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Frequently Asked Questions
  Staff Interpretation Letter 2019-1
Identification Number 1687

This is in response to your correspondence regarding the applicability of the shareholder approval requirements set forth in Listing Rules 5635(c) and IM-5635-1 (the “Rules”) to the Company’s assumption of an equity incentive plan (the “Plan”) of the Target in connection with its acquisition of the Target (the “Proposed Transaction”). Specifically, you asked whether the Plan assumed by the Company in connection with the Proposed Transaction may be considered a “pre-existing plan” for purposes of the Rules.

Both the Company and the Target are publicly traded companies listed on The Nasdaq Stock Market (“Nasdaq”). Upon the consummation of the Proposed Transaction, the Target will become a wholly owned subsidiary of the Company.

You stated that the Company and the Target began discussing a potential transaction approximately six months before the merger agreement was executed. After approximately two months of discussions, negotiations and due diligence, the board of directors of the Target (the “Target Board”) and a special transaction committee formed by the Target Board decided to terminate the merger negotiations and to continue as a standalone company.

You also stated that after these discussions ended, the Target Board began planning for the actions that it would need to approve at its next annual meeting of stockholders with the expectation that the Target would continue as a standalone company. The Target Board began drafting the Plan and the proposal for approval of the Plan by the Target’s stockholders at its annual meeting. Approximately two months after discussions between the Company and the Target ceased, the Target’s compensation committee approved the adoption of the Plan.

Shortly after the compensation committee approval, the Target and the Company recommenced discussions regarding the Proposed Transaction.

Approximately three weeks after the Company and the Target resumed discussions, the Target Board approved the adoption of the Plan, subject to and effective upon stockholder approval but not subject to the consummation of any corporate transaction. The Plan, as approved by the Target Board, contained the same initial share reserve as approved by the compensation committee. The Target distributed its proxy statement for its annual meeting approximately two weeks later. The proxy statement and the description of the Plan contained no reference to the Proposed Transaction. Approximately one month after the distribution of the proxy statement, the Company and the Target entered into the merger agreement. The next day, the Target’s stockholders approved the Plan at the annual meeting.

Following our review of the information you provided, we determined that the Plan was not approved in contemplation of the Proposed Transaction and is, therefore, a “pre-existing plan” for purposes of the Rules. We have reached this conclusion because: (i) the Plan was drafted after the Target had ceased initial discussions with the Company about the Proposed Transaction and while the Target was preparing for its annual meeting in the ordinary course of business with the expectation that it would remain a standalone company; (ii) key features of the Plan, including the size of the initial share reserve, were determined during the period when deal discussions had ceased; (iii) the compensation committee approved the Plan prior to the Target resuming discussions with the Company; (iv) the Target Board approved the Plan before the terms of the Proposed Transaction were finalized; (v) the Proposed Transaction was not definitive, its terms were not yet finalized, and it remained subject to negotiation at the time when the proxy statement was distributed to the Target’s stockholders; and (vi) the disclosed rationale for Target adopting the Plan was to support expected hiring and retention of key employees and align the employees’ interests with those of the Target’s stockholders. You have not asked us and we have not determined whether shareholder approval of the Proposed Transaction is required under Rule 5635(a).

Publication Date*: 3/21/2019 Mailto Link Identification Number: 1687
Frequently Asked Questions
  Staff Interpretation Letter 2017-3
Identification Number 1656

This is in response to your correspondence asking whether a proposed Exchange Transaction, as defined below, by the Company requires shareholder approval under Listing Rule 5635 (the "Rule") and whether it complies with voting rights requirements of Listing Rule 5640 and IM-5640 (the "Voting Rights Requirements").

Currently, the Company's authorized capital stock consists of three classes of common stock, High-vote common stock, Voting common stock and Non-voting common stock (collectively the "Common Stock"), each of which is listed on Nasdaq, and two series of preferred stock (Series X and Series Y convertible preferred stock, collectively, the "Preferred Stock"), which are closely-held and not publicly traded. The Substantial Shareholder currently has a greater than 20% voting and economic interest in the Company through its holding of all Series X and Series Y convertible preferred stock. Each share of Series X preferred stock is convertible into one share of Voting common stock and one share of Non-voting common stock. Each share of Series Y preferred stock is convertible into two shares Non-voting common stock.

