SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 41278 \ April 13, 1999 Admin. Proc. File No. 3-9637 ___________________________________________________ : In the Matter of the Application of : : TRANSNET CORPORATION : c/o Roger A. Tolins, Esq. : Tolins & Lowenfels : 12 East 49th Street : New York, New York 10017 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : ___________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- DELISTING OF SECURITY FROM THE NASDAQ NATIONAL MARKET Failure to Satisfy Requirements for Continued Inclusion Registered securities association delisted a security because the issuer repeatedly failed to hold required annual shareholder meetings, and, when granted a rule exception, failed to meet requirements of the exception. Held, review proceeding is dismissed. APPEARANCES: Roger A. Tolins, of Tolins & Lowenfels, P.C., for TransNet Corporation. Robert E. Aber, Sara Nelson Bloom, and David A. Spotts, for the Nasdaq Stock Market, Inc. Appeal filed: June 29, 1998 Last brief received: August 27, 1998 I. TransNet Corporation appeals the decision of the National Association of Securities Dealers, Inc. ("NASD") delisting the company's securities from the Nasdaq Stock Market, Inc. ("Nasdaq") National Market. The NASD found that TransNet had failed to hold annual shareholder meetings for three consecutive years and, when granted a rule exception by the NASD, failed to meet the requirements of the exception. [/] We base our findings on an independent review of the record. II. TransNet Corporation is a publicly-owned Delaware corporation engaged in the marketing of computers and related equipment and the provision of technical and support services. Its common stock was quoted on Nasdaq beginning on August 25, 1978. TransNet did not hold an annual shareholder meeting in 1994, 1995, or 1996. On February 19, 1997, Nasdaq staff notified TransNet that Nasdaq National Market Rule 4460(e) requires an issuer listed on the Nasdaq National Market System to hold annual meetings of shareholders as a condition of continued listing. The staff stated that, based on TransNet's failure to hold such meetings, the company was subject to delisting. On March 20, 1997, TransNet informed the staff that TransNet and General Electric Capital Information Technology Solutions, Inc. ("GE Solutions") were negotiating an asset purchase agreement. TransNet represented that a shareholder meeting would be held before the closing of the transaction or, in the event that the negotiations failed, soon after the talks ended. On May 14, 1997, TransNet informed Nasdaq that it and GE Solutions anticipated signing the asset purchase agreement by May 22 and would at that time announce the date of the shareholder meeting. TransNet, however, had no further contact with Nasdaq until October 17, 1997. On that date, Nasdaq staff informed TransNet that the company's stock would be delisted because, despite the February 1997 notice, TransNet had not held its shareholders meeting. [/] On December 4, 1997, at TransNet's request, the Nasdaq Listing Qualifications Hearing Panel conducted an oral hearing to determine whether to delist the company's common stock. TransNet's counsel stated that, in February 1993, TransNet had held an annual meeting at which, in addition to the company's directors and officers, only three shareholders were present. Because so few shareholders had appeared at the meeting, [m]anagement then decided that, unless we have something really significant to go to the stockholders with -- possibly management is wrong in doing this -- management said we would only hold meetings . . . on an interim basis; in other words, every couple of years unless we really have something to go to the stockholders about . . . . TransNet's counsel further asserted that the company was not aware of Rule 4460(e)'s requirement that a shareholder meeting be held each year. He complained that Nasdaq and the Commission had failed to inform TransNet of the annual meeting requirement. He also argued that, because the company both issued an annual report to shareholders and filed an annual report on SEC Form 10-K that disclosed the information that would be supplied in a proxy statement, a meeting would be redundant and a waste of resources. He noted that there had been no shareholder complaints. TransNet's counsel stated that TransNet had decided to delay holding its shareholder meeting until the conclusion of the negotiations with GE Solutions. According to TransNet's counsel, the negotiations had been stalled for several months over issues with TransNet's employee benefits plan. Counsel told the Listings Panel that TransNet (a) had announced, on October 24, 1997, that a shareholder meeting would be held on January 29, 1998, (b) had executed the asset purchase agreement on October 31, 1997, and (c) would file a "very complicated proxy statement" with the Commission in mid-December. TransNet's counsel declared that the company "will commit in writing that we will have a stockholder meeting as long as this company is alive every January or February thereafter." On December 22, 1997, the Hearing Panel granted TransNet a temporary exception to the shareholder meeting requirement. As a condition of the exception, the NASD required TransNet to notify Nasdaq by January 30, 1998 that the company had held a shareholder meeting. The decision stated that, "[i]n the event the Company fails to comply with any of the terms of this exception, its securities will be immediately