Document ID: SEC-2008-1031-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2008-07-23T04:00Z

[Federal Register: July 23, 2008 (Volume 73, Number 142)]
[Notices]               
[Page 42848-42850]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23jy08-84]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58182; File No. SR-NASDAQ-2008-062]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Clarify the Application of 
Nasdaq Rules When a Listed Company Combines With a non-Nasdaq Entity

July 17, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 10, 2008, The NASDAQ Stock Market LLC (``Nasdaq'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared by Nasdaq. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to clarify the application of Nasdaq rules when a 
listed company combines with a non-Nasdaq entity. Nasdaq will implement 
the proposed rule upon approval. The text of the proposed rule change 
is below. Proposed new language is in italics; proposed deletions are 
in brackets.\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic manual of Nasdaq found at http://www.complinet.com/
nasdaq.
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* * * * *
4340. Application for Re-Listing by Listed Issuers
    (a) [Reverse Mergers] Business Combinations With non-Nasdaq 
Entities Resulting in a Change of Control. An issuer must apply for 
initial listing in connection with a transaction whereby the issuer 
combines with a non-Nasdaq entity, resulting in a change of control of 
the issuer and potentially allowing the non-Nasdaq entity to obtain a 
Nasdaq Listing [(for purposes of this rule, such a transaction is 
referred to as a ``Reverse Merger'')]. In determining whether a 
[Reverse Merger] change of control has occurred, Nasdaq shall consider 
all relevant factors including, but not limited to, changes in the 
management, board of directors, voting power, ownership, and financial 
structure of the issuer. Nasdaq shall also consider the nature of the 
businesses

[[Page 42849]]

