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Frequently Asked Questions
  Staff Interpretation Letter 2016-3
Identification Number 1145
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed Transaction.
 
According to the information you provided, the Company will issue convertible notes (the “Notes”) to several investors in a private placement (the “Transaction”). Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion could exceed 20% of the pre-transaction total shares outstanding. The Notes contain anti-dilution provisions; however, the effect of any anti-dilution adjustments will be limited such that the conversion price could never be reduced to below the greater of market and book value as of the date of the agreement to issue the Notes.
 
You have represented that Shareholder A holds an approximately 15% interest in the Company and is currently the Company’s largest shareholder. However, you have represented that Shareholder A is a registered investment adviser, and holds its entire 15% interest in the Company in this capacity. In this role, Shareholder A has the power and discretion to buy and sell, but not vote, the securities held in the accounts it manages. Accordingly, you have represented that in regard to its entire 15% interest in the Company, Shareholder A has no sole voting power, no shared voting power and no sole dispositive power, and it is deemed to be a beneficial owner solely due to the shared dispositive power over the shares held in the managed accounts.
 
You have represented that Shareholder A is also a registered broker-dealer. In this role, Shareholder A acts as custodian for many individual investment accounts, with shares within such investment accounts held in “street” name. The holders of these accounts make their own decisions regarding voting and disposition of the securities in their accounts. Shareholder A may vote such shares in limited circumstances described in SEC Rule 13d-3(d)(2), but Shareholder A is not deemed to be a beneficial owner of such shares.
 
You have represented that the Company adopted a stockholder rights plan that, among other things, limits the ability of any person to acquire ownership of 15% or more of the shares of the common stock of the Company by triggering special rights for all other stockholders if this ownership threshold would otherwise be exceeded by such person (the “Plan”). The Plan’s definition of the acquiring person specifically excludes certain shares held by Shareholder A. This exclusion would not apply to any of the shares that might be acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect. Furthermore, this exclusion applies only to shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest. Any single account holder or retail customer of Shareholder A, and any single broker at Shareholder A with respect to such broker’s personal trading account, remains subject to the 15% limitation on beneficial ownership.
 
You have represented that none of the Shareholder A’s managed and custodial account holders is part of any arrangement or agreement constituting a “group” within the meaning of SEC Rule 13d, and that all of the shares of common stock for which it serves as investment adviser have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
 
Shareholder A has negotiated the terms of the Notes with the Company. Shareholder A’s managed and custodial accounts will be allowed to acquire at least one half of the total principal amount of the Notes sold by the Company. The note purchase agreement will provide that the Notes will not be convertible into shares of common stock to the extent that after conversion any managed or custodial account would beneficially own more than 9.9% of the outstanding shares of common stock. All purchasers of the Notes, including Shareholder A’s managed and custodial accounts, will sign the note purchase agreement.
 
Following our review of the information you provided, we have determined that the Transaction does not require shareholder approval under the Rules. Although the potential issuance under the Notes exceeds 20% of the pre-transaction outstanding shares, shareholder approval would not be required under Listing Rule 5635(d) because the conversion price could not be less than the greater of book or market value per share as of the date of the agreement to issue the Notes. Shareholder approval also is not required under Listing Rule 5635(b). We have reached this conclusion because no individual shareholder or a group will have a control position following the Transaction given that (i) none of the purchasers, other than Shareholder A, will beneficially own more than 9.9% of the outstanding shares of common stock due to a beneficial ownership limitation in the note purchase agreement; (ii) Shareholder A is deemed to be a beneficial owner solely due to the shared dispositive power over the shares it holds in its managed accounts as an investment advisor and all such shares have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect; and (iii) the Plan limits any person, including Shareholder A, from acquiring 15% or more of the Company’s outstanding shares, excluding the shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest.
 
Publication Date*: 5/11/2016 Identification Number: 1145 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-15
Identification Number 733
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Listing Rules 5635(b), 5635(d), and IM-5635-2 (the “Rules”) to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked about the applicability of the voting rights requirements of Listing Rule 5640 and IM-5640 (the “Voting Rights Requirements”) to rights that the Investor in the Proposed Transaction would receive allowing it to designate members to serve on the company’s board of directors and to have non-member board observers (the “Designation Rights”).
 
