[Federal Register Volume 67, Number 45 (Thursday, March 7, 2002)]
[Notices]
[Pages 10462-10463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5431]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45492; File No. SR-NASD-2002-20]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. Relating to the 
Use of Share Caps To Comply With the Shareholder Approval Rules of The 
Nasdaq Stock Market

March 1, 2002.
    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 February 6, 2002, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``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. On February 
27, 2002, the NASD--through Nasdaq--submitted Amendment No. 1 to the 
proposal.\3\ Nasdaq has asserted that the proposed rule change 
constitutes a stated policy, practice, or interpretation with respect 
to the meaning, administration, or enforcement of an existing rule and, 
therefore, is immediately effective pursuant to Rule 19b-4(f)(1) under 
the Act.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Sara Nelson Bloom, Associate General 
Counsel, Nasdaq, to Katherine England, Assistant Director, Division 
of Market Regulation, Commission, dated February 26, 2002 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq clarified the 
consequences for Nasdaq issuers of engaging in transactions that 
employ defective share caps.
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is adopting interpretive material on the use of share caps 
to comply with the 20% limitations under NASD Rule 4350(i) and to make 
conforming changes to NASD IM-4300, NASD IM-4310-2, and NASD Rule 
4350(i). Text of the proposed rule change, as amended, appears below. 
New language is italicized; deletions are bracketed.
* * * * *
    IM-4300, Interpretive Material Regarding Future Priced Securities, 
is renumbered as IM-4350-1 and footnote 2 is amended as follows:
    2. [In order to obviate the need for shareholder approval through 
such an arrangement, those shares already issued in connection with the 
Future Priced Security must not be entitled to vote on the proposal to 
approve the issuance of additional shares upon conversion of the Future 
Priced Security.] See IM-4350-2, Interpretative Material Regarding the 
Use of Share Caps to Comply with Rule 4350(i).
    New Rule, IM-4350-2, Interpretative Material Regarding the Use of 
Share Caps to Comply with Rule 4350(i), is added as follows:

IM-4350-2--Interpretative Material Regarding the Use of Share Caps to 
Comply with Rule 4350(i)

    Rule 4350(i) limits the number of shares or voting power that can 
be issued or granted without shareholder approval prior to the issuance 
of certain securities.\1\ Generally, this limitation applies to 
issuances of 20% or more of the common stock or 20% or more of the 
voting power outstanding before the issuance.\2\
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    \1\ An exception to this rule is available to issuers when the 
delay in securing stockholder approval would seriously jeopardize 
the financial viability of the enterprise. Rule 4350(i)(2). However, 
a share cap is not permissible in conjunction with the financial 
viability exception provided in Rule 4350(i)(2), because the 
application to Nasdaq and the notice to shareholders required in the 
rule must occur prior to the issuance of any common stock or 
securities convertible into or exercisable for common stock.
    \2\ While Nasdaq's experience is that this issue is generally 
implicated with respect to these situations, it may also arise with 
respect to the 5% threshold set forth in Rule 4350(i)(1)(C)(i).
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    Issuers sometimes comply with the 20% limitation in this rule by 
placing a ``cap'' on the number of shares that can be issued in the 
transaction, such that there cannot, under any circumstances, be an 
issuance of 20% or more of the common stock or voting power previously 
outstanding without prior shareholder approval. If an issuer determines 
to defer a shareholder vote in this manner, shares that are issuable 
under the cap (in the first part of the transaction) must not be 
entitled to vote to approve the remainder of the transaction. In 
addition, a cap must apply for the life of the transaction, unless 
shareholder approval is obtained. For example, caps that no longer 
apply if a company is not listed on Nasdaq are not permissible under 
the Rule. Of course, if shareholder approval is not obtained, then the 
investor will not be able to acquire 20% or more of the common stock or 
voting power outstanding before the transaction and would continue to 
hold the balance of the original security in its unconverted form.
    Nasdaq has observed situations where issuers have attempted to cap 
the issuance of shares at below 20% but have also provided an 
alternative outcome based upon whether shareholder approval is 
obtained, such as a ``penalty'' or a ``sweetener.'' For example, a 
company issues a convertible preferred stock or debt instrument that 
provides for conversions of up to 20% of the total shares outstanding 
with any further conversions subject to shareholder approval. However, 
the terms of the instrument provide that if shareholders reject the 
transaction, the coupon or conversion ratio will increase or the issuer 
will be penalized by a specified monetary payment. Likewise, a 
transaction may provide for improved terms if shareholder approval is 
obtained. Nasdaq believes that in such situations the cap is defective 
because the related penalty or sweetener has a coercive effect on the 
shareholder vote, and thus may deprive shareholders of their ability to 
freely exercise their vote. Accordingly, Nasdaq will not accept a cap 
that defers the need for shareholder approval in such situations. 
Instead, if the terms of a transaction can change based upon the 
outcome of the shareholder vote, no shares may be issued prior to the 
approval of the shareholders. Issuers that engage in transactions with 
defective caps will be in violation of Nasdaq rules and will be subject 
to delisting.
    Issuers having questions regarding this policy are encouraged to 
contact The Nasdaq Stock Market, Listing Qualifications Department at 
(877) 536-2737, which will provide a written interpretation of the 
application of Nasdaq Rules to a specific transaction, upon prior 
written request of the issuer.
    IM-4310-2, Definition of a Public Offering, is renumbered as IM-
4350-3 and the first paragraph is amended as follows:

[[Page 10463]]

    [Marketplace] Rule[s 4310(c)(25)(G)(i)(d), 4320(e)(21)(G)(i)(d), 
and 4460(i)(1)(D) provide] 4350(i)(1)(D) provides that shareholder 
approval is required for the issuance of common stock (or securities 
convertible into or exercisable for common stock) equal to 20 percent 
or more of the common stock or 20 percent or more of the voting power 
outstanding before the issuance for less than the greater of book or 
market value of the stock. Under [these] this rule[s], however, 
shareholder approval is not required for a ``public offering.''
    The existing cross-reference section following Rule 4350(i), 
Shareholder Approval, is amended to reflect the renumbering of existing 
IM-4300 and additional cross-references are added as follows:
IM-[4300]4350-1, Future Priced Securities

IM-4350-2, Interpretative Material Regarding the use of Share Caps to 
Comply with Rule 4350(i)

IM-4350-3, Definition of Public Offering

* * * * *

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

    In its filing with the Commission, the NASD 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. The NASD 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
    NASD Rule 4350(i) limits the number of shares or voting power that 
can be issued or granted without shareholder approval prior to the 
issuance of certain securities. Generally, this limitation applies to 
issuances of 20% or more of the common stock or 20% or more of the 
voting power outstanding before the issuance. Nasdaq has observed 
situations where issuers have attempted to cap the issuance of shares 
at below 20% but have also provided an alternative outcome based upon 
whether shareholder approval is obtained, such as a ``penalty'' or a 
``sweetener.'' Nasdaq believes that in such situations the cap is 
defective because it has a coercive effect on the shareholder vote and, 
thus, may deprive shareholders of their ability to freely exercise 
their vote. Accordingly, Nasdaq will not accept a cap that defers the 
need for shareholder approval in such situations. Instead, if the terms 
of a transaction can change based upon the outcome of the shareholder 
vote, no shares may be issued prior to the approval of the 
shareholders. Issuers that engage in transactions with defective caps 
will be in violation of Nasdaq rules and will be subject to delisting. 
Accordingly, Nasdaq is proposing the adoption of interpretive material 
to clarify for issuers, their counsel, and investors Nasdaq's 
requirements pertaining to the use of share caps to comply with its 
shareholder approval rules.
    Nasdaq is also proposing changes to conform existing rules and 
correct certain cross-references.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6) of the Act \5\ in that it is 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest. As previously noted, 
Nasdaq is proposing to adopt this interpretative material to provide 
greater clarity and transparency for issuers, their counsel, and 
investors.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Nasdaq has asserted that the proposed rule change constitutes a 
stated policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule and, therefore, is 
immediately effective pursuant to Rule 19b-4(f)(1) under the Act.\6\ At 
any time within 60 days of the filing of this proposed rule change, as 
amended, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \6\ 17 CFR 240.19b-4(f)(1).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, as 
amended, is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
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. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-2002-20 and 
should be submitted by March 28, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-5431 Filed 3-6-02; 8:45 am]
BILLING CODE 8010-01-P