Rule 4310(c)(2): $2,000,000 net tangible assets/$2,500,000 shareholders’ equity requirement, or its alternatives, for continued listing on the SmallCap Market.
Issue: The company no longer satisfied the net tangible assets/shareholders’ equity requirement. The company provided projections and stated it would be in compliance after certain reorganization transactions were consummated.
Determination: The company was properly delisted for failure to comply with the net tangible assets/ shareholders’ equity requirement. Even assuming that the company’s projections were accurate, the company would soon fall below the net
tangible assets/shareholders’ equity requirement based on the company’s history of losses.
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Rule 4310(c)(7): 500,000-share public float requirement for continued listing.
Issue: The company’s proxy statement reflected that the company had less than 500,000 shares in the public float. The company stated it had in excess of 500,000 shares in the public float, assuming conversion of its preferred stock.
Determination: The company was properly delisted for failure to comply with the public float requirements. The public float requirement is based solely on shares issued and outstanding.
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Rules 4350(c) and 4350(d)(2): Independent director and audit committee composition requirements.
Issue: One of the three members of the audit committee beneficially owned approximately 90% of the company.
Determination: The company was properly delisted for failure to demonstrate compliance with the independent director and audit committee composition requirements. A director, who has the ability to directly or indirectly control the company
through 90% ownership, is an affiliate of the company, as referred to in Listing Rule 4200(a)(14)(A), and accordingly, he is not independent. The company did not disclose in its proxy statement a basis for an exception to the audit committee composition requirements,
pursuant to Rule 4350(d)(2)(B).
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Rules 4350(g) and 4350(e): Annual meeting and proxy solicitation requirements.
Issue: The company did not hold an annual shareholder meeting or mail proxy statements for 2½ years, while it was resolving a takeover contest and related litigation.
Determination: The company was properly delisted for failure to comply with the annual shareholder meeting and proxy solicitation requirements. An unresolved takeover contest and related litigation is an insufficient reason to violate
the proxy solicitation and annual meeting requirements.
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Rule 4350(h): Requirement for independent review of related party transactions for conflicts of interest.
Issue: The company, the chief executive officer, a director and a shareholder group led by the director entered into related party transactions and, as majority shareholders, approved the transactions. The company provided minutes of meeting,
reflecting the existence of a special committee of directors.
Determination: The company was properly delisted for failure to demonstrate that the company’s audit committee or a comparable body of the board of directors reviewed the transactions for conflicts of interest. The minutes did not reflect
that the audit committee or an independent committee reviewed the transactions for conflicts of interests. The minutes did not state whether the special committee reviewed the transactions for conflicts of interests or which directors were on the special committee.
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Rule 4351: Voting rights requirement.
Issue: The company issued convertible preferred shares to investors at a discount to the market price on the date the investors and the company entered into a stock purchase agreement. The company’s majority shareholders approved the transaction.
The preferred shareholders had the right to vote their shares on an as-converted basis at the company’s annual shareholder meeting. To determine whether a voting rights violation exists, the preferred shareholders’ voting rights are compared to their relative
contribution based on the company’s market value at the time of issuance of the preferred shares. The company stated that for purposes of the voting rights rule, the time of issuance of the preferred stock should be the date the letter of intent was signed,
not the date the shares were issued.
Determination: The company was properly delisted for failure to comply with the voting rights requirements. In determining whether a voting rights violation exists, the execution date of a non-binding agreement cannot be the basis for
determining the value of the securities because the value is not definitive if the agreement is unenforceable and the terms can be changed. The company created a new class of securities that vote at a higher rate than the existing common shareholders, and
shareholders cannot otherwise agree to permit a voting rights violation by the company through approval of the transaction.