You stated that so long as the Substantial Shareholder continues to hold a specified percentage, representing a supermajority, of the shares of Series X preferred stock ("Veto Rights Threshold"), the Company must obtain the consent of the Substantial Shareholder before the Company can take certain actions ("Veto Rights"), including effecting substantial acquisitions and increasing the size of the Company's board beyond a certain number ("Maximum Board Size"). In addition, Substantial Shareholder, as the holder of the Preferred Stock, has the right to elect the number of members of the Company's board of directors proportional to its voting interest in the Company. The Preferred Stock will automatically convert into the applicable series of Common Stock when the number of shares of Series X preferred stock is less than 80% of the Veto Rights Threshold.

You stated that the Substantial Shareholder is seeking additional liquidity and, to that end, the Company is proposing to issue Series X-1 and Series Y-1 (the "New Preferred Stock") in exchange for the Preferred Stock held by the Substantial Shareholder (the "Exchange Transaction"). The terms of the New Preferred Stock will mimic the terms of the Preferred Stock except that:

  • New Series X-1 convertible preferred stock would be convertible only into Voting common stock and into the aggregate number of shares of Voting common stock into which the Series X preferred stock is currently convertible;
  • New Series Y-1 convertible preferred stock would be convertible into the aggregate number of shares of Non-voting common stock into which the Preferred Stock is currently convertible;
  • The Maximum Board Size may be adjusted to support the Potential Acquisition (as defined below); and
  • In the event of future common stock dividends, the holders of the New Preferred Stock would participate on a pari passu basis with holders of common stock, whereas holders of Preferred Stock are entitled to the benefits of dividends by means of an adjustment to the conversion ratio.
You stated that the Company is in initial discussion with an unrelated third party to acquire such third party (the "Potential Acquisition") for a consideration that may consist of Common Stock.

You stated that the Substantial Shareholder indicated that an agreement to undertake the Exchange Transaction is one of the bases upon which it has agreed to support the Potential Acquisition; however, the Substantial Shareholder has already provided all consents under the Veto Rights necessary for the Company to proceed with the Potential Acquisition and the completion of the Exchange Transaction and the Potential Acquisition are not contingent on one another.

Following our review of the information you provided, we have determined that the Exchange Transaction does not require shareholder approval under the Rule and complies with the Voting Rights Requirements. 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 Exchange Transaction, while the Company is providing New Preferred Stock (convertible into shares of Common Stock) in exchange for Preferred Stock, the aggregate number of shares of Voting common stock and Non-Voting common stock issuable upon conversion is the same for the Preferred Stock and the New Preferred Stock. Further, the potential adjustment to the Maximum Board Size and the mechanics of adjustments for future common stock dividends do not materially alter the economic and governance rights of the holders of the Preferred Stock and the Common Stock. As such, the Exchange Transaction would not be considered an issuance of the company's securities for purposes of the Listing Rules and such corporate action does not disparately reduce or restrict the voting rights of Common Stock holders.

Publication Date*: 11/5/2018 Mailto Link Identification Number: 1656
Frequently Asked Questions
  Staff Interpretation Letter 2012-7
Identification Number 1068

This is in response to your correspondence regarding whether certain proposed transactions (the “Proposed Transactions”), which would be undertaken in connection with an acquisition, would require the approval of the Partnership’s unitholders or the Corporation’s shareholders. The Partnership and Corporation are each listed on NASDAQ. The Corporation’s assets consist almost entirely of interests in the Partnership, including approximately 25% of its units and a 100% interest in its general partner.

