Private M&A Transaction Process

Step 1 — Conception.

Every M&A transaction begins as an idea, perhaps conceived by a seller in need of liquidity, a target seeking strategic or financial benefits or a buyer hungry for market share or looking to supplement its cash flow or asset base. During this initial stage, sellers and targets (which, for simplicity, I will jointly refer to as “sellers” for the rest of this post) may survey the market and identify potential buyers and may consult with financial advisers about available options. Different transaction structures may be contemplated, including dispositions of assets or lines of business that do not comprise the entire target company’s operations. Models may be prepared and the pros and cons of various alternatives will generally be considered in light of their relative impact on the seller’s or buyer’s competitive position, capital structure, risk profile and prospects.

This phase may range in duration from nearly instantaneous to several years. It ends when a seller determines to pursue a sale or when a buyer identifies a target or assets it wants to acquire.

Step 2 — Preparation Before Contact.

The next phase for a buyer is straightforward and, usually, brief. Once a target has been identified but before making first contact, to the extent it hasn’t already done so, the buyer often will interview and engage legal, financial and other advisers. It may also conduct preliminary due diligence on the target company using publicly-available information, which is usually quite limited for private companies. It may also prepare a form of exclusivity agreement that it will ask the seller to sign and form an internal working group of buyer employees and advisers, which may include key personnel from different functional areas, such as human resources, accounting, operations, legal, IT and so forth. Throughout this phase of the process, however, experienced buyers will keep an eye on the budget and endeavor not to invest an excessive amount of time, money and other resources in a potential transaction, which, at this point, has only a remote chance of reaching closing.

For the seller, this phase of the process may be substantially more involved as it begins to prepare for the transaction. As with the buyer, if it hasn’t already done so, the seller may interview and engage legal, financial and other advisers and form an internal working group. In the seller’s case, to avoid the potential disruptions that may result from premature disclosure of an impending sale transaction, including, for example, increased employee attrition or lost sales, this working group is frequently required to maintain strict confidentiality around its activities, which at times may interfere with necessary deal preparations.

Depending on the company, the seller may also need to begin some organizational “spring cleaning,” which often involves organizing and, as needed, updating contracts, permits, Board records, accounting records and intellectual property portfolios among other things. In fact, the seller working group may begin to set up and populate a virtual data room through which due diligence information may be accessed by prospective buyers. For many companies, this is a labor-intensive, time-consuming process, which distracts internal personnel from their day-to-day responsibilities.

There are a number of other actions sellers may take during this phase, including determining how to market the company or subject assets. An auction may or may not be the optimal approach. Together with their advisers, sellers may prepare a confidential information memorandum, create projections, draft a form of confidentiality agreement for prospective buyers, consider implementing employee retention incentives and prepare virtual data room procedures. Many sellers may even commence reverse due diligence, through which the seller working group will look to identify target company characteristics that may adversely affect the marketability of the target, such as areas of significant litigation exposure, inchoate tax liabilities, hazardous environmental conditions or expiring material contracts. Where a seller is looking to transfer ownership of a division or other subset of its assets and liabilities, sellers may also commence an internal reorganization to decouple shared assets and situate relevant assets and liabilities within the same subsidiary.

This phase may range in duration from as few as a few days to as long as several months.

Step 3 — First Contact & Early Discussions.

[N.B. The discussion that follows assumes that the transaction is not proceeding through an auction process. M&A auctions will be discussed in detail in a later post.]

In initial communications, senior representatives of the parties, or their financial advisers, will express their mutual interest in a transaction and discuss the broad parameters of a deal, focusing mainly on a purchase price range, which is always subject to the terms of the transaction, buyer due diligence and other contingencies. If the consideration offered to the seller is to consist of anything other than 100% cash to be delivered at closing, that would normally be discussed at this point, as well, and any buyer financing risk may be raised.

If the parties are within striking distance of each other’s respective positions, they then proceed to sign a confidentiality agreement, otherwise known as a non-disclosure agreement, or NDA, through which, among other things, the buyer and its advisers will be restricted in disclosing to third parties the existence and substance of the discussions between the parties as well as information about the target company and its operations obtained by the buyer from the seller. Buyers often attempt to include an exclusivity provision in the confidentiality agreement (or in a stand-alone letter agreement), which restricts the seller’s ability to pursue alternative transactions with other prospective buyers. These are generally resisted by sellers, who wish to keep as many options open as possible and pursue a sale that maximizes the value to be paid for the subject company or assets.