The company has two classes of common stock, Class A, which is listed on NASDAQ, and Class B, which is not publicly traded (collectively, the “Common Stock”). The Class A has one vote per share, and the Class B has ten votes per share. The number of shares of Class A outstanding equals approximately 97% of the shares of Common Stock outstanding, and the number of shares of Class B outstanding equals approximately 3% of the shares of Common Stock outstanding. The aggregate voting power of the Class A is approximately 79% of the company’s total outstanding voting power, and the Class B, approximately 21%. The company’s chief executive officer owns all of the Class B shares.  No other shareholder owns as much as 10% of the company’s outstanding voting power or outstanding shares of Common Stock.
 
According to the information you provided, in the Proposed Transaction the company would issue to the Investor: (i) non-convertible senior secured notes with an aggregate principal amount equal to approximately three times the current aggregate market value of the company’s outstanding shares of Common Stock; and (ii) warrants to purchase shares of Class A equal in number to approximately 55% of the pre-transaction outstanding shares of Common Stock, subject to the restrictions described below (the “Warrants”). On a post-transaction basis, the potential issuance would equal approximately 36% of the then outstanding shares of Common Stock and approximately 31% of the company’s then outstanding voting power.
 
Pursuant to the Designation Rights, upon the closing of the Proposed Transaction one designee of the Investor would be added to the company’s board of directors (the “Board”), representing not more than 11% of the total number of members of the Board.  Following shareholder approval of the Proposed Transaction, the Investor would be entitled to a second designee on the Board, with the two designees representing not more than 20% of the total number of members of the Board. In addition, the Investor would be entitled to have one or two non-voting observers attend meetings of the Board. At any given time, the number of designees together with the number of observers would not exceed two. The audit, nomination, and compensation committees could exclude the observers from the proceedings at the discretion of the respective committee. The Designation Rights would include step-downs for reduced Board representation if the size of the Investor’s stake in the company were to decrease.
 
Absent shareholder approval, the exercise price of the Warrants would not be less than the greater of book or market value prior to entering into the binding agreement (the “Exercise Price Restriction”). In addition, absent shareholder approval, a holder of the Warrants would not be entitled to exercise Warrants if immediately following such exercise: (i) the aggregate voting power of such holder (or any group including such holder) would exceed 19.9% of the aggregate voting power of the company; or (ii) the aggregate shares of the class of common stock underlying the Warrants owned by such holder (or any group including such holder) would exceed 19.9% of the company’s aggregate outstanding common shares (the “Ownership Limitation”).
 
The Exercise Price Restriction and the Ownership Limitation would apply until such time as shareholder approval is obtained.  The Warrants would not be exercisable to any extent until the earlier of: (i) shareholder approval; (ii) the holding of a specified maximum number of meetings of the company’s shareholders at which shareholder approval would be sought; and (iii) a specified maximum period of time after the closing of the Proposed Transaction during which the company would be permitted to seek shareholder approval pursuant to the agreement relating to the Proposed Transaction. The interest rate on the notes would increase over time unless shareholder approval has been obtained.
 
Following our review of the information you provided, we have determined that the Proposed Transaction, structured as you described and as summarized above, would satisfy the requirements of the Rules. Given the Ownership Limitation, the Proposed Transaction could result in a change of control only after shareholder approval is obtained, thereby satisfying Rule 5635(b). Given the Exercise Price Restriction, the exercise price could be less than the greater of book or market value only after shareholder approval is obtained, thereby satisfying Rule 5635(d). With respect to IM-5635-2, no shares of common stock could be issued in the Proposed Transaction (i.e., the Warrants would not be exercisable to any extent), unless either: (i) shareholder approval has been obtained, or (ii) shareholder approval could no longer be sought pursuant to the terms of the agreement. As such, absent shareholder approval, the Warrant would be exercisable only if there would not be a subsequent shareholder vote to approve the Proposed Transaction, and then only to the extent permissible under the Exercise Price Restriction and the Ownership Limitation. Accordingly, the Proposed Transaction complies with IM-5635-2. In addition, the Designation Rights satisfy the Voting Rights Requirements given the economics of the Proposed Transaction relative to the company’s aggregate market value and because such rights would decline if the size of the Investor’s stake in the company were to decrease.
 
