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Frequently Asked Questions
Staff Interpretation Letter 2016-3
Identification Number
1145
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed Transaction.
 
According to the information you provided, the Company will issue convertible notes (the “Notes”) to several investors in a private placement (the “Transaction”). Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion could exceed 20% of the pre-transaction total shares outstanding. The Notes contain anti-dilution provisions; however, the effect of any anti-dilution adjustments will be limited such that the conversion price could never be reduced to below the greater of market and book value as of the date of the agreement to issue the Notes.
 
You have represented that Shareholder A holds an approximately 15% interest in the Company and is currently the Company’s largest shareholder. However, you have represented that Shareholder A is a registered investment adviser, and holds its entire 15% interest in the Company in this capacity. In this role, Shareholder A has the power and discretion to buy and sell, but not vote, the securities held in the accounts it manages. Accordingly, you have represented that in regard to its entire 15% interest in the Company, Shareholder A has no sole voting power, no shared voting power and no sole dispositive power, and it is deemed to be a beneficial owner solely due to the shared dispositive power over the shares held in the managed accounts.
 
You have represented that Shareholder A is also a registered broker-dealer. In this role, Shareholder A acts as custodian for many individual investment accounts, with shares within such investment accounts held in “street” name. The holders of these accounts make their own decisions regarding voting and disposition of the securities in their accounts. Shareholder A may vote such shares in limited circumstances described in SEC Rule 13d-3(d)(2), but Shareholder A is not deemed to be a beneficial owner of such shares.
 
You have represented that the Company adopted a stockholder rights plan that, among other things, limits the ability of any person to acquire ownership of 15% or more of the shares of the common stock of the Company by triggering special rights for all other stockholders if this ownership threshold would otherwise be exceeded by such person (the “Plan”). The Plan’s definition of the acquiring person specifically excludes certain shares held by Shareholder A. This exclusion would not apply to any of the shares that might be acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect. Furthermore, this exclusion applies only to shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest. Any single account holder or retail customer of Shareholder A, and any single broker at Shareholder A with respect to such broker’s personal trading account, remains subject to the 15% limitation on beneficial ownership.
 
You have represented that none of the Shareholder A’s managed and custodial account holders is part of any arrangement or agreement constituting a “group” within the meaning of SEC Rule 13d, and that all of the shares of common stock for which it serves as investment adviser have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
 
Shareholder A has negotiated the terms of the Notes with the Company. Shareholder A’s managed and custodial accounts will be allowed to acquire at least one half of the total principal amount of the Notes sold by the Company. The note purchase agreement will provide that the Notes will not be convertible into shares of common stock to the extent that after conversion any managed or custodial account would beneficially own more than 9.9% of the outstanding shares of common stock. All purchasers of the Notes, including Shareholder A’s managed and custodial accounts, will sign the note purchase agreement.
 
Following our review of the information you provided, we have determined that the Transaction does not require shareholder approval under the Rules. Although the potential issuance under the Notes exceeds 20% of the pre-transaction outstanding shares, shareholder approval would not be required under Listing Rule 5635(d) because the conversion price could not be less than the greater of book or market value per share as of the date of the agreement to issue the Notes. Shareholder approval also is not required under Listing Rule 5635(b). We have reached this conclusion because no individual shareholder or a group will have a control position following the Transaction given that (i) none of the purchasers, other than Shareholder A, will beneficially own more than 9.9% of the outstanding shares of common stock due to a beneficial ownership limitation in the note purchase agreement; (ii) Shareholder A is deemed to be a beneficial owner solely due to the shared dispositive power over the shares it holds in its managed accounts as an investment advisor and all such shares have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect; and (iii) the Plan limits any person, including Shareholder A, from acquiring 15% or more of the Company’s outstanding shares, excluding the shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest.
 
Publication Date*: 5/11/2016 Identification Number: 1145 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2016-1
Identification Number
1141
This is in response to your request for confirmation that, in the context of a potential acquisition, certain institutional investors with greater than 5% ownership and voting power in the Company’s securities would not each be a Substantial Shareholder as defined in Listing Rule 5635(e)(3) (the “Rule”).
 