delisted from the Nasdaq National Market." It further stated: "It is a requirement during the exception period that the Company must provide prompt notification of any significant events which occur during this time." TransNet did not appeal this December 22 determination to the Nasdaq Review Council. According to TransNet, comments received on January 15, 1998 from Commission staff regarding TransNet's proxy materials resulted in additional negotiations between TransNet and GE Solutions. On January 22, TransNet informed Nasdaq staff that the company had rescheduled its shareholder meeting to March 12. On February 3, Nasdaq delisted TransNet's common stock. On February 4, TransNet appealed the February 3 delisting to the Nasdaq Listing and Hearing Review Council. TransNet informed Nasdaq staff that the company's negotiations with GE Solutions "will be resolved, one way or another, [by February 6]." The company stated: "IN ANY EVENT, THE [shareholder] MEETING WILL BE HELD ON THURSDAY, MARCH 12, 1998" (capitals in original). The company reiterated "the absolute certainty that the stockholder meeting will be held on March 12, 1998 (and annually thereafter)," and requested that the Panel extend until March 12 the date for written notification that the shareholder meeting had been held. On February 17, 1998, the Nasdaq Review Council granted a limited appeal. Nasdaq stated that, because TransNet had not filed a timely appeal of the December 22 determination, the Review Council would consider only the Listing Panel's February 3 decision finding that the company had not complied with the December 22 exception. [/] The Review Council set a deadline of February 25 for TransNet's submission of additional information. TransNet did not object to the deadline but did not submit any information before February 25. On February 26, Nasdaq informed TransNet that it intended to consider the request for review "abandoned" unless it received a response by the next day. On February 27, TransNet responded and requested review on the basis of the unsupplemented written record. The company offered no additional information at that time. [/] TransNet held a shareholder meeting on April 2, 1998. On May 19, 1998, the Review Council issued its decision affirming the February 3 delisting of TransNet's common stock. It concluded that TransNet had held no shareholder meeting in 1994, 1995, 1996, or 1997. TransNet also had failed to hold a shareholder meeting either by January 30, 1998, as required by the exception, or by March 12, 1998, as represented by the company. The Review Council concluded: Despite these repeated assurances that an annual meeting would be held, over one year has passed since the staff first notified the Company of the deficiency and the Company did not hold an annual meeting on any of the indicated dates. Furthermore, the Company did not provide us with any indication of the cause for the latest delay from the March 12, 1998 date. For these reasons, the Review Council found that, "given the Company's repeated failure to comply and the length of non- compliance, an additional extension until April 2, 1998 would not be appropriate." This appeal followed. III. TransNet Corporation seeks reversal of the NASD's action and an order directing the NASD again to list the company's common stock on the Nasdaq National Market System. The statute provides that the Commission must dismiss this action if it determines that the specific grounds on which the NASD based its action exist in fact, that such action is in accordance with applicable NASD rules, and that such rules are, and were applied in a manner consistent with, the purposes of the federal securities laws, unless the action has created a burden on competition. [/] We find that the NASD acted properly in delisting TransNet's common stock from the Nasdaq National Market, and in denying the company's appeal. The facts on which the NASD's action is based are supported by the record. TransNet admits that it repeatedly failed to comply with the listing requirement to hold an annual shareholder meeting. Moreover, TransNet persisted in this failure for another year despite being informed by the NASD in February 1997 of its deficiency. TransNet also failed to comply with the conditions of the exception granted on December 22, 1997. TransNet claims that the NASD or the Commission should have contacted the company earlier to notify it that annual shareholder meetings were mandatory under the listing requirements of the Nasdaq National Market. We have found previously, however, that "the responsibility for complying with regulatory requirements cannot be shifted to regulatory authorities." [/] Moreover, TransNet had notice of the annual shareholder meeting requirement during the period in which the company was listed. The Commission provided notice requesting public comment on the NASD's proposal for corporate governance rules for issuers of the NASDAQ national market on October 1985, November 1985, and November 1986. [/] The Commission's approval of the NASD's proposal of corporate governance rules, including the annual shareholder meeting requirement, was published on June 23, 1987. [/] In February 1997, Nasdaq staff directly informed TransNet of the requirement and warned the company that it appeared to be in violation. Over eleven months passed before Nasdaq delisted TransNet's common stock. TransNet had ample warning concerning its non-compliance. TransNet argues that the Review Council's