After the NDA is signed, the parties and their advisers may convene in-person or electronic meetings to discuss further key transaction terms, including purchase price, transaction structure, post-closing governance, timing, antitrust and other regulatory issues and conditions to closing. Sellers may also permit the buyer and its representatives to commence legal, financial and operational due diligence while negotiations are ongoing. If there is a meeting of the minds on key terms and conditions, these may be set forth in a non-binding letter of intent (LOI), sometimes referred to as a term sheet or memorandum of understanding (MOU).

This phase may range in duration from as short as one week to as long as two months. It won’t often extend beyond that because parties will usually know fairly quickly whether a deal is likely to move on to the next phase.

Step 4 — Negotiations & Due Diligence.

Purchase Agreement

If the parties are sufficiently interested in pursuing a transaction to invest more substantial resources, the time will have come to prepare and negotiate the primary transaction agreement. Depending on deal structure and drafters’ preferences, this may be a Stock Purchase Agreement, Asset Purchase Agreement, Merger Agreement, Agreement and Plan of Merger or simply Purchase Agreement. In most cases (other than M&A auctions), it is customary for attorneys for the buyer to prepare the first draft.

In average private transactions, outside counsel will need one to five days to prepare the first draft and send it to its client, which will then provide feedback for the lawyers to incorporate into a revised draft. The draft may proceed through multiple iterations between the party and its lawyers before being sent to the other side. This process is designed to ensure that the transaction document reflects the priorities of the principal, the agreed-upon deal structure and other terms (as may have been set forth in an LOI) and the client’s perception of areas of heightened risk. With few exceptions, it is written in a manner that is more favorable to the party preparing it than to the party on the other side of the deal. This means, among other things, that a draft prepared by the buyer’s counsel will typically be longer than one prepared by the seller’s attorneys. The greater length for a buy-side draft is generally attributable to more numerous and detailed seller representations and warranties and more extensive covenants and conditions to closing.

When the draft is ready, the buyer’s lawyers will send it to the seller and its lawyers. This version of the document may include numerous annotations and bracketed phrases and, even though it was written by the buyer and its lawyers, is subject to supplementation and change by the buyer to reflect specialist input (particularly from tax counsel) and new information that may come to light as due diligence progresses. Once received, the seller and its counsel will review the draft. Depending on client preferences, they may then discuss material issues presented by the document, or the attorneys may prepare an issues list for client consideration.

Practice varies, but the seller may then reengage with the buyer to discuss key deal points that may need to be resolved before investing attorney hours in turning a revised draft back to the buyer. Alternatively, the seller’s lawyers will begin making revisions to the draft to make it more favorable to the seller and reflect the seller’s priorities and concerns. This generally takes two or three days but may require more time, particularly if the revisions are being prepared by an associate attorney before being reviewed by a law firm partner. As with the buyer’s first draft, the seller and its counsel may undertake multiple rounds of internal revisions before sending the document back to the buyer and its lawyers, together with a document comparison highlighting differences between the drafts, a so-called redline or blackline.

The parties and their lawyers will then trade competing drafts and negotiate the terms of the purchase agreement over the ensuing weeks.

Due Diligence

Meanwhile, the buyer and its advisers will have simultaneously been conducting financial, operational and legal due diligence on the target company or assets. This involves reviewing contracts, permits, financial statements, accounting records, correspondence, policies, organizational documents, Board minutes, benefit plans, litigation records, patents, filings and other documents and materials relating to the target company or assets. Buyers may also conduct inspections of facilities and environmental site assessments and hold meetings with key personnel. All of this will be facilitated by the seller and its legal and other advisers, and is typically run through an online portal known as a data site or virtual data room. Information identified during the due diligence process may impact the structure of the transaction and the terms of the purchase agreement.

