The Board of Directors of Nasdaq Stock Market, Inc. ("Nasdaq") approved certain changes to Nasdaq's corporate governance standards and submitted the changes to the SEC for approval.

As described in greater detail below, these proposals would:

• mandate shareholder approval of stock option plans in which officers and directors participate;
• narrow the definition of director independence;
• require approval by the audit committee of related party transactions;
• clarify the existing prohibition against misrepresenting information; and
• require through issuance of a press release notification of going concern qualifications in audit opinions.

Stock Option Plans

Nasdaq rules generally require shareholder approval for all stock option or purchase plans in which officers or directors participate. The current rules contain an exception for plans in which at least a majority of the participants are not officers or directors. The proposed rule changes would eliminate this exception and, accordingly, would require shareholder approval for all plans in which officers and directors participate.

The current rules also exempt inducement grants to new officers from the shareholder approval requirement. The new proposal would require that inducement grants be subject to approval by either (i) a compensation committee comprised solely of independent directors or (ii) a majority of the company's independent directors.

The exception for tax qualified, non-discriminatory plans such as Employee Stock Ownership Plans would be retained.

With respect to implementation of the proposed rule, Nasdaq has proposed that existing plans be grandfathered, and that the rule become effective 60 days after SEC approval.

Independent Directors

Nasdaq rules generally require issuers to have an audit committee of at least three members, comprised solely of independent directors. An independent director is currently defined as a person other than an officer or employee or a person who, in the opinion of the board of directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The current rules also specify that the following relationships preclude independence; compensation in excess of $60,000 paid to a director, familial relationships with officers, payments between the listed company and a for-profit company with which the director is associated, and relationships arising from interlocking service on another company's compensation committee.

The new proposal would extend the current prohibition on the receipt of $60,000 in "compensation" to include "any payments" (which would include political contributions) in excess of $60,000 (other than compensation for board service) and to extend this prohibition to the receipt of such payments by an immediate family member of a director. In addition, the proposal would delete the phrase "for-profit business" from the existing rule so that a director will not be considered independent if the company makes payments to a charity where the director is an executive officer and such payments exceed the greater of $200,000 or five percent of either the company's or the charity's gross revenues.

Related Party Transactions

Nasdaq's conflict of interest rule currently provides that an issuer must conduct an appropriate review of all related party transactions on an ongoing basis and utilize its audit committee or comparable body of the board of directors for the review of potential conflicts of interest. Nasdaq is proposing to expand this rule by requiring the audit committee or comparable body of the board of directors to actually approve, rather than merely review, related party transactions.

Explicit Prohibition on Misrepresenting Information to Nasdaq

Current Nasdaq rules do not explicitly state than an issuer that makes a material misrepresentation to Nasdaq, omits necessary material information in a communication with Nasdaq, or otherwise fails to provide requested material information, may be delisted. The new proposal would clarify that an issuer can be delisted for misrepresenting material information to Nasdaq.

Requirement to Disclose Audit Opinions with Going Concern Qualifications

Nasdaq proposes to require issuers to disclose in a press release the receipt of an audit opinion with a going concern qualification. Ordinarily, if an auditor concludes that substantial doubt exists about the entity's ability to continue as a going concern for a reasonable period of time, the auditor provides this conclusion through an explanatory paragraph in the auditor's opinion. While the audit opinion is available in the Form 10-K, the proposed rule change would require that the going concern qualification be brought to the attention of investors and potential investors through a press release issued within seven calendar days after the filing of the Form 10-K. Nasdaq's market surveillance would also have to be notified.

The proposed rule changes will become effective only upon SEC approval.

Any person who has a question about this memorandum or its application to specific circumstances may obtain additional guidance by contacting this firm.