affirmation of the delisting was unfair because it "was based on the sole ground that the said stockholder meeting was not held on or before January 30, 1998," as required by the exception that Nasdaq had granted the company. [/] As discussed above, however, the Council's holding was much broader -- the Council cited TransNet's failure to hold a shareholder meeting since 1993 and TransNet's failure to act on its "repeated assurances" that the shareholder meeting would occur. TransNet also asserts the Review Council erred when it did not reinstate TransNet's common stock listing after the company conducted its April 2, 1998 shareholder meeting. TransNet argues that the shareholder meeting brought the company into compliance with the listing criteria. The record, however, supports the NASD's finding that TransNet repeatedly failed to comply with Nasdaq requirements. For several years, TransNet failed to comply with the annual shareholder meeting requirement, failed to hold meetings after having represented to Nasdaq that those meetings would occur on specified dates, and failed to keep Nasdaq informed of intervening events. We find that this series of failures is a sufficient basis to affirm the NASD's decision not to reinstate TransNet's listing in light of the company's extremely tardy compliance. [/] We also conclude that the NASD followed its rules. TransNet claims that the "decision to delist TransNet common stock was arbitrary and capricious, lacked judgment and violated due process." In particular, the company argues that the Review Council's February 25 deadline for receiving additional information prevented TransNet's presentation of new, material information that became available subsequent to February 25, such as the March 5 clearance of the proxy materials by the Commission staff. TransNet, however, neither informed Nasdaq of the status of its proxy materials nor sought additional time to make further submissions. The record indicates that the company did not notify the Review Council prior to February 25 that its proxy materials remained under review, nor did it offer any additional information at that time. Rather, it agreed that the Review Council could consider the matter on the unsupplemented written record. Furthermore, contrary to TransNet's claims, the Review Council recognized and considered events that took place after the February 25 deadline, including the company's assurances that the meeting of shareholders would take place on March 12, the company's failure to hold the meeting on March 12, its failure to explain that delay, and the rescheduling of the meeting to April 2. Nasdaq also recognized that the company filed proxy materials on a Form 14A with the Commission on March 9, 1998. Rule 4460(e) was designed to provide minimum standards of corporate governance for listed companies. [/] We believe that, in light of TransNet's repeated failures to hold a shareholder meeting as required of all National Market-listed issuers, the application here of Nasdaq National Market Rule 4460(e) was consistent with the purposes of the federal securities laws. TransNet further claims that, because the delisting harmed the company's existing shareholders, the Review Council's determination "constituted an abdication of Nasdaq's responsibility to the investing public." We have found in the past, however, that, [t]hough exclusion from the system may hurt existing investors, primary emphasis must be placed on the interests of prospective future investors. The latter group is entitled to assume that the securities in the system meet the system's standards. Hence, the presence in NASDAQ of non- complying securities could have a serious deceptive effect. [/] IV. We find that a sufficient factual basis existed to delist TransNet's securities from the Nasdaq National Market, that the NASD acted fairly and in accordance with its rules, and that those rules are, and were applied, consistent with the purposes of the federal securities laws. Accordingly, we dismiss this review proceeding. An appropriate order will issue. [/] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY AND UNGER). Jonathan G. Katz Secretary **FOOTNOTES** [/]:/For continued inclusion of a security on the Nasdaq National Market, NASD Rule 4460(e) requires that the issuer hold an annual meeting of shareholders. NASD Rule 4410(d) permits Nasdaq to make exceptions to, inter alia, Rule 4460(e) "where it deems appropriate." [/]:/The October 17 letter cited additional reasons for delisting TransNet's common stock: Nasdaq charged that the company had failed (a) to file its most recent Form 10-K with the SEC and Nasdaq, and (b) to maintain an audit committee on which the majority of the members are independent directors as required by NASD Rule 4460(d). These issues subsequently were resolved in TransNet's favor and are not a basis for this appeal. [/]:/Before the Commission, TransNet has not challenged the Review Council's limitation on the scope of TransNet's appeal. [/]:/By letter dated March 17, 1998, counsel forwarded to the Nasdaq staff copies of the affidavit of mailing of the proxy materials to shareholders, announcing a shareholder meeting on April 2, 1998. [/]:/Section 19(f) of the Securities Exchange Act of 1934, 15 U.S.C. § 78s(f). TransNet has not alleged, and we do not find, that the NASD's action has created a burden on competition. [/]:/Steven P. Sanders, Securities Exchange Act Rel. No. 40600 (Oct. 26, 1998), __ SEC Docket __, __ & n.23. See also