[Federal Register: September 4, 2008 (Volume 73, Number 172)]
[Notices]
[Page 51669-51670]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04se08-69]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-58432; File No. SR-NASDAQ-2008-062]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order
Approving Proposed Rule Change To Clarify the Application of Nasdaq
Rules When a Listed Company Combines With a Non-Nasdaq Entity
August 27, 2008.
I. Introduction
On July 10, 2008, The NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule
[[Page 51670]]
19b-4 thereunder,\2\ a proposed rule change to clarify the application
of certain Nasdaq listing rules when a Nasdaq-listed company combines
with a non-Nasdaq entity. The proposed rule change was published for
comment in the Federal Register on July 23, 2008.\3\ The Commission
received no comments on the proposal. This order approves the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 42848 (July 17,
2008), 73 FR 42848.
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II. Description of the Proposal
Nasdaq Rule 4340(a) requires that 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. The current Rule refers to such a transaction as a
``Reverse Merger'' and provides a non-exclusive list of factors that
Nasdaq will consider to determine if a transaction should be considered
a Reverse Merger for purposes of the Rule.\4\
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\4\ Specifically, the rule provides that, in determining whether
a Reverse Merger has occurred, Nasdaq will 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, as well as the nature of the businesses and relative
size of the Nasdaq issuer and non-Nasdaq entity. Securities Exchange
Act Release No. 44067 (March 13, 2001), 66 FR 15515 (March 19, 2001)
(SR-NASD-01-01).
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Nasdaq notes that Rule 4340(a) 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.\5\ In these combinations, a non-Nasdaq entity would
purchase a Nasdaq issuer in a transaction that would result 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.
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\5\ Securities Exchange Act Release No. 32264 (May 4, 1993), 58
FR 27760 (May 11, 1993) (SR-NAS-93-07).
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While this Rule was originally adopted to deal with companies
seeking a ``backdoor listing'' by acquiring a listed shell company, its
language is not limited in that regard. Accordingly, Nasdaq states that
it 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. For example, 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.\6\ 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.
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\6\ 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.
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However, given the use of the term ``Reverse Merger'' within Rule
4340(a), and the existence of a footnote in IM-4350-1 referring to
``backdoor listings,'' \7\ Nasdaq states that companies have expressed
confusion as to the scope of the Rule. Nasdaq therefore proposes to
remove these references from Rule 4340(a) and IM-4350-1 and instead
refer simply to business combinations with non-Nasdaq entities
resulting in a change of control.
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\7\ See Nasdaq IM-4350-1, footnote 4.
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III. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, with Section 6(b)(5) of the Act,\8\ which requires,
among other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, 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.\9\
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\8\ 15 U.S.C. 78f(b)(5).
\9\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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The Commission believes that the proposed rule change will provide
clarity to, and eliminate any ambiguity over, the scope of application
of Nasdaq Rule 4340. In particular, the revised rule language will make
clear that an issuer must satisfy the initial listing requirements
whenever it enters into any 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. The
Commission notes that the Rule will continue to apply to ``backdoor
listings'' or ``reverse mergers,'' but that the proposed rule change
will clarify that the Rule also applies to a broader category of
business combinations that result in a change of control of the issuer.
The Commission believes that, in the case of any transaction resulting
in such a change of control, which includes a backdoor listing, it is
important for Nasdaq to ensure that the company meets all initial
listing criteria and is subject to the scrutiny normally applied to
issuers seeking initial listing. Accordingly, the Commission finds that
the proposed rule change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-NASDAQ-2008-062) be, and
hereby is, approved.
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\10\ 15 U.S.C. 78s(b)(2).
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. E8-20468 Filed 9-3-08; 8:45 am]
BILLING CODE 8010-01-P