The Proposed Transactions are designed to allow the Partnership to acquire a privately-held company (the “Target”) in exchange for a combination of Partnership units, cash (the “Cash Consideration”), and shares of the Corporation’s common or non-voting preferred stock (the “Shares”) (collectively, the “Acquisition Consideration”). Three members of the Corporation’s board, one of whom is also on the Partnership’s board (the “Partnership Director”), have an indirect economic interest in the Target, representing an aggregate indirect ownership of approximately 10% of the Target. The Acquisition Consideration would be paid to the owners of the Target. To the extent the Target’s owners are entities, rather than individuals, each such entity would individually determine whether, and to what extent, to distribute its share of the Acquisition Consideration to its owners.

To raise funds that would be used as a part of the Cash Consideration, the Partnership is considering a private placement of its common units (or units that would be convertible into its common units) to several institutional investors at a discount to market value (the “Partnership Private Placement”). A member of the Partnership’s board is a senior managing director (the “Board Member”) of one of the potential investors (the “Investor”). The Board Member has not participated, and would not participate, in the discussions and board meetings with respect to the Partnership Private Placement and would resign from the Partnership’s board prior to the execution of any definitive agreement with respect to the Partnership Private Placement. You asked whether the Partnership Private Placement would be considered equity compensation, requiring approval by the Partnership’s unitholders under Listing Rule 5615(a)(4)(H).

The Partnership may raise additional cash to be used as part of the Cash Consideration by selling common units to the Corporation at a price not less than their market value. The Corporation would raise the funds for this purchase through the issuance of non-voting preferred stock to one or more investors, including the Investor (the “Corporation Private Placement”). No shares of common stock would be issuable in the Corporation Private Placement until the Corporation’s shareholders approve the transaction, at which time the preferred shares would automatically convert into common shares at a discount to their market value at the time of the issuance of the preferred shares. The preferred stock would receive a quarterly cash dividend, which, if the preferred stock remains outstanding one year after issuance, could be adjusted up to 115% of the per share dividend paid on the Corporation’s common stock. You stated that these terms are based on, and are consistent with, similar transactions of other companies in the same industry. An investor in the Corporation Private Placement would be allowed to designate one member of the Corporation’s board of directors (the “New Director”). You asked: (i) whether the adjustment in the dividend rate would be an “alternative outcome” under IM-5635-2; and (ii) whether the Corporation Private Placement would be considered equity compensation with respect to the New Director, requiring shareholder approval under Rule 5635(c).

In order for the Partnership to obtain the Shares that would be used as part of the Acquisition Consideration, it would issue common units in exchange for shares of non-voting preferred stock of the Corporation (the “Preferred Exchange Shares”). The Preferred Exchange Shares would be convertible into shares of the Corporation’s common stock only after shareholder approval is obtained (the “Share Exchange”). The Share Exchange would be at prices not less than the respective market values of the common units and the common stock. The Preferred Exchange Shares would not be entitled to cash distributions for six quarters but would receive distributions in-kind, which also would be convertible into common stock only after shareholder approval is obtained. Dividends on the Preferred Exchange Shares would be subject to adjustment after six quarters. You stated that these terms are based on, and are consistent with, similar transactions of other companies in the same industry.

Although several directors and officers of the Corporation own common units of the Partnership, the ownership of each is less than 5% and in the aggregate is less than 10%. Currently, no substantial shareholder of the Corporation has a 5% or greater interest in the Partnership. The Investor, however, currently owns a 5% interest in the Partnership and is considering purchasing shares of common stock of the Corporation currently held by another party. Upon the completion of that purchase, which could occur prior to the closing of the Proposed Transactions, the Investor would be a substantial shareholder in the Corporation. You asked whether the proposed structure of the Share Exchange would satisfy the shareholder approval requirements.

Finally, in connection with the acquisition, the Corporation contemplates that it may amend its agreement with the Partnership, which sets forth the amount of quarterly cash distributions the Corporation is entitled to receive from the Partnership. Under the revised agreement, the amount of the distributions would be reduced for a specified period of time to allocate the accretion of the acquisition between the Corporation and the Partnership. You stated that this revision is unrelated to the financing transactions described above and would be contemplated with respect to the acquisition irrespective of such financing transactions.