Disclosure Schedules

Toward the end of this phase in the process, the seller and its lawyers will prepare and deliver to the buyer a seller disclosure schedule, which is an attachment to, and part of, the purchase agreement. Disclosure schedules perform a dual purpose. First, they will list out information required to be disclosed by certain representations and warranties. For example, a section of the disclosure schedule may identify all real estate owned by the target and another section may list all ongoing legal proceedings. Second, disclosure schedules qualify and limit the scope of certain representations and warranties. For example, a seller representation may state:

“Assuming that all consents, approvals, authorizations and other actions described in Section 3.07 have been obtained, the execution, delivery and performance of this Agreement by Seller do not and will not (a) violate, conflict with or result in the breach of any provision of the Organizational Documents of Seller or the Company, (b) conflict with or violate (or cause an event which could have a Material Adverse Effect as a result of) any Law or Governmental Order applicable to Seller, the Company or any of their respective assets, properties or businesses, or (c) except as set forth in Section 3.06(c) of the Disclosure Schedule, conflict with, result in any breach of, constitute a default (or event which with the giving of notice or lapse of time, or both, would become a default) under, require any consent under, or give to others any rights of termination, amendment, acceleration, suspension, revocation or cancellation of, or result in the creation of any Encumbrance on any of the Shares or any of the Assets pursuant to, any Contract to which the Company is a party or by which any of the Shares or any of the Assets is bound or affected.”

Inclusion of such exceptions in disclosure schedules accordingly results in a shifting of risk between the parties and may have profound effects on the economics of the deal. They are thus often subject to extensive negotiations between the parties and their attorneys.

Ancillary Documents

Also later in this phase of the M&A process, the parties will begin to prepare and negotiate ancillary agreements and other documents necessary for signing or closing. These may include:

escrow agreements,
transition services agreements,
commercial agreements,
employment agreements (and officer and director resignations),
leases,
certificates and
legal opinions.

This phase of the transaction process comes to a close when all of the transaction documents are fully drafted and negotiated, including disclosure schedules and all ancillary documents, and due diligence has been completed. It generally ranges in duration from as short as two weeks to several months, depending on the complexity of the deal, scope of due diligence, responsiveness of the parties and contentiousness of negotiations.

Step 5 — Signing.

In the past, parties would meet in person to sign the final versions of agreements, referred to as definitive agreements. Today, signature pages are usually executed by the parties and circulated among the deal participants by one of the lawyers on the deal via email together with soft copies of the definitive agreements.

In some smaller deals, signing and closing of the transaction—that is, the actual consummation of the sale—occur simultaneously. In most cases, though, there is a period of time after signing and before closing.

Step 6 — The Gap Period.

Why is there a gap period?

There are several common reasons why many M&A transactions cannot close at signing. First, if the transaction value for an M&A deal equals or exceeds $76.3 million (as of the date of this post; the threshold is adjusted annually), a premerger notification filing with the Premerger Notification Office of the Federal Trade Commission (FTC) may be required under the Hart-Scott-Rodino (HSR) Act, and the parties must wait 30 days to consummate the deal. This waiting period is subject to exceptions and is usually terminated early by the antitrust authorities if the transaction does not present any competition concerns. If, on the other hand, the transaction does present competition concerns, the waiting period may be extended, and the parties may receive a “second request,” a request for additional information and materials, which may add several months to a transaction timeline.

Second, consummation of a sale may require third party and, less frequently, governmental approvals. Contractual counterparties, including, for example, lenders and landlords, may have the right to block assignments of contracts (or changes in control of the party that signed the contract). Although it may be technically possible to secure such consents prior to signing definitive agreements, thus allowing for a simultaneous sign-and-close, most sellers are not prepared to engage with important commercial counterparties and solicit consent to a deal that is not yet certain, particularly given sensitivities around premature disclosure of the transaction.

In highly-regulated industries, governmental approvals may also be needed. For instance:

In the banking industry, the acquisition of more than 5 percent of a bank-holding company by another bank-holding company would require prior approval of the Federal Reserve Board. A merger of two banks may require both federal and state regulator approval.
Electric utilities must obtain prior approval to combine from the Federal Energy Regulatory Commission under Section 203 of the Federal Power Act.
The Committee on Foreign Investment in the United States (CFIUS) reviews deals in which a foreign person will obtain control over a U.S. trade or business, so-called “covered transactions.” CFIUS’s review focuses on the national security implications of the transaction.

There are many other, less common, reasons why transactions may not close simultaneously with signing. Indeed, any milestone that the deal parties wish to establish as a condition to closing may require a gap period. These may include, for example, the buyer’s need to obtain financing, completion of a restructuring of the target or acquired assets, completion of due diligence, obtaining stockholder approvals or remediation of environmental conditions.

What do the parties do during the gap period?

