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Frequently Asked Questions
  Can an investor in a Nasdaq-listed company obtain the right to nominate or designate directors to the company's board?
Identification Number 292
A Nasdaq-listed company may allow an investor to nominate or designate directors to its board. However, under Listing Rule 5640 (the Voting Rights Rule), the voting rights of existing shareholders cannot be disparately reduced through any corporate action. Thus, should a company allow an investor to nominate or designate directors at a level which is disproportionately greater than its ownership position, Nasdaq would view that corporate action as disparately reducing the voting power of the other shareholders.
 
The investor's ownership position should generally be consistent with the voting power held by the investor as a percentage of the overall votes entitled to be cast in the election of directors. For example, if the investor has a 30% ownership interest in the company, it could nominate or designate 30% of the members of the board. The number of directors can be rounded up to next whole number. However, rounding up would not be acceptable where the investor has less than a 50% ownership position but rounding up would allow the investor to nominate or designate a majority of the board. Please note that in evaluating voting power, Nasdaq will generally consider votes attributable to otherwise non-voting securities that are immediately convertible into voting securities at the investor's option, unless the investor must make additional payments to receive the voting security (such as with warrants).
 
The number of directors that can be nominated or designated is determined based on the ownership position at the time that the directors are initially appointed. Any agreement for the nomination or designation of directors must take into account subsequent reductions in the investor's voting power. As such, if the investor’s ownership position materially declines, whether through sales by the investor or additional issuances by the company, the investor's nomination or designation rights should be concomitantly reduced (this is sometimes called a "step-down"). In addition, the agreement with respect to directors should include a minimum level below which the investor would lose these rights. For example, Nasdaq has allowed agreements which provided that if the investor's ownership position were to fall below 5%, it would lose its director rights. Nasdaq would not require that a director be forced to resign intra-term as a result of a change to the investor's ownership.
 
In limited circumstances, such as when director rights derive from a substantial investment in the debt or non-voting securities of a troubled company, it may be appropriate to afford voting rights to the investor. In such cases, Nasdaq will generally evaluate such investments by comparing the amount of the investment to the company's market value.
 
Publication Date*: 2/2/2016 Mailto Link Identification Number: 292
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