You stated that the Company has two Institutional Investors each having more than 5%, but less than 10%, of the beneficial ownership of, and voting power in, the Company’s securities (together, the “Institutional Investors”). You stated that these positions reflect the composite of a significant number of funds with distinct management objectives and that none of the individual funds have a greater than 5% position. Each of these fund’s advisors have a fiduciary duty to vote its shares in the best interests of that fund and each individual fund’s board or portfolio manager has the ultimate decision making power on how to vote the shares.
 
Additionally, you note that in the Schedule 13Gs filed with the Securities and Exchange Commission by the Institutional Investors, each certified that it acquired the Company’s common stock in “…the ordinary course of business and [the shares] were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer of such securities and were not acquired in connection with or as a participant in any transaction having such purpose or effect.” You stated that the Institutional Investors are fundamentally passive with respect to control of the Company, and accordingly, it is the Company’s belief that the Institutional Investors are not covered by the definition of Substantial Shareholder.
 
Based on these representations, we have determined that, for purposes of the Company’s proposed acquisition, each Institutional Investor is not a Substantial Shareholder as defined in the Rule. Our conclusion is based on the diffusion of ownership and voting power of the Company’s securities among several funds with no individual fund having a 5% or greater position and that each of the fund’s advisors, in accordance with their fiduciary duty, vote the fund’s shares in the best interests of that individual fund. Our determination is also based on your representations, as evidenced by the certifications included in the Institutional Investors’ Schedule 13Gs, that each Institutional Investor is fundamentally passive with respect to control of the Company. You did not ask and we have not determined as to whether the proposed acquisition would require shareholder approval under Listing Rule 5635(a).
 
Publication Date*: 1/21/2016 Identification Number: 1141 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2015-3
Identification Number
1140

This is in response to your correspondence asking if an amendment to a shareholder approved employee stock purchase plan (the “ESPP”) changing certain purchase limitations would be considered a material amendment and, as a result, require shareholder approval under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”).

You stated that the Company has an ESPP that does not satisfy the tax qualification requirement of Section 423 of the Internal Revenue Code because only certain employees of the Company are eligible to participate, and as a result, is an equity compensation plan that requires shareholder approval under the Listing Rules. The ESPP provides an eligible participant (“Participant”) the opportunity to purchase shares of Company common stock on a quarterly basis (the “Offering Period”), subject to certain limits. In a single Offering Period, a Participant is allowed to purchase shares of common stock subject up to a maximum number of shares and the percentage of compensation that a participant may use to purchase shares is capped. The ESPP also contains a calendar year limitation on total payroll deductions.

You stated that the Company is proposing two changes to the ESPP (together, the “Amendment”). First, the Company proposes to reduce the maximum percentage of a Participant’s compensation that may be used to purchase shares during each Offering Period. Second, the Company proposes to increase the maximum dollar amount a Participant may spend to purchase shares during a calendar year. You stated that the proposed Amendment would not increase the maximum number of shares a Participant may purchase during an Offering Period and would not increase the total number of shares authorized and available for purchase under the ESPP.

Following our review of the information you provided, we have determined that the Amendment would not be a material amendment for purposes of the Rule. While the Amendment changes certain purchase limitations, there will be no increase in the maximum number of shares to be issued under the ESPP. As such, while the Amendment may affect the timing of when certain awards could be made, it will not increase the overall dilution possible under the ESPP. Furthermore, the Amendment does not result in any material increase in benefits to the Participants or any material expansion in the class of participants eligible to participate in the ESPP. Finally, the Amendment does not result in any expansion in the types of awards provided under the ESPP.

Publication Date*: 12/2/2015 Identification Number: 1140 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2015-2
Identification Number
1138

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, a biopharmaceutical company, has experienced delays in government funding for its lead product candidate, and has been unsuccessful in securing alternative funding to continue operations. Additionally, in its 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 stated that, without the Proposed Transaction, the Company is in imminent danger of being unable to meet its monthly payroll, lease payments and other obligations and has only enough cash to fund operations for a month, at which time it will be forced to initiate steps to cease operations, in addition to laying-off or furloughing many of its scientific employees.

In the Proposed Transaction, you stated that the Company will issue shares of common stock to one investor equal to greater than 20% of the existing total shares outstanding at a price per share expected to be greater than current market and book value. However, due to fluctuation in the Company’s stock price, the ultimate price per share of the common stock may potentially be at a discount to market value. Additionally, following the closing of the Proposed Transaction, the sole investor will obtain greater than 50% voting power and beneficial ownership in the company.