Publication Date*: 7/31/2012 Identification Number: 733 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2007-20  
Identification Number 796
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), and 4350(i)(1)(D) (the “Rules”).
 
According to the information you submitted, in the Transaction the company will issue convertible debentures (“Debentures”) to several investors.  Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion would equal approximately 10% of the pre-transaction total shares outstanding.  The Debentures contain anti-dilution provisions, however, which could reduce the conversion price to below market value and increase the number of shares that would be issued.  The effect of any anti-dilution adjustments will be limited by a provision of the Debentures which will prohibit conversion into more than 19.9% (the “Conversion Limitation”) of the pre-transaction outstanding shares at an average conversion price which is less than the closing bid price immediately prior to entering into the binding agreement (“Market Value”) unless shareholder approval is obtained.  The company’s market value exceeds its book value.
 
The investors will include two members (the “Directors”) of the board of directors (the “Board”) and two advisory directors (the “Advisory Directors”) who, although not members of the Board, provide consulting services to the company.  The conversion price for the Directors and the Advisory Directors will be limited so that it will not be less than Market Value (the “Conversion Price Limitation”).  The investors will not include any employees or officers of the company, or any other directors or consultants.
 
You stated that, as a result of the Transaction, no investor individually, or as part of a group, could beneficially own, or obtain the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis, and there would be no other related arrangements between the company and any of the investors (the “Ownership Limitation”, and together with the Conversion Limitation and the Conversion Price Limitation, the “Limitations”).
 
You stated that the Limitations may be removed only if shareholder approval is obtained.  The terms of the Transaction would not otherwise change as a result of a shareholder vote.
 
Following our review of the information you provided, we have determined that the Transaction complies with the Rules.  The Transaction would not require shareholder approval under Listing Rule 4350(i)(1)(A) because, due to the Conversion Price Limitation, no shares could be acquired by any officer, director, employee, or consultant of the company at a discount to market value.  Given the Ownership Limitation and the lack of any other related arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and therefore will not require shareholder approval under Listing Rule 4350(i)(1)(B).  Due to the Conversion Limitation, the Transaction could not result in the issuance of 20% or more of the pre-transaction outstanding shares or voting power at a discount to the greater of book or market value, and, therefore, shareholder approval would not be required under Listing Rule 4350(i)(1)(D).  The Limitations could be removed only after shareholder approval is obtained.  Please note that pursuant to IM-4350-2: (i) shares issued under a cap cannot be counted in the vote to approve the removal of the cap; (ii) a cap must apply for the life of the transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can change based on the outcome of the shareholder vote, then no shares of common stock may be issued prior to the vote.
 
 
Publication Date*: 7/31/2012 Identification Number: 796 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-8
Identification Number 726
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to a proposed issuance of securities in exchange for the Old Notes (the “Exchange”).  You asked about the potential applicability of Listing Rules 5635(b) and 5635(d)(2) (the “Rules”).
 
According to the information you provided, approximately one year ago the company issued the Old Notes, which are convertible into shares of the company’s common stock. In the Exchange, for each $1,000 principal amount of the Old Notes, the company would issue to each participating note holder: (i) a lesser principal amount of new notes (the “New Notes”) convertible into shares of common stock (the “Conversion Shares”); (ii) a specified amount of cash (the “Cash Component”); and (iii) a specified number of shares of common stock or warrants exercisable for such shares (the “New Common Shares”). The Conversion Shares include shares of common stock that could be issued: (i) in connection with interest payments on the New Notes; and (ii) as a result of adjustments to the conversion rate, other than adjustments relating to stock splits and similar events.
 
The total number of shares of common stock that could be issued as a result of the Exchange (the “Aggregate Issuance”), which is calculated as the sum of the Conversion Shares and the New Common Shares, exceeds 20% of the pre-transaction outstanding shares. However, the Aggregate Issuance would be subject to a maximum number of shares (the “Maximum”) such that the price per share (the “Price”), calculated as described below, would not be less than the greater of book or market value prior to entering into the agreement for the Exchange. The Price will be calculated by dividing the face amount of the Old Notes that are exchanged, less the Cash Component paid by the company, by the Aggregate Issuance. In addition, the company will not effectuate the Exchange if it could result in any stockholder owning 20% or more of the company’s outstanding stock or voting power (the “Ownership Maximum”). The holders of the New Notes would not have any board representation, and there would be no additional agreement between the company and the note holders.
 
