news media any material information that would reasonably be expected to affect the value of the company’s securities or influence investors’ decisions. In an effort to align Nasdaq’s requirements with those of the Securities and Exchange Commission, as outlined in Regulation FD, the Nasdaq board has approved a modification that would allow the disclosure of material information through not only broadly disseminated press releases, but also, conference calls, press conferences and webcasts, so long as the public is provided adequate notice and access. Listed companies would still be required to provide prior notification of certain planned material news to the Nasdaq MarketWatch department.

Legal Alert is a bulletin of new developments and is not intended as legal advice or as an opinion on specific facts. For more information on securities law issues, please call any of the attorneys on our Securities Team, including W. Randy Eaddy or Jan M. Davidson, or contact us through our website, www.KilpatrickStockton.com.