Following our review of the information that you provided, we have reached the following conclusions. The Partnership Private Placement would not be considered equity compensation under Rule 5615(a)(4)(H) with respect to the Board Member because the Board Member would resign from the Partnership’s board prior to the execution of an agreement and would not participate in the discussions and board meetings with respect to the Proposed Transactions. In addition, the provisions of Rule 5635, which may require shareholder approval for certain below market issuances and in connection with certain acquisitions, do not apply to limited partnerships. As such, consummating the Partnership Private Placement as described would not require approval of the Partnership’s unitholders under NASDAQ’s rules.

The proposed Corporation Private Placement also satisfies the shareholder approval requirements. While we would aggregate the Corporation Private Placement with the shares to be issued in the Share Exchange, the Corporation would obtain shareholder approval prior to issuing any common stock in the Corporation Private Placement, and we would not consider the proposed adjustment in the dividend rate to be an “alternative outcome” under IM-5635-2. We have reached this determination because (i) the adjustment is not a function of the outcome of a shareholder vote; and (ii) you represented that the adjusted rate is consistent with similar transactions by other companies in the industry. The Corporation Private Placement also would not require shareholder approval as equity compensation because the New Director would not join the Corporation’s board until after the transaction is consummated.

We would consider the shares issued by the Corporation in the Share Exchange to be issued in connection with the acquisition of the Partnership’s units. Structured as you described, however, the Share Exchange satisfies the shareholder approval requirement of Rule 5635(a) because no shares of the Corporation’s common stock could be issued unless shareholder approval is first obtained. We would not consider the adjustment in the dividend of the Preferred Exchange Shares to be an “alternative outcome” under IM-5635-2 because (i) the adjustment is not a function of the outcome of a shareholder vote; and (ii) you represented that the adjusted rate is consistent with similar transactions by other companies in the industry. In addition, because the Share Exchange would be done at the respective market values of the Corporation’s common stock and the Partnership’s common units, shareholder approval would not be required by the Corporation or Partnership under Rules 5635(c) or 5615(a)(4)(H), respectively.

Rule 5635(a) is not applicable to a limited partnership. As such, the issuance of units by the Partnership in the Share Exchange does not require approval under that rule. Similarly, the issuance of units to the owners of the Target by the Partnership as Acquisition Consideration also would not require shareholder approval. The issuance of Partnership units as part of the consideration for the Target also would not require shareholder approval as equity compensation with respect to the Partnership Director. The Partnership would not be issuing units to the Partnership Director, and any units ultimately distributed to him would be solely in consideration of his ownership interest in the Target. As a result, shareholder approval would not be required under Rule 5615(a)(4)(H) by the Partnership for the issuance of Partnership units to the Target.

Finally, the contemplated amendment to the agreement between the Partnership and Corporation does not impact any aspect of the above analysis because it would not result in the issuance of any securities by either the Corporation or the Partnership and it would not affect the pricing analysis in determining whether any issuance is at or above market value.

Publication Date*: 1/17/2013 Mailto Link Identification Number: 1068
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 Mailto Link Identification Number: 1093
Frequently Asked Questions
  Staff Interpretation Letter 2013-5
Identification Number 1091

This is in response to your request asking whether the Director is eligible to be an independent member of the company's board of directors under Listing Rule 5605(a)(2)(A) and IM-5605 (the "Rules"), notwithstanding his prior service as the company's Executive Chairman.

According to the information you provided, the Director previously served as an independent member of the company's board of directors (the "Board") and non-executive Chairman. The Director did not fall within any of the disqualifications from serving as an independent director in Listing Rule 5605(a)(2) and the Board made an affirmative determination that the Director did not have a relationship that would impair his independent judgment in carrying out the responsibilities of a director. Additionally, up until his appointment as Executive Chairman, the Director served as a member of the Compensation Committee and Nominating and Corporate Governance Committee.

Last year, the Board undertook evaluations of the company's management team. In order to get a better inside perspective of senior management, the Board asked the Director to serve as Executive Chairman, given his years of senior executive experience and his professional relationship with the company's President and Chief Executive Officer.