You stated that following the issuance of the Old Notes, the company’s financial and liquidity positions have been negatively impacted as a result of the worsening global and national economic conditions, giving rise to the need for the company to seek additional sources of financing. The Exchange would decrease the amount of indebtedness, delay for at least two years payments that otherwise would be due under the Old Notes, provide greater operational and financial flexibility, and provide terms under the New Notes that would be more favorable than those under the Old Notes.
 
Following our review of the information you submitted, we have determined that the Exchange would not require shareholder approval under the Rules. Given that the Exchange would not result in any stockholder exceeding the Ownership Maximum, the Exchange would not result in a change of control and, therefore, would not require shareholder approval under Listing Rule 5635(b). In addition, the Exchange is considered to be a new transaction under Listing Rule 5635(d) because of the amount of time that has elapsed since the issuance of the Old Notes and the ensuing significant changes in circumstances giving rise to the company’s need to enter into the Exchange. As such, because the Exchange is structured such that the Price is not less than the greater of book or market value, the Exchange would not require shareholder approval under Listing Rule 5635(d). Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
 
Publication Date*: 7/31/2012 Identification Number: 726 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2013-6
Identification Number 1093

This is in response to your interpretive request asking whether a proposed Transaction by the company requires shareholder approval under Listing Rule 5635 (the "Rule").

According to the information you provided, the company, the company's majority shareholder and a new investor are considering entering into a two part agreement, which would result in the reduction of the majority shareholder's ownership from more than 50% to less than 15%, and the new investor obtaining approximately 25% of the company's total shares and voting power outstanding on a post-transaction basis (the "Transaction"). The new investor is a limited partnership in which two executive officers of the company (the "Insiders") would own a minority interest. The general partner of the new investor would also be owned by the Insiders. The Transaction would be structured in two interdependent parts and the closing of each would be conditioned upon the other.

In the Transaction, the company would first repurchase shares of its common stock owned by the majority shareholder (the "Repurchase Transaction"). The Repurchase Transaction would be structured such that the company acquires a wholly owned subsidiary of the majority shareholder (the "Subsidiary"), holding only shares of the company's common stock and net operating losses, in exchange for cash and a fewer number of newly issued shares of common stock. You stated that the shares purchased by the company in the Repurchase Transaction would be at a discount to the market value of those shares and that the newly issued shares would be in exchange for the same number of shares held by the Subsidiary. Following the Repurchase Transaction, the company would own 100% of the Subsidiary and company shares held by the Subsidiary would be considered treasury shares, which have no voting rights and would not be taken into account when calculating the company's earnings per share. You stated that these treasury shares would be entitled to receive dividends, if any, paid by the company, but that such amounts would remain within the company's consolidated financial statements.

Immediately following the Repurchase Transaction, the majority shareholder would sell shares of the company's common stock to the new investor at the same price per share agreed to in the Repurchase Transaction (the "Private Sale").

Currently, the company is a Controlled Company under the Listing Rules and does not have a majority independent board, nominating committee or compensation committee. Following the Transaction, the company will cease to be a Controlled Company and neither the majority shareholder nor the new investor would have any board designation rights. The Insiders currently sit on the company's board and would retain their board seats following the Transaction.

You stated that the company could complete the Transaction without issuing new shares in exchange for the same number of currently outstanding shares in the Repurchase Transaction. However, by structuring the Transaction in the manner described, the company believes that it could achieve a significant economic benefit for its remaining shareholders, including the existing public shareholders.

Following our review of the information you provided, we have determined that the Transaction does not require shareholder approval under the Rule. Listing Rule 5635(a) requires shareholder approval in certain circumstances "prior to the issuance of securities in connection with the acquisition of the stock or assets of another company"; Listing Rule 5635(b) requires shareholder approval "prior to the issuance of securities when the issuance or potential issuance would result in a change of control of the company"; Listing Rule 5635(c) requires shareholder approval "prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants"; and Listing Rule 5635(d) requires shareholder approval "prior to the issuance of securities" in connection with certain transactions at a price below the greater of book or market value. Each of these rules predicates the need for shareholder approval on an issuance of securities by the company. In the Repurchase Transaction, while the company is providing new shares in exchange for currently outstanding shares, there would be no increase in the number of shares outstanding and, in fact, the number of shares outstanding would decrease. As such, the Repurchase Transaction would not be considered an issuance of the company's securities for purposes of the Listing Rules. In the Private Sale, the majority shareholder is selling shares to the Insiders, and no shares are being issued by the company.