Under the typical set of private M&A transaction agreements, the parties will be required to exercise efforts to cause the conditions to closing to be satisfied, and once those conditions are satisfied the transaction will be consummated. In the meantime, the seller may also be required:

to operate the target company in the ordinary course and obtain buyer approval before taking certain actions,
1. to provide the buyer and its representatives with access to the target company’s facilities and records,

to facilitate the post-closing integration of the acquired company or assets and
to notify the buyer of (1) any occurrence or non-occurrence of any event that may cause any representations or warranties of the seller to be inaccurate, (2) any failure by the seller to comply with its covenants and (3) the failure of any closing condition.

The pre-closing gap period may range from as short as a few weeks to as long as several months for transactions facing antitrust or other regulatory challenges.

Step 7 — Closing.

Once all conditions to closing are satisfied, the parties proceed to consummate the transaction, typically within a few days. At closing, which, like signing, usually transpires electronically, the buyer will pay any cash consideration by wire transfer to the seller’s bank account and/or issue shares constituting any stock consideration. Simultaneously, the seller will convey the acquired shares or assets through appropriate instruments of transfer. (This process differs slightly for a merger, which involves the cancellation of the target company’s shares and their conversion into the right to receive payment of the merger consideration.) A portion of the purchase price may also be transferred by the buyer to a third party financial institution serving as an escrow agent. Various closing certificates will also be exchanged, and some ancillary agreements, such as a transition services agreement, lease or employment agreements, may also be signed and become effective.

The buyer now owns the acquired company or assets, and the seller has received all of the purchase price, except for any amounts deposited into escrow.

Step 8 — After Closing.

The relationship between the seller and buyer does not cease at closing. On the contrary, there may be significant ongoing ties between the parties. Initially, the parties will likely cooperate in determining and, if necessary, paying an adjustment to the purchase price to reflect the amount of working capital or other net assets of the acquired company or assets at closing. For a period of time, a seller with ongoing operations may provide transition services, as well, such as IT support or access to facilities or personnel, until the buyer can secure such services independently.

In addition, after closing, sellers are usually required to indemnify the buyer and hold it harmless from any losses it incurs as a result of any false representations or warranties of the seller or any breached covenants. All or a portion of any such indemnification obligations may be paid out of an escrow account. This residual exposure may exist for several years after closing.

In some transactions, a portion of the purchase price may be allocated to an “earnout,” payments that are contingent upon some future achievement of one or more specified milestones. These may be financial targets, like revenue or net income goals, or operational objectives, like receipt of Food and Drug Administration approval for pharmaceutical products. In these deals, the parties may be working together extensively for years in an effort to achieve the agreed-upon milestones.

There are many other potential post-closing covenants that may bind, and be enforceable against, the parties, including with respect to non-competition, non-solicitation of employees, confidentiality, tax cooperation, environmental remediation and more. These may remain effective for several years post-closing.

Gayatri GuptaJanuary 22, 2024

Nasdaq Compliance

The Nasdaq Stock Market features three tiers of listed companies, namely: (1) The Nasdaq Global Select Market, (2) The Nasdaq Global Market, and (3) The Nasdaq Capital Market. These tiers are characterized by progressively stringent listing requirements, with the Nasdaq Global Select Market setting the highest standards for initial listings and the Nasdaq Capital Market serving as the entry-level tier, particularly suitable for most small-cap issuers.

To list securities on Nasdaq, a company must fulfill minimum listing requirements, encompassing defined criteria related to financial performance, liquidity, and corporate governance. Nasdaq retains extensive discretion in the listing process and reserves the right to reject an application, even if the technical prerequisites are satisfied, if it deems such denial essential to safeguard the interests of investors and the public.

After securing a listing on Nasdaq, a company is obligated to adhere to ongoing listing standards. To initiate the listing process, a company seeking inclusion on Nasdaq must diligently complete and submit a comprehensive listing application to Nasdaq. This application should include specific documents and information as outlined by Nasdaq's requirements.

Typically, the application process spans a duration of four to six weeks. Once the application is submitted, a Nasdaq analyst is designated as the primary liaison with the company. Within two to three weeks of submission, the company can expect to receive an initial comment letter. The comment and review process persists until a decision is reached on the approval or denial of the application. Similar to filing with the SEC, a meticulously prepared Nasdaq application tends to attract fewer comments and facilitates a more streamlined process. Generally, the company's securities counsel assumes a leading role, serving as the primary contact for preparing the application and engaging in communication with Nasdaq.