You stated that at the time of the Director's appointment, the independent directors of the Board understood that the Director's service as Executive Chairman would be temporary, allowing the Board to complete its assessment and, if necessary, undertake and complete a change in senior management. To that end, the employment agreement with the Director was structured such that it could be terminated on short notice for any reason whatsoever without incurring significant cost to the company.

Approximately four months later, the company appointed a new President and Chief Executive Officer. Simultaneously with this appointment, the Director resigned his position as Executive Chairman and transitioned back to his position as non-executive Chairman of the Board. Upon resigning from the position as Executive Chairman, the Director ceased to be an officer and employee of the company and his employment agreement was terminated. You stated that in relation to his employment, the Director did not receive severance or termination benefits, was not awarded any equity compensation, is not due any future compensation and did not participate in any employee benefit plan after his employment.

Following our review of the information you provided, we have concluded that the Director's service as Executive Chairman would not preclude the company from making a determination that the Director is independent on a going-forward basis. Under IM-5605, employment by a director as an Executive Officer on an interim basis does not disqualify that director from being considered independent following such employment pursuant to Listing Rule 5605(a)(2)(A), provided that the interim employment did not last longer than one year.

Notwithstanding this conclusion, pursuant to Listing Rule 5605(a)(2) and IM-5605, the company's board has the responsibility to make an affirmative determination that no relationship exists that would interfere with the Director's exercise of independent judgment in carrying out the responsibilities of a director. In assessing the Director's independence, the Board should consider his service as Executive Chairman. We are not expressing an opinion as to whether it would be appropriate for the company's board to make such a finding with respect to the Director. Please also note that if the Director participated in the preparation of the company's financial statements while serving as Executive Chairman, Rule 5605(c)(2)(A)(iii) precludes his service on the audit committee for three years.

Publication Date*: 9/30/2013 Mailto Link Identification Number: 1091
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 Mailto Link Identification Number: 1113
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 Mailto Link Identification Number: 1411
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 Mailto Link Identification Number: 726
Frequently Asked Questions
  Staff Interpretation Letter 2009-19
Identification Number 737
This is in response to your correspondence regarding whether certain members of the company’s board of directors (the “Directors”) may be considered independent directors pursuant to Listing Rule 5605(a)(2) and IM – 5605.
 
According to the information you provided, as a for-profit educational institution, the company is subject to a federal regulation (the “Regulation”) which could negatively impact the company’s access to government funding in the event of a change of control. Under the Regulation, a change of control would be deemed to have occurred if the ownership position of the largest shareholder were to fall to below 25%.
 
Prior to the company’s initial public offering (“IPO”) approximately 10 months ago, the Largest Investor held approximately 31% of the company’s outstanding shares of common stock. In connection with the IPO, the Largest Investor and certain other investors (the “Other Investors”) entered into a voting agreement such that upon completion of the IPO, the Largest Investor had voting power over approximately 43% of the outstanding shares (the “Voting Agreement”). Under the Voting Agreement, the Other Investors granted the Largest Investor a proxy to vote their shares, but did not give dispositive or any economic interest in those shares. You stated that the Voting Agreement is permissible under the Regulation and that no change of control will be deemed to have occurred unless the shares subject to the Voting Agreement decreases to less than 25%.
 
You stated that since the IPO, the Other Investors have sold some of their stock and the company anticipates that over time the voting power of the Largest Investor could decrease to less than 25% as a result of the sale of additional shares that are subject to the Voting Agreement and additional issuances of common stock by the company. To prevent a change of control under the Regulation, the Fund Investor has offered to join the Voting Agreement.
 
The Directors are managing directors of the Fund Investor. You stated that none of the provisions of Listing Rule 5605(a)(2) precludes the Directors from being considered independent and that the company’s board of directors has determined that no other relationship exists that would interfere with the Directors’ exercise of independent judgment in carrying out the responsibilities of a director. The Directors would not serve on the audit committee. The Voting Agreement relates only to the voting of the common stock that is subject to the agreement and in no way relates to the Directors’ voting as board members on matters that come before the board.
 