In addition, with respect to Listing Rule 5635(c), we note that shareholder approval is also required in connection with other equity compensation arrangements. Because the company is not issuing shares to any officer, director, employee or consultant at a discount to market value, and because the company would not be required to account for any part of the Transaction as equity compensation under GAAP, we would not consider the Transaction to be an equity compensation arrangement and shareholder approval therefore is not required under Listing Rule 5635(c).

Publication Date*: 10/23/2013 Identification Number: 1093 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2014-4
Identification Number 1130
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from Nasdaq’s shareholder approval requirements with respect to the proposed issuance of securities (the “Proposed Transaction”).
 
You have stated that since its inception, the Company has recorded net losses in every fiscal year but one. Additionally, in the most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You have stated that, without the Proposed Transaction, the Company has only enough cash to fund operations for the next four weeks.
 
In the Proposed Transaction, the Company will issue units consisting of common stock and convertible preferred stock (the “Preferred Stock”). The purchase price would be at a discount to the current market value of the units (when such value is determined by adding the current market values of the common stock shares issued as part of the units and common stock shares to be issued upon a future conversion of the Preferred Stock shares issued as part of the units).
 
You stated that investors in the Proposed Transaction would include officers and directors, as well as current and new shareholders of the Company (the “Proposed Investors”). Following completion of the Proposed Transaction and subject to conversion of the Preferred Stock, the Proposed Investors would own greater than 50% of the outstanding common stock shares, with the largest shareholder owning more than 20% of the outstanding common stock shares. The common stock shares issued or issuable as a result of the Proposed Transaction will represent more than 20% of the pre-transaction total number of outstanding common stock shares.
 
You stated that the Company has pursued multiple alternative financing strategies for over one year, including the potential sale of the Company, and that there are no realistic alternatives to the Proposed Transaction. You stated that if the Proposed Transaction is not completed in the very near term, the Company would be forced to cease operations and terminate most employees, and that the Company’s assets would be liquidated through an assignment for the benefit of creditors or through a bankruptcy process. You stated that there can be no assurance that any liquidation proceeds would remain for distribution to the Company’s shareholders. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
 
Without the requested exception, shareholder approval may be required pursuant to each of the following rules: Listing Rule 5635(b), because one of the Proposed Investors would own more than 20% of the shares of common stock outstanding upon completion of the Proposed Transaction; Listing Rule 5635(c), because the issuance at a discount of common stock shares to the officers and directors constitutes equity compensation; and Listing Rule 5635(d), because common stock shares issued or issuable as a result of the Proposed Transaction at a price less than the greater of book or market value would represent more than 20% of the pre-transaction number of outstanding common stock shares.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid the ceasing of operations. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration to be received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
 
Publication Date*: 10/7/2014 Identification Number: 1130 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2017-2
Identification Number 1411

This is in response to your correspondence asking whether certain payments made by the Company to the Director preclude the Director from being considered independent under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D) (the "Rules") and to serve on the Company's audit committee under Listing Rule 5605(c)(2)(A)(ii). The payments were made to the Director as consideration for Director's ownership in the Target in connection with the Company's acquisition of the Target.

According to the information you provided, the Company agreed to acquire a controlling interest in the Target (the "Acquisition") through an offer, open to all Target shareholders, to purchase at least 80% of the outstanding shares of the Target. As a result of the Acquisition, the Target became a subsidiary of the Company. The Director, directly and indirectly, owned approximately 10% of the Target.

As consideration for the Target, the Company paid cash and issued shares of the Company's common stock (the "Merger Consideration"). Accordingly, as an owner of shares in the Target, the Director received Merger Consideration pro ratably in the same manner as the Target's other shareholders. You stated that the Company accounted for the Merger Consideration as acquisition consideration and not as compensation.