Similarly to the SEC review process, Nasdaq conducts a thorough examination of publicly accessible information pertaining to a company. This encompasses, but is not limited to, SEC filings, the company's website, management communications and speeches, as well as press releases. The iterative nature of the review process typically doesn't necessitate a formal protocol, and communication is commonly facilitated through email correspondence and phone calls.

Listing Criteria For Nasdaq
For a company to list its securities on Nasdaq, it must satisfy the following criteria:

Specific Initial Requirements:
- Quantitative Standards: Meeting defined thresholds for both quantitative and qualitative factors.
- Qualitative Standards: Fulfilling certain qualitative benchmarks.
Continuing Requirements:
- Quantitative Criteria: Adhering to ongoing quantitative benchmarks.
- Qualitative Criteria: Maintaining specified qualitative standards.

The initial quantitative thresholds are typically set at a higher level than those required for continued listing. This distinction aims to ensure that companies achieve a sufficient level of maturity before being listed. Additionally, Nasdaq imposes rigorous corporate governance standards that listed companies must adhere to throughout their tenure on the exchange.

Before formally submitting a comprehensive listing application, a company has the option to pursue a preliminary listing eligibility review. In this stage, the Listing Qualifications Staff conducts a thorough examination of the company's public filings to assess its compliance with numerical listing requirements. Additionally, the team evaluates the company's adherence to corporate governance requirements outlined in the Marketplace Rules ("Rules"). This preliminary review provides valuable insights into the company's eligibility for listing on Nasdaq before committing to the full application process.

Upon completion of the preliminary review, the Listing Qualifications Staff will make an assessment regarding whether the company meets the numerical listing criteria. Additionally, any corporate governance or regulatory concerns raised during this phase will be considered to determine their impact on the listing approval. It's important to note that while the preliminary review provides insights, final approval necessitates the submission of a formal listing application. This application undergoes a thorough examination by the NASDAQ Listing Qualifications Staff. Furthermore, the final approval process involves satisfactory compliance with specific qualitative reviews. This includes an examination of the regulatory history of the company's officers, directors, and significant shareholders. Meeting these criteria is integral to obtaining the final approval for listing on Nasdaq.

Financial And Liquidity Requirements

    Requirements

    Equity Standard
    Market Value of Listed Standard
    Net Income Standard

    Listing Rules

    5505(a)
and
5505(b)(1)
    5505(a)
and
5505(b)(2)
    5505(a)
and
5505(b)(3)
    
    Stockholders Equity

    	$5 million
    	$4 million
    	$4 million
    
    The market value of publicly held shares

    $15 million
    $15 million
    $
      5 million
    
    Operating History

    	Two years
    N/A
    N/A
    
    The market value of listed securities

    N/A
    $50 million
    N/A
    
    Net income from continuing operations (in the latest fiscal
a year or in two of the last three
fiscal years)

    N/A
    N/A
    $750,000
    
    Publicly held shares

    	1 million
    	1 million
    	1 million
    
    Bid Price

    	$4
    	$4
    	$4)
    
    Closing Price

    	$3
    	$2
    	$43
    
    Corporate Governance

    Yes
    Yes
    Yes
    
    Total Shareholders

    300
    300
    300

Corporate Governance Requirements

Across all three tiers of the Nasdaq Stock Market, corporate governance requirements remain largely consistent. The categories encompassing corporate governance standards include:

Distribution of Annual or Interim Reports
Independent Directors
Audit Committee
Compensation Committee
Nomination of Directors
Code of Conduct
Annual Meetings
Solicitation of Proxies
Quorum
Conflict of Interest
Shareholder Approval
Voting Rights

These governance elements play a crucial role in ensuring transparency, accountability, and ethical conduct within listed companies, irrespective of the specific tier within the Nasdaq Stock Market.

Companies seeking listing on Nasdaq must adhere to specific corporate governance standards, including the following:

Compensation Committee with Independent Directors:
- The company is required to establish a compensation committee comprised of independent directors.
- The committee must consist of at least two members.
- Rule 5605(d)(2)(A) introduces an additional independence test for compensation committee members.
Responsibility for Executive Compensation:
- The compensation committee is tasked with determining or recommending to the entire board the compensation of the chief executive officer (CEO) and all other executive officers.

