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Frequently Asked Questions
  Staff Interpretation Letter 2019-1
Identification Number 1687

This is in response to your correspondence regarding the applicability of the shareholder approval requirements set forth in Listing Rules 5635(c) and IM-5635-1 (the “Rules”) to the Company’s assumption of an equity incentive plan (the “Plan”) of the Target in connection with its acquisition of the Target (the “Proposed Transaction”). Specifically, you asked whether the Plan assumed by the Company in connection with the Proposed Transaction may be considered a “pre-existing plan” for purposes of the Rules.

Both the Company and the Target are publicly traded companies listed on The Nasdaq Stock Market (“Nasdaq”). Upon the consummation of the Proposed Transaction, the Target will become a wholly owned subsidiary of the Company.

You stated that the Company and the Target began discussing a potential transaction approximately six months before the merger agreement was executed. After approximately two months of discussions, negotiations and due diligence, the board of directors of the Target (the “Target Board”) and a special transaction committee formed by the Target Board decided to terminate the merger negotiations and to continue as a standalone company.

You also stated that after these discussions ended, the Target Board began planning for the actions that it would need to approve at its next annual meeting of stockholders with the expectation that the Target would continue as a standalone company. The Target Board began drafting the Plan and the proposal for approval of the Plan by the Target’s stockholders at its annual meeting. Approximately two months after discussions between the Company and the Target ceased, the Target’s compensation committee approved the adoption of the Plan.

Shortly after the compensation committee approval, the Target and the Company recommenced discussions regarding the Proposed Transaction.

Approximately three weeks after the Company and the Target resumed discussions, the Target Board approved the adoption of the Plan, subject to and effective upon stockholder approval but not subject to the consummation of any corporate transaction. The Plan, as approved by the Target Board, contained the same initial share reserve as approved by the compensation committee. The Target distributed its proxy statement for its annual meeting approximately two weeks later. The proxy statement and the description of the Plan contained no reference to the Proposed Transaction. Approximately one month after the distribution of the proxy statement, the Company and the Target entered into the merger agreement. The next day, the Target’s stockholders approved the Plan at the annual meeting.

Following our review of the information you provided, we determined that the Plan was not approved in contemplation of the Proposed Transaction and is, therefore, a “pre-existing plan” for purposes of the Rules. We have reached this conclusion because: (i) the Plan was drafted after the Target had ceased initial discussions with the Company about the Proposed Transaction and while the Target was preparing for its annual meeting in the ordinary course of business with the expectation that it would remain a standalone company; (ii) key features of the Plan, including the size of the initial share reserve, were determined during the period when deal discussions had ceased; (iii) the compensation committee approved the Plan prior to the Target resuming discussions with the Company; (iv) the Target Board approved the Plan before the terms of the Proposed Transaction were finalized; (v) the Proposed Transaction was not definitive, its terms were not yet finalized, and it remained subject to negotiation at the time when the proxy statement was distributed to the Target’s stockholders; and (vi) the disclosed rationale for Target adopting the Plan was to support expected hiring and retention of key employees and align the employees’ interests with those of the Target’s stockholders. You have not asked us and we have not determined whether shareholder approval of the Proposed Transaction is required under Rule 5635(a).

Publication Date*: 3/21/2019 Mailto Link Identification Number: 1687
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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