Following our review of the information you provided, we have determined that the Company's board of directors is not precluded by the Rules from finding that the Director is independent and that the Director is eligible under Listing Rule 5605(c)(2)(A) to serve on the Company's audit committee. The Merger Consideration is not compensation under Listing Rule 5605(a)(2)(B) because it was paid pro ratably to all shareholders of the Target and the Company accounted for the payment as acquisition consideration and not compensation. Listing Rule 5605(a)(2)(D) is not implicated by the Acquisition because the Merger Consideration is a payment to the shareholders of the Target rather than a payment for "property or services" to the Target itself as an organization, as contemplated by Listing Rule 5605(a)(2)(D). In addition to the independence requirements under Listing Rule 5605(a)(2), Listing Rule 5605(c)(2)(A)(ii) requires that audit committee members meet the criteria for independence set forth in Rule 10A-3(b)(1) under the 1934 Act. Under these facts and circumstances, the Merger Consideration does not constitute a direct or indirect "consulting, advisory or other compensatory fee from the issuer or any subsidiary thereof," as described in by Rule 10A-3(b)(1)(ii)(A) and, therefore, Listing Rule 5605(c)(2)(A)(ii) would not prohibit the Director from serving on the Company's audit committee.

Notwithstanding this determination, the Company remains subject, on an ongoing basis, to Rule 5605(a)(2) and IM-5605, which require the Company's board to make an affirmative determination that no relationship exists between the Company and the Director that would interfere with the exercise of independent judgment in carrying out the responsibilities as a director. We are not expressing any opinion as to the whether the Board could reasonably make such a determination.

Publication Date*: 8/10/2017 Identification Number: 1411 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-3
Identification Number 748
This is in response to your correspondence regarding the applicability of the shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A) and 4350(i)(1)(B) (the “Rules”).
 
According to the information you submitted, in the Transaction the company would issue shares of common stock and warrants to the Investor at market value.  In the aggregate, the number of shares that would be issued, including those that could be issued upon the exercise of the warrants, would equal approximately 5% of the company’s pre-transaction outstanding shares.  The proceeds of the Transaction would be used to fund a strategic acquisition (the “Acquisition”).  As a result of prior transactions, the Investor currently beneficially owns 19.32% of the company’s outstanding common stock.  The company’s board of directors includes two members who are affiliated with the Investor.
 
The purchase price of the common stock and the exercise price of the warrants will equal the closing bid price immediately prior to entering into the binding agreement, and the purchase price of the warrants will be $0.125 for each share of common stock subject to the warrants.  You stated that the aggregate number of shares to be issued in the Transaction and the Acquisition would be significantly less than 20% of the shares outstanding before the Transaction.
 
Approximately three years ago, the company entered into an agreement to issue common stock and warrants to the Investor in a prior transaction (the “Prior Transaction”).  The company sought shareholder approval of the Prior Transaction for reasons including that the issuance would result in a change of control for purposes of Listing Rule 4350(i)(1)(B).  Following the approval of its shareholders (the “Shareholder Approval”) approximately two and one-half years ago, the company issued the securities in the Prior Transaction resulting in the Investor owning approximately 24.5% of the company’s then outstanding shares of common stock.  Subsequently, the Investor has acquired additional shares on the open market, and the company has issued additional shares to other investors in acquisitions and in a public offering, together resulting in a decrease in the Investor’s beneficial ownership to 19.32% of the shares outstanding.  The company’s second largest shareholder beneficially owns approximately 6.5%.
 
Following our review of the information you provided, we have determined that the Transaction will not require shareholder approval under the Rules.  Although two members of the board are affiliated with the Investor, shareholder approval under Listing Rule 4350(i)(1)(A) is not required because the purchase price is not at a discount to market value.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the company’s shareholders previously approved a change of control with regard to the Investor, and since that time: (i) the Investor’s ownership position has not significantly decreased and only recently has fallen below 20% to its current level of 19.32%; (ii) the decrease was not caused by any action of the Investor but rather was a result of issuances by the company to other investors; and (iii) the Investor has remained the largest shareholder.  You did not ask, and we do not express any opinion on whether the Acquisition would require shareholder approval under NASDAQ rules.
 