These standards are designed to ensure a level of independence and scrutiny in the decision-making processes related to executive compensation within the company.

The Application And Documents

The Nasdaq application package encompasses several key components:

Symbol Reservation Form:
- Used to request the reservation of a specific trading symbol for the company.
Listing Application:
- Requires supplemental documents and details about the company's financials, operations, and other pertinent information.
Listing Agreement:
- A formal agreement outlining the terms and conditions of the listing on Nasdaq.
Corporate Governance Certification:
- A certification affirming the company's commitment to meeting Nasdaq's corporate governance standards.
Initial Application Fee:
- Payable via check or wire transfer, this fee is a prerequisite for initiating the listing process.
Logo Submission Form:
- Used for submitting the company's logo for use in Nasdaq's materials.

These application forms are completed through the Nasdaq website listing center, utilizing the online platform to facilitate the submission of supplemental and supporting documents. It is advisable to thoroughly review all required paperwork in advance, ensuring that the necessary information is readily available before initiating the application process.

Symbol Reservation Form

The symbol reservation form is a concise, one-page electronic form where applicants input information for Nasdaq's consideration. Nasdaq symbols, limited to 1-5 characters, adhere to guidelines established by the Intermarket Symbols Reservation Authority (ISRA). The ISRA system is designed to organize symbols efficiently, prevent duplication, and reduce programming and operational complexities. The ISRA operates within the framework of the NMS Symbology Plan, a plan utilized by Nasdaq.

Key details about the symbol reservation process:

Symbol Choices:
- The form allows applicants to propose three symbol choices in order of preference.
- While Nasdaq generally honors the first choice if available, it retains the authority to assign, rescind, or reassign a trading symbol at its discretion.
ISRA and Nasdaq Authority:
- The ISRA and Nasdaq have overarching authority in managing the assignment of symbols.
Additional Information:
- The form captures essential details about the issuer and the planned public offering.
- Information may include the name of the attorney, lead underwriter (if applicable), CEO and CFO names, yearly revenues, company website, and the sector in which the company operates.

Completion of this symbol reservation form initiates the process of securing a trading symbol on Nasdaq, and it's essential to provide accurate and comprehensive information to facilitate this stage of the listing application.

The Application

The Nasdaq listing application process is comprehensive and varies based on the circumstances surrounding the listing sought. There are twelve distinct listing applications catering to different situations, including changes of control, switches from other exchanges or markets, spin-offs, and initial public offerings (IPOs). Each application, spanning approximately seven pages, collects detailed information about the company, covering areas such as address, contact and billing details, securities attorney and auditor information, transfer agent particulars, and the company's officers and directors. Specific information on the company's securities, including type, par value, and cusip number, is also required.

Furthermore, the application mandates disclosure of legal proceedings involving the company, its officers or directors, or significant shareholders over the past ten years. This encompasses inquiries, investigations, lawsuits, litigation, arbitrations, and other legal and administrative proceedings. Documents supporting the backup and final disposition of these matters must be provided.

Regarding private offerings within the prior six months, including bridge financings, shelf registrations, and Regulation S offerings, the company is required to disclose such activities. Additionally, the application delves into the company's background, posing questions to ensure compliance with seasoning rules.

While Nasdaq retains the right to request relevant supporting documents, specific documents are mandatory based on the application type. For an uplisting from an existing U.S. market, the application must include letters from three market makers confirming their commitment to making a market in the subject securities. Other required documents include a listing agreement, a logo submission form, a corporate governance certification form, regulatory correspondence over the past 12 months, and shareholder confirmation documents. Nasdaq often seeks confirmation from the company's transfer agent regarding the eligibility of the security for the direct registration program (DRS).

During the review of an up listing application, Nasdaq may request additional information, such as a Broadridge share range analysis and NOBO list, a certified shareholder list, details about mitigating any going concerns or opinions, income statement and/or balance sheet projections for the next 12 months, and confirmation of Sarbanes Oxley Section 302 and 906 certifications by the company, among other inquiries related to compliance and financial matters.