Richard R. Perkins, 51 S.E.C. 380, 384 n.20 (1993), and cases cited therein. Furthermore, as we have stated, "[a] regulatory authority's failure to take early action neither operates as an estoppel against later action nor cures a violation." William H. Gerhauser, Securities Exchange Act Rel No. 40639 (Nov. 4, 1998), __ SEC Docket __, __ & n.17 (quoting Variable Investment Corp., 46 S.E.C. 1352, 1354 n.6 (1978)). [/]:/See Securities Exchange Act Releases 22506 (October 4, 1985), 50 FR 41769 (October 15, 1985), 22602 (November 7, 1985), 50 FR 47474 (November 18, 1985), 23818 (November 17, 1986), 51 FR 42960 (November 26, 1986). [/]:/See Securities Exchange Act Release 24632 (June 23, 1987), 52 FR 24233 (June 29, 1987). [/]:/That exception required that any significant events occurring during the exception period be reported to Nasdaq on or before January 30. On January 22, 1997, TransNet informed Nasdaq staff that the annual shareholders meeting had been rescheduled for March 12 without giving reasons. Although, in its brief to the Commission, TransNet states that the cause of this delay was additional negotiations between it and GE Solutions, TransNet has not contended that it informed Nasdaq prior to January 30 of the reasons for rescheduling the meeting. We conclude that TransNet failed to satisfy this condition of the exception. [/]:/TransNet argues that the NASD was too strict in its enforcement of the annual shareholder meeting requirement. The company relies on Eagle Supply Group, Inc., Securities Exchange Act Rel. No. 39800 (March 25, 1998), 66 SEC Docket 2497, but that case does not support its argument. In Eagle Supply, we remanded the case because the NASD did not describe in detail the factual basis for its conclusions. 66 SEC Docket at 2502. As a result, we were unable to make the determinations required under Exchange Act Section 19(f). Id. Here, as discussed above, the NASD made clear the reasons for delisting TransNet's common stock, and we have found that those reasons comport with Section 19(f). TransNet correctly notes that Eagle Supply states: "The decision as to whether or not to list a particular security `should not depend solely on meeting quantitative criteria, but should also entail an element of judgment given the expectation of investors and the imprimatur of listing on a particular market.'" 66 SEC Docket 2503 (quoting Order Approving Proposed Rule Change, Securities Exchange Act Rel. No. 34151 (June 3, 1994), 59 Fed. Reg. 29843, 29845 (June 9, 1994) ("Order")). However, in the Order relied on by Eagle Supply, we also stated that the NASD may deny continued inclusion of particular securities based on any event or circumstance "which exists or occurs that makes initial or continued inclusion of the securities in Nasdaq inadvisable or unwarranted, even though the securities meet all enumerated criteria for initial or continued inclusion in Nasdaq." 59 Fed. Reg. at 29846. [/]:/Pursuant to Section 11A of the Exchange Act, the Commission in 1981 amended Exchange Act Rule 11Aa2-1 to establish criteria governing designation of securities as national market system securities. See Adoption of Rule Amendment, Securities Exchange Act Rel. No. 17549 (Feb. 2, 1981), 46 Fed. Reg. 13992 (Feb. 25, 1981). In 1985, the NASD requested that the Commission amend Exchange Act Rule 11Aa2-1 to permit the NASD to establish corporate governance standards. See Exchange Act Rel. Nos. 22505 and 22506 (Oct. 4, 1985), 50 Fed. Reg. 41697 and 41769 (Oct. 15, 1985). In amending Rule 11Aa2-1 and approving the NASD's rule change establishing corporate governance standards, including the requirement for annual shareholder meetings, the Commission stated that it is reasonable for a self-regulatory organization such as the NASD to continue to set standards affecting minimum investor protections. By requiring minimum safeguards for all companies listing stock in their market, exchange listing standards already, and NASD standards will, create uniformity not otherwise provided by providing assurance to investors that all the companies traded in those markets have the fundamental safeguards they have come to expect of major companies. Consequently, investors are spared the costs of reviewing each potential company and evaluating the significance of varying corporate structures in making investment decisions. Securities Exchange Act Rel. No. 24633 (June 23, 1987), 52 Fed. Reg. 24234, 24235 (June 29, 1987). [/]:/Tassaway, 45 S.E.C. 706, 709 (1975). See also Ryan-Murphy Inc., Securities Exchange Act Rel. No. 38999 (Sept. 2, 1997), 65 SEC Docket 824, 831 & n.17 ("While the continued delisting of [the Company's] securities may have an adverse impact upon the Company's existing shareholders, primary emphasis must be placed on the interests of prospective future investors."), and cases cited therein. [/]:/We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 41278 \ April 13, 1999 Admin. Proc. File No. 3-9637 ___________________________________________________ : In the Matter of the Application of : : TRANSNET CORPORATION : c/o Roger A. Tolins, Esq. : Tolins & Lowenfels : 12 East 49th Street : New York, New York 10017 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : ___________________________________________________: ORDER DISMISSING REVIEW PROCEEDING On the basis of the Commission's opinion issued this day, it is ORDERED that the application for review filed by TransNet Corporation be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary