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Frequently Asked Questions
  Staff Interpretation Letter 2016-3
Identification Number 1145
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed Transaction.
 
According to the information you provided, the Company will issue convertible notes (the “Notes”) to several investors in a private placement (the “Transaction”). Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion could exceed 20% of the pre-transaction total shares outstanding. The Notes contain anti-dilution provisions; however, the effect of any anti-dilution adjustments will be limited such that the conversion price could never be reduced to below the greater of market and book value as of the date of the agreement to issue the Notes.
 
You have represented that Shareholder A holds an approximately 15% interest in the Company and is currently the Company’s largest shareholder. However, you have represented that Shareholder A is a registered investment adviser, and holds its entire 15% interest in the Company in this capacity. In this role, Shareholder A has the power and discretion to buy and sell, but not vote, the securities held in the accounts it manages. Accordingly, you have represented that in regard to its entire 15% interest in the Company, Shareholder A has no sole voting power, no shared voting power and no sole dispositive power, and it is deemed to be a beneficial owner solely due to the shared dispositive power over the shares held in the managed accounts.
 
You have represented that Shareholder A is also a registered broker-dealer. In this role, Shareholder A acts as custodian for many individual investment accounts, with shares within such investment accounts held in “street” name. The holders of these accounts make their own decisions regarding voting and disposition of the securities in their accounts. Shareholder A may vote such shares in limited circumstances described in SEC Rule 13d-3(d)(2), but Shareholder A is not deemed to be a beneficial owner of such shares.
 
You have represented that the Company adopted a stockholder rights plan that, among other things, limits the ability of any person to acquire ownership of 15% or more of the shares of the common stock of the Company by triggering special rights for all other stockholders if this ownership threshold would otherwise be exceeded by such person (the “Plan”). The Plan’s definition of the acquiring person specifically excludes certain shares held by Shareholder A. This exclusion would not apply to any of the shares that might be acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect. Furthermore, this exclusion applies only to shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest. Any single account holder or retail customer of Shareholder A, and any single broker at Shareholder A with respect to such broker’s personal trading account, remains subject to the 15% limitation on beneficial ownership.
 
You have represented that none of the Shareholder A’s managed and custodial account holders is part of any arrangement or agreement constituting a “group” within the meaning of SEC Rule 13d, and that all of the shares of common stock for which it serves as investment adviser have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
 
Shareholder A has negotiated the terms of the Notes with the Company. Shareholder A’s managed and custodial accounts will be allowed to acquire at least one half of the total principal amount of the Notes sold by the Company. The note purchase agreement will provide that the Notes will not be convertible into shares of common stock to the extent that after conversion any managed or custodial account would beneficially own more than 9.9% of the outstanding shares of common stock. All purchasers of the Notes, including Shareholder A’s managed and custodial accounts, will sign the note purchase agreement.
 
Following our review of the information you provided, we have determined that the Transaction does not require shareholder approval under the Rules. Although the potential issuance under the Notes exceeds 20% of the pre-transaction outstanding shares, shareholder approval would not be required under Listing Rule 5635(d) because the conversion price could not be less than the greater of book or market value per share as of the date of the agreement to issue the Notes. Shareholder approval also is not required under Listing Rule 5635(b). We have reached this conclusion because no individual shareholder or a group will have a control position following the Transaction given that (i) none of the purchasers, other than Shareholder A, will beneficially own more than 9.9% of the outstanding shares of common stock due to a beneficial ownership limitation in the note purchase agreement; (ii) Shareholder A is deemed to be a beneficial owner solely due to the shared dispositive power over the shares it holds in its managed accounts as an investment advisor and all such shares have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect; and (iii) the Plan limits any person, including Shareholder A, from acquiring 15% or more of the Company’s outstanding shares, excluding the shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest.
 
Publication Date*: 5/11/2016 Mailto Link Identification Number: 1145
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 Mailto Link Identification Number: 1130
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 Mailto Link Identification Number: 1351
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 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 Mailto Link Identification Number: 733
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 Mailto Link Identification Number: 739
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 2009-13
Identification Number 731
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 common stock (the “Proposed Offering”).  In addition, you asked whether the Proposed Offering would be aggregated with a prior private placement (the “Prior Offering”) so as to cause the Prior Offering to violate Listing Rule 5635(d).  Relevant to the applicability of the Rules is whether the Proposed Offering would be a public offering pursuant to IM-5635-3.
 
According to the information you provided, prior to the public announcement of the Proposed Offering, the company would spend approximately four days contacting and meeting with approximately 30 to 40 institutional investors to identify potential core institutional investors. These institutions would be asked to sign confidentiality agreements or otherwise commit to maintain the confidentially of any material non-public information. If the company determines to proceed with the Proposed Offering, then shortly after the close of the market the company would file a preliminary prospectus with the Securities and Exchange Commission specifying the number of shares to be offered and publicly announce the Proposed Offering by means of a press release that would contain information about the offering including how to obtain a copy of the preliminary prospectus. The Proposed Offering would be conducted by underwriters on a firm commitment basis. The shares which would be issued would be registered under the company’s effective shelf registration statement.
 
You stated that promptly after the public announcement, the underwriters would undertake a broad and active marketing effort in the United States and Europe from approximately 4:30 p.m. EDT until shortly before the opening of the market the morning after the public announcement. During that period, the underwriters would expect to: (i) conduct a road show with the company involving telephonic or in-person meetings with approximately 30 to 40 institutional investors; (ii) make available an internet road show to prospective investors; (iii) undertake retail marketing through a network of more than 1,500 brokers to several thousand retail accounts; and (iv) distribute electronic copies of the preliminary prospectus to more than 100 prospective institutional investors and more than 1,500 retail brokers.
 
You stated that the Proposed Offering would be priced shortly before the opening of the market the morning after the public announcement at a discount to the prior day’s closing price in a range, approximately 5 % to 10%, expected to be customary for underwritten offerings of comparable companies. In addition, you stated that you expect purchasers in the Proposed Offering will include 15 to 30 or more institutional investors and 300 to 500 retail investors. The number of shares that would be issued in the Proposed Offering exceeds 20% of the company’s pre-transaction shares of outstanding common stock.
 
Following our review of the information you provided, we have determined that the Proposed Offering would be a public offering under IM-5635-3 because: (i) the offering would be a firm commitment offering of registered securities; (ii) the offering would be broadly marketed to both retail and institutional potential investors; (iii) the company expects that there would be many purchasers in the offering including both retail and institutions; (iv) the discount to the market is expected to be in a range consistent with underwritten offerings of comparable companies; and (v) the company would have little control over the Proposed Offering. Accordingly, because the Proposed Offering would be a public offering, shareholder approval would not be required under the Rules, and the Proposed Offering would not affect the compliance of the Prior Offering with the Rules. NASDAQ is expressing no opinion on whether shareholder approval is required under any other provision of Listing Rule 5635.
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 731
Frequently Asked Questions
  Staff Interpretation Letter 2018-1
Identification Number 1517
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").
 
A few years ago, the Company completed a private placement of convertible notes (the "Notes") due in approximately two months. You stated that the Company does not currently have sufficient funds available to repay the Notes upon maturity and does not expect to be able to generate sufficient funds from operations to do so. You represented that the Company expected to pay off the Notes at maturity by utilizing an existing credit facility, which recently became unavailable to the Company due to certain adverse operational developments that left the Company unable to satisfy the conditions for release of funds under the credit facility. If the Company does not repay the Notes as they become due, such default may result in cross default and acceleration of the other outstanding indebtedness, which could force the Company to seek bankruptcy protection. We also understand the Company has sought advice from bankruptcy counsel.
 
In the Proposed Transaction, the Company will issue to certain holders of the Notes, in exchange for their Notes, new convertible notes (the "New Notes"). The initial conversion price of the New Notes is expected to be at a premium to the current market price of the Company's common stock. However, due to make-whole provisions in the New Notes, the effective conversion price of the New Notes may potentially be at a discount to the market value. Accordingly, without the requested exception, shareholder approval would be required 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.
 
You stated that the Proposed Transaction would sufficiently reduce the outstanding principal amount of the Notes so that the Company would be in a position to retire the remaining Notes outstanding when they become due.
 
You further stated that the Company has been unsuccessful in obtaining alternative financing that could reasonably be expected to be completed before the maturity of the Notes, given its current capital structure and the depressed pricing of potential asset sales, among other things. You represented that the Proposed Transaction is currently the only viable alternative with a reasonable likelihood of permitting the Company to repay the Notes at maturity and avoid a Chapter 11 process. You stated that holders of the Notes with whom the Company is negotiating indicated to the Company that the Proposed Transaction is the only transaction in which they are currently willing to engage that would permit the Company to repay the Notes at maturity. As a result, the Company believes it would not be able to consummate the Proposed Transaction if it were delayed to obtain shareholder approval prior to the issuance of securities in the Proposed Transaction. You also represented 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.
 
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 terms of 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*: 4/24/2018 Mailto Link Identification Number: 1517
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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