The Listing Agreement

The Listing Agreement is a concise document, spanning two pages, serving as a formal affirmation of the company's commitment to adhere to all rules and regulations set forth by the Nasdaq Stock Market. It includes provisions for indemnifying and holding Nasdaq harmless from liability. Notable points in the agreement include:

Compliance Assurance:
- The company explicitly agrees to comply with all rules and regulations stipulated by the Nasdaq Stock Market.
Indemnification Clause:
- The company indemnifies Nasdaq, meaning it undertakes to compensate or reimburse Nasdaq for any losses or damages incurred. This includes harm resulting from third-party trademark infringement claims related to the company's symbol and logo, as well as Nasdaq's use of the same.
Disclaimer of Warranty and Liability:
- The agreement contains a disclaimer of warranty and liability against Nasdaq for trading issues, with the exception of those resulting from gross negligence or willful misconduct.

This agreement establishes a clear framework for the relationship between the listed company and Nasdaq, emphasizing the company's commitment to regulatory compliance while providing indemnification for certain specified matters and delineating the scope of Nasdaq's liability.

Corporate Governance Certification Form

The corporate governance certification form certifies compliance with the governance requirements related to an audit committee, director nomination process, compensation committee, board composition, executive sessions, quorum, and codes of conduct. Where an exemption applies, the form requires specification of the exemption terms. The document specifies the different rules and exceptions in a check-the-box format.

Logo Submission Form

The logo submission form contains the guidelines for the logo and affirms Nasdaq’s rights to use the same. Nasdaq uses company logos in its marketing materials, on the MarketSite Video Wall and Tower, and websites.

Fees

Entry fees are based upon the aggregate number of shares to be listed at the time of initial listing, regardless of class, with a maximum cap of $75,000. Fees are assessed on the entry date in The Nasdaq Capital Market, except for $5,000, representing a non-refundable application fee. This fee must be submitted with the company’s application.

Nasdaq does not charge application or entry fees for any securities transferred from a national securities exchange.

Benefits Of Trading On An Exchange

There are many benefits to trading on an exchange instead of the OTC Markets. The most significant benefits to a business are the ability to attract analyst coverage and institutional investors and the corresponding increase in liquidity that comes with both. Stocks that trade on Nasdaq tend to have a lower bid/offer spread — again encouraging trading volume and liquidity. Exchange-traded securities are exempt from the penny stock definition, allowing more market maker and broker-dealer participation. As further explained below, a broker-dealer cannot recommend a penny stock transaction to its retail clients. Therefore, no analysts, financial advisors, or institutional investors make recommendations for purchases of penny stocks.

As an aside, this is one of the reasons that OTC Markets created the OTCQX market tier, which does not list penny stocks. It is also why the small-cap industry is pushing for a supported valid venture exchange (for further reading.

In today’s world, depositing stock and/or trade-in non-exchange traded securities is increasingly difficult. Despite the congressional efforts and SEC rulemaking in support of small-cap capital formation (for example, the JOBS Act, including the emerging growth company regulations, new Regulation A+ and Title III Crowdfunding and the new FAST Act), through enforcement and investigative proceedings, both the SEC and FINRA continue to apply pressure on broker-dealers, clearing firms and transfer agents to reduce the secondary trading and free flow of penny stocks. For more information on difficulties in depositing stocks.

Further On Penny Stocks

NASDAQ and NYSE MKT traded securities are exempted from the definition of a “penny stock” due to the initial and ongoing listing standards. Penny stock rules focus on broker-dealers’ activity in effectuating trades in penny stocks. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the “Penny Stock Act”) prohibits broker-dealers from effecting transactions in penny stocks unless they comply with the requirements of Section 15(h) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The rules promulgated thereunder, particularly Exchange Act rules 15g-1 through 15g-100 (the “penny stock rules”).

Section 15(h) of the Exchange Act provides that no broker or dealer may effectuate a customer’s purchase or sale of any penny stock unless such broker or dealer.

Approves the customer for the specific penny stock transaction and receives a written agreement to the transaction from the customer.
Furnishes the customer a risk disclosure document describing the risks of investing in penny stocks.
Discloses to the customer the current market quotation, if any, for the penny stock, including the bid and ask prices and the number of shares that apply to such bid and ask prices.
Discloses to the customer the amount of compensation the firm and its broker will receive for the trade.

In addition, after executing the sale, a broker-dealer must send its customer monthly account statements showing the market value of each penny stock held in the customer’s account.

Moreover, brokers and dealers subject to the penny stock rules are subject to additional disclosure requirements outlined in Rules 15g-2 through 15g-9. For my information on penny stocks and the rules affecting broker-dealer activity.

Securities Lawyer Blog