SEC Directs Exchanges to Adopt Listing Standards for Compensation Committees

By Final Rule adopted June 20 and to be effective 30 days after publication in the Federal Register, the SEC has adopted new rules to implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 10C to the Securities Exchange Act of 1934.  Section 10C requires the SEC to direct national securities exchanges and national securities associations to prohibit the listing of any equity security of an issuer that is not in compliance with certain compensation committee and compensation adviser requirements.

Under new Rule 10C-1, the exchanges are required to adopt listing standards that require each member of a company’s compensation committee to be a member of the board of directors and to be independent.  In developing a definition of independence, the exchanges will be required to consider relevant factors, including the source of compensation of the board member and whether the board member is affiliated with the company or any of its subsidiaries. 

Rule 10C-1 requires the exchanges to adopt listing standards providing that the compensation committee of a listed company:

• May, in its sole discretion, retain or obtain the advice of a compensation adviser;
• Is directly responsible for the appointment, compensation and oversight of compensation advisers, and
• Must be appropriately funded by the listed company.

The exchanges themselves may impose additional factors.  These listing standards, with limited exceptions, will also apply to members of a listed company’s board of directors who, in the absence of a board committee, oversee executive compensation matters on behalf of the board of directors.  Rule 10C-1 requires the exchanges to exempt four categories of companies from the compensation committee independence requirements:

• Limited partnerships;
• Companies in bankruptcy proceedings;
• Open-end management investment companies registered under the Investment Company Act of 1940, and
• Any foreign private issuer that discloses in its annual report the reasons that the foreign private issuer does not have an independent compensation committee.  

Each national exchange that lists equity securities must propose listing standards that comply with the new rule no later than 90 days after effectiveness.  The new listing standards must be approved by the Commission within one year of the new rule becoming effective.  Amendments to Item 407 of Regulation S-K will require issuers to provide certain disclosures regarding their use of compensation consultants and how they address compensation consultant conflicts of interest.

Treasury Department Prices Offerings of TARP Preferred

The United States Department of the Treasury today priced secondary public offerings of cumulative perpetual preferred stock in seven financial institutions, with aggregate net proceeds to Treasury expected to be approximately $275 million.  The preferred shares will be offered through modified Dutch auctions conducted by Merrill Lynch and Sandler O'Neill as representatives of the several underwriters, pursuant to effective shelf registration statements filed by the seven issuer companies. 

Treasury acquired the preferred shares as part of the Troubled Assets Relief Program (TARP) established pursuant to the Emergency Economic Stabilization Act of 2008 (ESSA).  EESA was enacted into law on October 3, 2008 to restore confidence and stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.  Five of the prospectus pricing supplements were filed today by the following banks:

Ameris Bancorp, Form 424B4 (SEC file no. 333-180820)
First Defiance Financial Corp. Form 424B2 (file no. 333-180902)
LNB Bancorp, Inc. Form 424B1 (file no. 333-180906)
Taylor Capital Group, Inc. Form 424B2 (file no. 333-180892)
United Bancorp, Inc. Form 424B4 (SEC file no. 333-180883)

Proxy Proposals to Comply With NASDAQ Listing Rule 5635

Dialogic Inc. PRE14A on 6/11/12 (SEC file no. 1-33391)
Stereotaxis, Inc. DEF14A on 6/8/12 (SEC file no. 0-50884)
Authentidate Holding Corp. DEF14A on 5/21/12 (SEC file no. 0-20190)

Rule 5635(b) of the NASDAQ listing standards requires stockholder approval when any issuance or potential issuance will result in a change of control of the issuer.  NASDAQ has not adopted any rule on what constitutes a “change of control” for purposes of Rule 5635(b).  However, NASDAQ has previously indicated that the acquisition of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common stock (or securities convertible into or exercisable for common stock) or voting power of an issuer could constitute a change of control.

Dialogic seeks approval to issue common shares upon the exercise of warrants issued pursuant to a subscription agreement, and to issue common shares upon the conversion of notes issued under a securities purchase agreement.  The full exercise of the warrants or the full conversion of the notes may result in the issuance of equity in an amount that may be deemed to exceed the share threshold constituting a change of control for purposes of Rule 5635(b).  As a result of certain anti-dilution provisions in the warrants, the exercise price is deemed to be below the market value of the common shares on the date the warrants were issued. 

Rule 5635(d) of the NASDAQ listing standards requires stockholder approval of any sale, issuance or potential issuance of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock outstanding or 20% or more of the voting power outstanding before such issuance for a price less than the greater of book or market value of the common stock at the time of such issuance.

Stereotaxis sold approximately $8.5 million in aggregate principal amount of unsecured, subordinated, convertible debentures to certain institutional investors under a Securities Purchase Agreement dated May 7, 2012.  For no additional consideration, purchasers of the debentures also received six-year warrants to purchase 25.2 million issuer common shares at an exercise price of $0.3361 per share.   As a condition to closing, Stereotaxis agreed to seek stockholder approval of being able to convert all of the convertible debentures and honor the exercise of all convertible debt warrants, even in excess of 20% of its pre-transaction capitalization, for purposes of Rule 5635(d).  The Board believes it is in the best interests of the company to have the flexibility to settle these obligations with common stock rather than repaying or settling them in cash.

Authentidate also seeks stockholder approval in compliance with NASDAQ Listing Rules 5635(b) and 5635(d) to issue securities in connection with a $5 million private placement of convertible redeemable preferred stock in October 2010 and a March 2012 financing of $4.05 million aggregate principal amount of senior secured promissory notes and warrants to purchase common stock for gross proceeds of $4.05 million.