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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 2017-1
Identification Number
1351

This is in response to your correspondence asking whether Listing Rule 5605(a)(2) (the “Rule”) specifically prohibits the Company from deeming the Directors independent.

The Listing Rules specifically prohibit a finding of independence in certain circumstances, as set forth in the Rule. If any of the circumstances enumerated in the Rule are present with respect to a director, then that director cannot be deemed independent, and the board is not permitted to conclude otherwise. On the other hand, if the enumerated circumstances are not present, then the board must, under the Rule and IM-5605, affirmatively determine that no relationship exists that would interfere with the exercise of independent judgment in carrying out the director’s responsibilities.

We discuss below whether the Rule specifically prohibits a finding of independence with respect to the Directors, given payments the Company has made, and will continue to make, to the Lessor, which is partially owned by the Directors. We do not address the broader question of whether the relationships described among the Directors, the Lessor, and the Company would interfere with the exercise of the Directors’ independent judgment and express no opinion as to the whether such a determination by the Company’s board that they do not interfere would be appropriate in this instance.

According to the information you provided, the Company has a lease agreement for its main office with the Lessor. You also indicated that the annual lease payments made by the Company to the Lessor in the current fiscal year are in excess of $200,000 and 5% of the Lessor’s consolidated gross revenues for the year (the “Payments”).

You explained that the Lessor is organized as Limited Liability Company and that it currently has less than 10 members, each holding a membership interest between 5% and 22.5%. You also stated that one of these members, the only managing member of the Lessor, holds a 20.0% membership interest. Under the Lessor’s operating agreement, the managing member makes all of the control decisions for the Lessor. The operating agreement also provides that all material items require approval of 65% of the membership and routine items require the approval of 51% of the membership. Each of the Directors indirectly owns membership interests in the Lessor of between 17% and 20%.

You also stated that the Directors do not perform any policy making function for the Lessor and do not have a family member who is a partner in, or controlling Shareholder, or an Executive Officer of the Lessor. You further stated that under the Lessor’s operating agreement, you believe the non-managing members’ interest in the Lessor is similar to the interest of a limited partner in a partnership.

Following our review of the information you provided, we have determined that the Company’s board of directors is not precluded by Rule 5605(a)(2)(D) from finding that the Directors are independent, notwithstanding the Payments. We have reached this conclusion because none of the Directors is (i) a partner in; (ii) a controlling Shareholder of; or (iii) an Executive Officer of the Lessor.

Although the Directors are members of the Lessor, and the Lessor is a limited liability company, you suggested that the Company’s structure could more appropriately be viewed as similar to that of a limited partnership. To the extent that we accept that view, the Directors’ membership interests would be analogous to limited partnership interests and, as noted in IM-5605, the reference to “partner” in Listing Rule 5605(a)(2)(D) is not intended to include limited partners. On the other hand, to the extent the Company’s structure is treated like a corporation, the Directors would be shareholders and none of the Directors would be a controlling Shareholder of the Lessor because under the current ownership and operational structure of the Lessor, as governed by the operating agreement, neither of the Directors has the ability individually to exercise either significant influence over the Lessor’s operations or the power to direct or cause the direction of the management and policies of the Lessor. This determination is made based on the specific facts and circumstances you described, including the small number of members of the Lessor, the Directors’ inability (based on their membership interests) to determine the vote on either routine or material items; and the fact that there is a member -- the only managing member -- who makes all the control decisions for the Lessor and has an ownership position that is no less than each of the Directors’. Finally, none of the Directors is an Executive Officer of the Lessor under the Listing Rules because they are not the managing member of the Lessor and do not perform any policy making function for the Lessor. In addition, and as explained in IM-5605Rule 5605(a)(2)(B) is generally intended to capture situations where compensation is made directly to (or for the benefit of) a director. Nonetheless we note that to the extent we were to look through the Lessor and treat the Payments as compensation made directly to the Lessor’s members, the portion of the payments attributable to each Director would be less than $120,000 in the current fiscal year and the Payments would therefore not prevent the Directors from being considered independent by Rule 5605(a)(2)(B).

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 Directors that would interfere with their exercise of independent judgment in carrying out their responsibilities as directors. As noted above, we are not expressing any opinion as to the whether the Board could reasonably make such a determination.

Publication Date*: 4/11/2017 Identification Number: 1351 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 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
Frequently Asked Questions
Staff Interpretation Letter 2015-1
Identification Number
1137
This is in response to your correspondence regarding the application of Nasdaq’s shareholder approval rules to certain equity grants. You asked if the Company may rely upon the exception set forth in Listing Rule 5635(c)(4) (the “Rule”) to the shareholder approval requirement for equity grants made in connection with the appointment of a director of a Company subsidiary as an executive officer of the Company.
 
The Company has a majority owned subsidiary, a master limited partnership (the “Subsidiary”), whose general partner (the “GP”) is an indirect wholly-owned subsidiary of the Company. The Subsidiary is listed and publicly traded on a U.S. stock exchange. You stated that, in connection with consideration by the Company’s board of directors of a potential change in management, the board approached a director of the GP to assess that individual’s interest in becoming an executive officer of the Company (the “New Executive Officer”). The board of directors of the GP has determined that the director is an independent director under the rules of the exchange where the Subsidiary is listed. Shortly thereafter, the Company and the New Executive Officer agreed to a framework for compensation, subject to final documentation prepared with the assistance of the Company’s compensation committee. You further stated that the agreed-upon compensation structure included the issuance of options and performance stock units. You asked whether the fact that the New Executive Officer is an independent director of the Subsidiary precludes the availability of the “inducement” grant exception under the Rule.
 
Following our review of the information provided, and subject to the disclosure requirements in the Rule, we determined that the New Executive Officer’s role as an independent director of the Subsidiary does not preclude the availability of the “inducement” grant exception under the Rule. Our determination is based on facts as you described them to us, including that the New Executive Officer was neither an employee nor a director of the Company and that the agreed-upon compensation structure included equity grant(s) to the New Executive Officer.
 
Publication Date*: 3/16/2015 Identification Number: 1137 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-21
Identification Number
739
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed issuance of securities (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue warrants (the “Warrants”) to a current shareholder (the “Shareholder”) in connection with the Shareholder’s providing a credit facility (the “Credit Facility”). The Warrants would be exercisable for less than the book value per share. The aggregate number of shares of common stock that could be issued upon the exercise of the Warrants would be limited to 19.99% of the pre-transaction outstanding shares of common stock subject to proportional adjustment for stock splits and similar events (the “Aggregate Limit”). In addition, a holder of the Warrants, whether the Shareholder or a subsequent transferee, could not exercise the Warrants if the result would be the holder’s owning more than 19.99% of the company’s outstanding shares of common stock or voting power after giving effect to the shares issued as a result of such exercise (the “Ownership Limit”). The Credit Facility is not convertible into common stock.
 
Following our review of the information you provided, we have determined that the Proposed Transaction, structured as you described, would not require shareholder approval under the Rules. Given the Ownership Limit, shareholder approval is not required under Listing Rule 5635(b) because the issuance could not result in a change control.  Given the Aggregate Limit, shareholder approval is not required under Listing Rule 5635(d) because the number of shares that could be issued is less than 20% of the pre-transaction outstanding shares.
 
 
Publication Date*: 7/31/2012 Identification Number: 739 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2016-2
Identification Number
1144
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) to Nasdaq’s otherwise applicable shareholder approval requirements with respect to a proposed issuance of securities (the “Proposed Transaction”).
 
You represented that the Company has experienced a rapid and substantial deterioration in its financial condition due to several events each of which alone jeopardizes the financial viability of the Company. Additionally, in its most recent Form 10-Q, the Company noted there is substantial doubt in its ability to continue as a going concern.
 
In August 2015, the Company completed a private placement of convertible notes (the “Notes”), Series A warrants and Series B warrants. You stated that the Company is in default under the terms of the Notes and related registration rights agreement, and if declared in default by the Note holder, the entire principal amount plus interest and any penalties would be immediately due. Additionally, you stated that based on its current cash position, the Company expects in the near term to trigger a default under a technology agreement with its largest customer. You stated that without the Proposed Transaction, the Company does not have sufficient cash to repay the Notes or meet its obligations under the technology agreement and would have to seek bankruptcy protection.
 
In the Proposed Transaction, you stated that the Company will issue to one investor (the “Investor”) shares of common stock, a convertible note, and warrants to purchase shares of common stock equal to greater than 20% of the existing total shares outstanding. The price per share of common stock and conversion price of the note will be based on a 20-day simple moving average, and the exercise price of the warrants will be at a premium to the current market price. However, due to the fluctuation in the Company’s stock price, the price per share of the common stock and the conversion price of the notes may potentially be at a discount to the market value. Additionally, following the closing of the Proposed Transaction, the Investor could potentially own greater than 50% voting power and beneficial ownership in the Company.
 
You stated that part of the proceeds from the Proposed Transaction will be used to pay off the Notes as well as any interest and penalties accrued and past due. Any remaining proceeds will enable the Company to continue to meet covenants under its technology agreement and provide adequate capital for the Company to operate over the next 12 months. Additionally, the Company will lower the exercise price of its outstanding Series A warrants to an exercise price that is greater than the current market value. Finally, the Note holder will exercise the Series B warrants up to no more than the Note holder owning 9.9% of the shares outstanding. Any remaining Series B warrants will be canceled.
 
You stated that the Company has been unsuccessful in obtaining alternative financing given its current capital structure and depressed share price. Despite these efforts, you represented that there are currently no realistic alternatives to the Proposed Transaction and as a result, there is not enough time to obtain shareholder approval prior to the issuance of the shares of common stock in the Proposed Transaction as a delay may cause the Company to declare bankruptcy. You also represented that prior to the Proposed Transaction, the Company engaged an outside law firm to evaluate its options including bankruptcy. 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 would be required:
  • pursuant to Listing Rule 5635(b) because the Proposed Transaction would result in a change of control of the Company due to the fact that the Investor will own greater than 20% of the common stock and voting power outstanding upon completion of the Proposed Transaction; and
  • pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price that may be less than the greater of book or market value.
Based on our review of the circumstances described in your correspondence and on your representations regarding: (i) the Company’s financial condition, (ii) the dire consequences to the Company should it not obtain the financing provided by the Proposed Transaction, and (iii) the Company’s expectation that it will remain in compliance with all applicable continued listing requirements upon completion of the Proposed Transaction, we have determined to grant the requested exception to the shareholder approval rules. 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 received) and alerting shareholders to the omission to seek the 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*: 4/8/2016 Identification Number: 1144 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 2007-23
Identification Number
799
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval and voting rights requirements to the company’s proposed issuance of securities (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(D), 4351 and IM-4350-2 (the “Rules”).
 
According to the information you provided, in the Transaction the company would issue shares of non-voting exchangeable preferred stock (the “Preferred Stock”) to the Investor in a private placement.  Although the final terms have not been reached, the number of common shares that could be issued in the event of an exchange could exceed 20% of the pre-transaction total shares outstanding at a price that is less than market value.  The Preferred Stock would be exchangeable for common stock only if shareholder approval is first obtained.  The holder of the Preferred Stock would have no voting rights other than the right to consent to any amendment of the terms or to the creation or issuance of any capital stock or debt securities that rank senior to or equal with the Preferred Stock, or as otherwise required by applicable state law.
 
The Investor would have the right to designate one member of the company’s seven-member board of directors for so long as it owns at least 50% of the Preferred Stock, or in the event of an exchange for common, for so long as it owns at least: (i) 10% of the company’s total stock outstanding or (ii) 50% of the common stock acquired pursuant to the Exchange.  If shareholder approval is not received within one year of closing, the Preferred Stock would be entitled to receive cumulative cash dividends at an annual rate of 10%.  If still outstanding after four years, the Preferred Stock would become redeemable for cash at the option of either the company or the holder.  The holder may require the company to redeem the Preferred Stock for cash upon the occurrence of certain events, such as liquidation or a change of control.
 
Following our review of the information you provided, we have concluded that the Transaction, structured as you described, would comply with the Rules because no common shares or voting power (except limited voting power as describe above) could be issued until after shareholder approval is obtained.  Specifically, the Transaction would comply with: (i) Listing Rule 4350(i)(1)(B) because a change in control could not occur without shareholder approval, and (ii) Listing Rule 4350(i)(1)(D) because the issuance could not reach 20% of the pre-transaction outstanding shares or voting power without shareholder approval.  Further, IM-4350-2 is not implicated because no shares of common stock could be issued prior to the shareholder vote.  In addition, the right to designate one director would be consistent with the voting rights provisions of Listing Rule 4351 because the percentage of the board of directors that may be appointed by the Investor would not exceed its percentage economic contribution to the company.  Please be advised that you have not asked us to reach, and we have not reached, a conclusion as to whether any director designated by the Investor would be eligible to be an independent director or to
Publication Date*: 7/31/2012 Identification Number: 799 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-8
Identification Number
1111

This is in response to your correspondence regarding the effect of a planned business combination between the company and the Target (the “Business Combination”) under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”). You asked whether grants from the company’s existing equity plans would require shareholder approval under the Rule after the Business Combination is completed.

In the Business Combination, a holding company (“HoldCo”) will be formed and the company and the Target will each merge into separate newly created subsidiaries of HoldCo. The company’s shareholders will receive one newly issued HoldCo ordinary share for each company share owned, and the Target’s shareholders will receive a number of Holdco ordinary shares for each Target share owned that would result in the Target shareholders owning X percent of HoldCo. You stated that the company’s President/Chief Executive Officer will become the Chief Executive Officer of Holdco and that the company’s Chief Financial Officer will become the Chief Financial Officer of HoldCo. Additionally, you stated that the company will be considered the acquirer for accounting purposes under U.S. GAPP. Upon closing you stated that you expect HoldCo will be listed on the NASDAQ Stock Market, where the company is now listed, and a foreign market, where the Target is now listed.

You indicated that the company currently maintains the Incentive Plan, which is a shareholder approved plan that provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to service providers of the company and certain related entities, and both the U.S. ESPP and the Offshore ESPP, which allow U.S. and non-U.S. employees, respectively, to purchase the company’s equity. The outstanding awards under each Plan will be assumed by HoldCo and adjusted by the exchange ratio of 1:1, and therefore, the number of shares subject to such awards and the exercise price will remain the same.

Following our review of the information provided, we have concluded that the Business Combination will be treated as a substitution listing event under Listing Rule 5250(e)(4). We have reached this conclusion because the company’s shareholders will own substantially more than 50% of the HoldCo’s shares following the Business Combination, and it is supported by the fact that the company’s CEO and CFO will maintain those roles at HoldCo and by your representation that the company will be considered the acquirer in the transaction under U.S. GAAP. As such, HoldCo may assume the company’s Incentive Plan without any restrictions on future grants or awards to the eligible participants of HoldCo under the Incentive Plan. Furthermore, since the U.S. ESPP is designed to satisfy the requirements of Section 423, and the Offshore ESPP is a plan that provides non-U.S. employees with the substantially the same benefits as the U.S. ESPP, HoldCo may assume both the U.S. ESPP and the Offshore ESPP without shareholder approval under the Rule.

Publication Date*: 3/5/2014 Identification Number: 1111 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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