Although many years ago I wrote a high-level review of foreign private issuer (FPI) registration and ongoing disclosure obligations, I have not drilled down on the subject until now. While I’m at it, in the multi part blog series, I will cover the Nasdaq corporate governance requirements for listed FPIs.
In Part 1 in this series, I covered the definition of a foreign private issuer (FPI), registration and ongoing reporting requirements – see HERE. In Part 2 I covered Rules 801 and 802 of the Securities Act, which give FPI’s registration exemptions for rights offerings and exchange offers, respectively – see HERE. In this Part 3, I discuss the Nasdaq corporate governance requirements for FPIs.
Nasdaq Corporate Governance
In addition to its quantitative listing standards, Nasdaq imposes certain corporate governance and board composition requirements as part of its listing standards. FPIs, however, are exempt from numerous of these standards and may instead opt to comply with home country rules. An FPI must comply with all quantitative listing standards to the same extent as a U.S. domestic issuer. Below I will summarize which corporate governance requirements an FPI is exempt from following and those for which they are not exempt.
Corporate Governance Standards for Which an FPI is Exempt
All FPIs may elect to follow home country rules in lieu of certain Nasdaq corporate governance listing requirements. However, an FPI must disclose each corporate governance rule for which it does not follow and has elected to comply with its home country practice instead and describe the home country rules or practice it does follow. Moreover, an FPI that elects to follow home country practice in lieu of Nasdaq rules, must submit a written opinion from independent counsel certifying that the company’s practices are not prohibited by the home country’s laws.
A company that ceases to be an FPI will have six months to phase in the various requirements to meet full Nasdaq compliance.
Listing Rule 5605(b)(1) – Majority of Independent Directors – An FPI is not required to have a majority of independent directors, but it is required to disclose those directors that the board has determined are independent. For a review of the Nasdaq board independence standards see – HERE.
Listing Rule 5605(b)(2) – Regular Meetings of Independent Directors – AN FPI is not required to have regularly scheduled meetings at which only independent directors are present.
Listing Rule 5605(d) – Compensation Committees – An FPI is not required to have a compensation committee.
Listing Rule 5605(e) – Nomination Committee – An FPI is not required to have a nomination committee.
Listing Rule 5250(b)(3) – Disclosure of Director and Nominee Compensation – An FPI may elect to follow home country policy in lieu of disclosing director and nominees compensation and compensation arrangements.
Listing Rule 5250(d) – Proxy Solitication; Distribution of Annual and Interim Reports – An FPI is not subject to the U.S. proxy rules nor required to publish or distribute annual or quarterly reports, provided however, nothing in this rule alleviates the requirement to file an annual Form 20-F.
Listing Rule 5620 – Shareholder Meetings and Quorum Requirements – A Nasdaq listed company must provide for a quorum of no less than 33 1/3% of the outstanding common voting stock. An FPI can be relieved of this requirement if it provides an independent opinion that its home country rules require a lower quorum threshold and the company cannot obtain an exemption or waiver from the requirement.
Listing Rule 5635 – Shareholder Approval Requirements – Nasdaq Rule 5635 sets sets forth the circumstances under which shareholder approval is required prior to an issuance of securities in connection with: (i) the acquisition of the stock or assets of another company (see HERE); (ii) equity-based compensation of officers, directors, employees or consultants (see HERE); (iii) a change of control (see HERE); and (iv) transactions other than public offerings (see HERE). An FPI may elect home country rules in lieu of each of these requirements.
Corporate Governance Standards for Which an FPI is not Exempt
Although FPI’s may elect home country rules in lieu of certain Nasdaq corporate governance listing requirements, there are several requirements for which an FPI must comply either to the same extent as domestic companies or with some modifications as explained herein.
Listing Rule 5602(c) – Audit Committees – Each listed company is required to have an audit committee comprised of a minimum of three members all of which must be independent directors. For a drill down on the Nasdaq audit committee requirements, see HERE.
Listing Rule 5605(f) – Board Diversity Requirements – Although an FPI is required to either have, or explain why it does not have, the minimum required diverse directors, the Nasdaq rules provide some leeway to FPIs where disclosure would be prohibited by home country laws. Nasdaq has also created an alternative board matrix disclosure form that can be used by FPIs. Finally, Nasdaq allows an FPI to satisfy the diversity requirements by having two female directors (domestic issuers must have at least one female and one other director that meets a different diversity standard). For a review of the Nasdaq board diversity standards, see HERE.
Listing Rule 5608 – Recovery of Erroneously Awarded Compensation (Clawback) – Although an FPI is required to adopt a compensation recovery policy and related disclosures to the same extent as a domestic company, it can be relieved from actually recovering compensation where doing so would violate home country laws. Before concluding that it would be impracticable to recover any amount of erroneously awarded compensation based on violation of home country law, the FPI must obtain an opinion of home country counsel, acceptable to Nasdaq, that recovery would result in such a violation, and must provide such opinion to Nasdaq. For a review of the Clawback rules, see – HERE.
Listing Rule 5610 – Code of Conduct – An FPI must establish a code of conduct to the same extent as a domestic company, but may disclose waivers to the code by either filing a 6-K, issuing a press release, or posting it on the company website (a domestic company must file an 8-K). For more on codes of conduct and waivers, see HERE.
Listing Rule 5625 – Notification of Noncompliance – An FPI must provide Nasdaq with prompt notification after an executive officer of the Company becomes aware of any noncompliance by the Company with the Nasdaq corporate governance requirements, including home country rules.
Listing Rule 5640 – Voting Rights – An FPI must comply with the Nasdaq voting rights rule which prohibits the voting rights of shareholder from being disparately reduced or restricted through any corporate action or issuance. For a review of the voting rights rule – see HERE.
Listing Rule 5630 – Review of Related Party Transactions – Nasdaq requires all listed companies to conduct appropriate review and oversight of all related party transactions for potential conflict of interest situations. For more on the Nasdaq rule see HERE. For specific related party transaction disclosure obligations by FPI’s see HERE.
Listing Rule 5250(b)(1) – Disclosure of Material Information – A Nasdaq-listed Company shall make prompt disclosure to the public of disclosure of any material information that would reasonably be expected to affect the value of its securities or influence investors’ decisions. An FPI may do so either by filing a Form 6-K or listing the information on its website, though in common practice, companies elect to file a Form 6-K.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony, Linder & Cacomanolis, PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALC legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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