and the relative size of the Nasdaq issuer and non-Nasdaq entity. The 
issuer must submit an application for the post-transaction entity with 
sufficient time to allow Nasdaq to complete its review before the 
transaction is completed. If the issuer's application for initial 
listing has not been approved prior to consummation of the transaction, 
Nasdaq will issue a Staff Determination Letter as set forth in Rule 
4804 and begin delisting proceedings pursuant to the Rule 4800 Series.
    (b) Bankruptcy.
    No change.
* * * * *
IM-4350-1. Interpretive Material Regarding Future Priced Securities
Summary
    No change.
How the Rules Apply
Shareholder Approval
    No change.
Voting Rights
    No change.
The Bid Price Requirement
    No change.
Listing of Additional Shares
    No change.
Public Interest Concerns
    No change.
    [Reverse Merger] Business Combinations With non-Nasdaq Entities 
Resulting in a Change of Control
    Rule 4340(a) provides:
    An issuer must apply for initial listing in connection with a 
transaction whereby the issuer combines with a non-Nasdaq entity, 
resulting in a change of control of the issuer and potentially allowing 
the non-Nasdaq entity to obtain a Nasdaq Listing [(for purposes of this 
rule, such a transaction is referred to as a ``Reverse Merger'')]. In 
determining whether a [Reverse Merger] change of control has occurred, 
Nasdaq shall consider all relevant factors including, but not limited 
to, changes in the management, board of directors, voting power, 
ownership, and financial structure of the issuer. Nasdaq shall also 
consider the nature of the businesses and the relative size of the 
Nasdaq issuer and non-Nasdaq entity. The issuer must submit an 
application for the post-transaction entity with sufficient time to 
allow Nasdaq to complete its review before the transaction is 
completed. If the issuer's application for initial listing has not been 
approved prior to consummation of the transaction, Nasdaq will issue a 
Staff Determination Letter as set forth in Rule 4804 and begin 
delisting proceedings pursuant to the Rule 4800 Series.
    This provision, which applies regardless of whether the issuer 
obtains shareholder approval for the transaction, requires issuers to 
qualify under the initial listing standards in connection with a 
[Reverse Merger] combination that results in a change of 
control.[4] It is important for issuers to realize that in 
certain instances, the conversion of a Future Priced Security may 
implicate this provision. For example, if there is no limit on the 
number of common shares issuable upon conversion, or if the limit is 
set high enough, the exercise of conversion rights under a Future 
Priced Security could result in [a Reverse Merger with] the holders of 
the Future Priced Securities obtaining control of the listed company. 
In such event, an issuer may be required to re-apply for initial 
listing and satisfy all initial listing requirements.
    Footnotes to IM-4350-1:
    1-3 No change.
    [\4\ This provision is designed to address situations where a 
company attempts to obtain a ``backdoor listing'' on Nasdaq by merging 
with a Nasdaq issuer with minimal assets and/or operations.]
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Marketplace Rule 4340(a) requires that an issuer must apply for 
initial listing following a transaction whereby the issuer combines 
with a non-Nasdaq entity, resulting in a change of control of the 
issuer and potentially allowing the non-Nasdaq entity to obtain a 
Nasdaq listing. This rule was originally adopted in 1993 to address 
concerns associated with non-Nasdaq entities seeking a ``backdoor 
listing'' on Nasdaq through a business combination involving a Nasdaq 
issuer.\4\ In these combinations, a non-Nasdaq entity purchased a 
Nasdaq issuer in a transaction that resulted in the non-Nasdaq entity 
obtaining a Nasdaq listing without qualifying for initial listing or 
being subject to the background checks and scrutiny normally applied to 
issuers seeking initial listing. The rule was amended in 2001 to define 
``Reverse Merger'' and to provide clarification regarding the factors 
used by Staff to determine if a transaction should be considered a 
Reverse Merger.\5\ In 2006, Nasdaq amended the rule to clarify the 
timing of the application of the rule.\6\
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    \4\ Securities Exchange Act Release No. 32264 (May 4, 1993), 58 
FR 27760 (May 11, 1993) (approving SR-NASD-93-07).
    \5\ Securities Exchange Act Release No. 44067 (March 13, 2001), 
66 FR 15515 (March 19, 2001) (approving SR-NASD-01-01).
    \6\ Securities Exchange Act Release No. 55052 (January 5, 2007), 
72 FR 1569 (January 12, 2007) (approving SR-NASDAQ-2006-047).
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    While this Rule was originally focused on companies seeking a 
``backdoor listing'' by acquiring a listed shell company, its language 
is not limited in that regard, and Nasdaq has applied the rule to any 
transaction where there is a change of control potentially allowing a 
non-Nasdaq entity to obtain a Nasdaq listing. As such, Nasdaq has 
applied the rule to mergers involving operating companies in 
substantially similar businesses and, in appropriate cases, to mergers 
of ``equals,'' where the companies are approximately the same size.\7\ 
This allows Nasdaq staff to review the post-transaction entity, 
including any new officers, directors and control persons, before the 
transaction is consummated, thereby allowing staff to confirm that the 
post-transaction entity will meet all initial listing criteria and that 
there are no public interest concerns. Nonetheless, given the use of 
the term ``Reverse Merger'' within Rule 4340(a), and the existence of a 
footnote in IM-4350-1 speaking of ``backdoor listings,'' companies have 
expressed confusion as to the scope of the rule. As such, Nasdaq 
proposes to remove these references from Rule 4340(a) and IM-4350-1.\8\ 
As

[[Page 42850]]

revised, Nasdaq believes the rule will more clearly reflect that a 
company must satisfy the initial listing requirements whenever it 
enters into a transaction with a non-Nasdaq entity, resulting in a 
change of control of the listed company and potentially allowing the 
non-Nasdaq entity to obtain a Nasdaq listing.
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    \7\ See, e.g., Decision 2002/2003-9 of the Nasdaq Listing and 
Hearing Review Council (December 2002), available at: http://
www.nasdaq.com/about/NLHRCDecisions20022003.pdf.
    \8\ Nasdaq has confirmed that the rule would still, of course, 
apply to ``backdoor listings'' or ``reverse mergers,'' and that this 
proposed change is intended to clarify that the rule also applies to 
a broader category of business combinations that result in a change 
of control of the issuer. See Telephone conversation between Arnold 
Golub, Associate General Counsel, Nasdaq, and Sara Gillis, Special 
Counsel, Division of Trading and Markets, Commission, on July 15, 
2008.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 6 of the Act,\9\ in general and with sections 
6(b)(5) of the Act,\10\ in particular in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. The proposed rule change 
would clarify Nasdaq's listing requirements related to change of 
control transactions, and thereby provide additional transparency to 
the rules. This proposed clarification is designed to protect investors 
and the public interest by allowing Nasdaq to confirm that the post-
transaction entity will meet all initial listing criteria and that 
there are no public interest concerns associated with individuals or 
entities newly joining the company.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2008-062 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2008-062. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of Nasdaq. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASDAQ-2008-062 and should be submitted on or before 
August 13, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-16827 Filed 7-22-08; 8:45 am]

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