Following our review of the information you provided, we have concluded that the Fund Investor’s joining the Voting Agreement would not preclude the company’s board from finding that the Directors are independent, provided that the total voting power controlled through the Voting Agreement is less than a majority of the company’s outstanding voting power. We have reached this conclusion based on the provision of IM-5605 which states that NASDAQ does not believe that ownership of company stock by itself would preclude a board finding of independence. Please note that pursuant to IM-5605, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors. We are not expressing any opinion as to whether it would be appropriate for the company’s board to make such a finding regarding the Directors.
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 737
Frequently Asked Questions
  Staff Interpretation Letter 2009-7
Identification Number 725
This is in response to your correspondence regarding whether the Director is eligible to be an independent member of the company’s board of directors under Listing Rules 5605(a)(2)(B) and 5605(a)(2)(D) (the “Rules”) notwithstanding payments made by the company to the Director and the Firm in connection with the acquisition of the Target (the “Acquisition”). The Director has been a member of the company’s board of directors for approximately fifteen years and has served as its chairman for about four years.
 
According to the information you provided, the company acquired the Target approximately two years ago. Prior to the closing of the Acquisition, the Director was the chairman of the board and an executive officer of the Target. The Director resigned from these positions immediately prior to the Acquisition. The Target’s capital stock consisted of common stock and preferred stock. The Director personally owned shares of common stock of the Target equal to approximately 15% of the Target’s outstanding capital stock.  In addition, the Director is the founder and a managing director of the Firm, a venture capital firm which was the sole owner of the preferred stock. The number of shares of preferred stock was equal to approximately 40% of the Target’s outstanding capital stock. The consideration for the Acquisition, which the company paid to the Target’s shareholders, consisted of cash and shares of the company’s common stock. All holders of the Target’s common stock received the same consideration per share of Target common stock held (the “Common Stock Consideration”). Due to the liquidation preferences of the preferred stock, the Firm received a higher amount of consideration per preferred share than the per share common stock consideration (the “Preferred Stock Consideration”). You stated that the liquidation preferences were negotiated among the shareholders of the Target well in advance of the Acquisition and were in no way related to the Acquisition. The total number of shares of common stock issued as acquisition consideration was equal to approximately one percent of the company’s total shares outstanding, and the aggregate cash consideration was approximately $3,000,000.
 
In addition, the Firm had outstanding bridge notes of the Target, which were repaid by the Target at the closing of the Acquisition in accordance with the terms of such bridge notes. You represented that the terms of the bridge notes, including the interest rate and maturity triggers, were standard.
 
You stated that the Director and the Firm had no role in determining the allocation of the acquisition consideration among the stockholders of the Target because the allocation was entirely pre-determined on a pro-rata basis by the terms of the Target’s securities. To evaluate the Acquisition, the company’s board of directors established a committee of independent directors (the “Board Committee”) of which the Director was not a member. You stated that the Director did not participate on behalf of the company in any actions with respect to the Acquisition and did not participate in any deliberations or other activities of the Board Committee.
 
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, notwithstanding the payment of the acquisition consideration to the Director and the Firm. The acquisition consideration is not compensation from the company under Listing Rule 5605(a)(2)(B), and it is not a payment for property or services within the meaning of Listing Rule 5605(a)(2)(D).  In reaching this conclusion, we note that the acquisition consideration was paid pro-ratably to all shareholders of the Target based on their ownership interest in the Target. Although the Preferred Stock Consideration was larger than the Common Stock Consideration, such Preferred Stock Consideration was likewise determined pursuant to the terms of the preferred stock, which was negotiated among the Target’s shareholders prior to the Acquisition and was in no way related to the Acquisition.  The repayment by the Target of the bridge loan is also neither compensation by the company under Listing Rule 5605(a)(2)(B) nor a payment by the company for property or services under Listing Rule 5605(a)(2)(D), as the loan terms were standard and it was re-paid by the Target pursuant to its terms.
 
Notwithstanding this determination, pursuant to IM-5605, a company’s board has a responsibility to make an affirmative determination that no relationship exists that would impair the independence of any individuals serving as independent directors.  We are not expressing any opinion as to whether it would be appropriate for the company’s Board to make such a finding with respect to the Director.
 
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 725
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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