 
Publication Date*: 7/31/2012 Identification Number: 748 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-5  
Identification Number 750
This is in response to your correspondence regarding a proposed issuance of securities to the Controlling Stockholder (the “Transaction”).  You asked about the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), and 4350(i)(1)(D)(ii) (the “Rules”).  In addition, you asked whether the Controlling Stockholder may vote the shares it currently owns in a shareholder vote to approve the Transaction.
 
According to the information you provided, in the Transaction the company would issue notes (the “Notes”) to the Controlling Stockholder.  The Notes would be convertible into common stock only if the company obtains shareholder approval of the issuance of common stock upon conversion.  The conversion price will be at a discount to the market value of the common stock at the time the company and the Controlling Investor enter into a definitive agreement to issue the Notes.  The number of shares that would be issued upon conversion equals approximately 32% of the pre-transaction outstanding shares.
 
Currently, the Controlling Stockholder owns approximately 73% of the company’s outstanding common stock, which it obtained approximately five years ago in a transaction unrelated to the Transaction.  The Controlling Stockholder has three representatives on the company’s board of directors.  These directors have an indirect pecuniary interest in the holdings of the Controlling Stockholder.
 
Following our review of the information you provided, we have determined that the Transaction complies with the Rules.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the Transaction will not result in a change of control given that the Controlling Stockholder will have a control position both before and after the Transaction.  Shareholder approval is required under Listing Rule 4350(i)(1)(A) because of the equity compensation that would result from a discounted issuance of common stock to directors.  Shareholder approval is also required under Listing Rule 4350(i)(1)(D) because the issuance of common stock would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  The Transaction complies with Listing Rule 4350(i)(1)(A) and Listing Rule 4350(i)(1)(D), however, because no shares of common stock could be issued until after shareholder approval.  Accordingly, the Notes may be issued prior to the receipt of such approval.  For purposes of complying with the Rules, the Controlling Stockholder is not prohibited from voting the shares it currently owns to approve the Transaction because those shares are not part of the Transaction.
 
Publication Date*: 7/31/2012 Identification Number: 750 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2014-1
Identification Number 1113

This is in response to your correspondence asking whether, for purposes of the shareholder approval requirements in Listing Rule 5635(d) (the “Rule”), shares issued in a proposed transaction (the “Proposed Transaction”) would be aggregated with shares issued in connection with a pending acquisition (the “Acquisition”).

In the Acquisition the Company will purchase certain assets for cash. The Company will obtain the cash needed for the Acquisition and satisfy certain related closing conditions by selling in two private placements shares of its common stock representing in aggregate approximately 12% of the total number of shares currently outstanding (not including any shares that by then may have been issued in the Proposed Transaction) (the “Private Placements”). The terms of the Private Placements were agreed by the Company and participating investors in two security purchase agreements, which were executed on the same date as the purchase agreement with respect to the Acquisition. Due to the various required closing conditions, including regulatory approval, the Company does not expect the Acquisition and Private Placements to close in the near term.

After announcing the Acquisition and Private Placements, the Company received unsolicited inquiries from institutional investors expressing interest in acquiring directly from the Company shares of its common stock. To take advantage of this interest and favorable market conditions, you stated that the Company is now considering the Proposed Transaction, in which the Company may issue shares representing up to 19.9% of the number of shares of common stock currently outstanding. The proceeds from the Proposed Transaction would be used for general working capital purposes, including future potential acquisitions. The investors in the Proposed Transaction are different than the investors in the Private Placements, and there are no contingencies between the Private Placements and the Proposed Transaction. The Proposed Transaction was not contemplated at the time the Company’s Board considered and approved the Acquisition and Private Placements. If the Company proceeds with the Proposed Transaction, it expects it to close in the near term.

Following our review of the information you provided, we have determined that the shares issued in the Proposed Transaction would not be aggregated with the shares to be issued in the Private Placements, and thus the Proposed Transaction would not require shareholder approval under the Rule. Our conclusion is based on all of your representations to us, including, but not limited to, the following: (i) there is no commonality of investors in the two transactions; (ii) the transactions are not contingent on each other; (iii) the proceeds from the transactions would be used for different purposes; (iv) the Proposed Transaction was not contemplated at the time the Private Placements agreements were entered into; and (v) the transactions are not part of the same financing plan.

Publication Date*: 8/4/2014 Identification Number: 1113 Mailto Link
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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