You stated that the Company has pursued multiple alternative sources of financing for more than one year, completing smaller financings that raised limited funds but failing to complete several larger transactions, including the sale of common stock in a public offering that reached late stage negotiations, but was ultimately unsuccessful. Despite these efforts, you represented that there are currently no realistic alternatives to the Proposed Transaction and that the proposed investor is unwilling to structure the Proposed Transaction in a manner consistent with the shareholder approval rules. 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 before the Company runs out of cash. You further indicated that if the Proposed Transaction is not completed in the very near term, the Company will be forced to cease operations, including all product development efforts, and terminate or furlough scientific employees, and that the result of these actions may negatively affect the Company’s ability to obtain government funding. Additionally, you stated that given the potential negative effects on the Company’s operations, the Company sought advice from bankruptcy counsel. 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 sole investor will own greater than 50% 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 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, 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*: 9/14/2015 Identification Number: 1138 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2014-5
Identification Number
1132
This is in response to your correspondence asking if an amendment to a shareholder approved equity compensation plan to permit the accrual of cash dividend equivalents for restricted stock units (“RSUs”) would be considered a material amendment requiring shareholder approval under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”).
 
You stated that the Company currently has a shareholder-approved equity compensation plan (the “Plan”) that allows for grants of restricted stock, which may accrue dividends during vesting, and of RSUs, which do not accrue dividends. The Company proposes to amend the Plan to allow for the accrual of cash dividend equivalents with respect to the RSUs. The cash dividend equivalents would not vest until the underlying RSUs vest, and would be payable in cash. You stated that the holders of the RSUs would not be able to elect to receive common stock or stock units in lieu of the cash payment. You stated that there would be no other changes to the Plan and the proposed amendment would not either require or permit the issuance of additional shares under the Plan.
 
Following our review of the information provided, including that the proposed amendment you described would not necessitate the issuance of any shares under the Plan, we have determined that it would not be material for purposes of the Rule and, accordingly, would not require shareholder approval under the Rule.
 
Publication Date*: 11/12/2014 Identification Number: 1132 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2014-3
Identification Number
1129
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635(d)(2) (the “Rule”) to a proposed transaction that would be agreed to immediately before the Company’s listing but completed following the listing.
 
According to the information you provided, the Company is currently a wholly-owned subsidiary of a public company (the “Parent”). The Parent intends to separate the Company by distributing the Company’s common stock to the holders of the Parent’s common stock (the “Spinoff”). In the Spinoff, each holder of the Parent’s common stock would be entitled to receive a set number of shares of the Company’s common stock for each share of the Parent’s common stock held by such holder on the record date. Shares of the Company’s common stock are expected to begin trading on Nasdaq on a “when issued” basis on or shortly before the record date and “regular way” on the day the Company’s shares are distributed to the Parent’s shareholders. Parent will remain a separately traded public company.
 
The Company may pursue a private placement of shares of the Company’s common stock or securities convertible into or exercisable for the Company’s common stock (the “Transaction”). The definitive agreement for the purchase and sale of such securities would be executed prior to the distribution date of the Spinoff. At the time such definitive agreement is executed, the Parent, as the sole shareholder of the Company, would approve the terms of the Transaction. However, the Transaction would not be consummated, and the securities would not be issued, until after the distribution date of the Spinoff. The Transaction may result in the issuance of more than 20% of the Company’s common stock or voting power outstanding before the issuance. The issuance may be for less than the greater of book or market value of the shares of the Company’s common stock.
 
Following our review of the information you provided, we have determined that if the Transaction results in the potential issuance, at a price less than the greater of book or market value, of shares equal to 20% or more of the common stock or voting power outstanding before the issuance, then the Rule would require shareholder approval of the Transaction because the Company will be listed on Nasdaq at the time of the issuance. However, approval of the Transaction by the Parent prior to the distribution date of the Spinoff, as the sole shareholder of the Company, would satisfy this requirement.
 
Publication Date*: 10/7/2014 Identification Number: 1129 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2014-2
Identification Number
1114

This is in response to your correspondence asking whether the issuance of preferred shares in a proposed acquisition (the “Acquisition”) would comply with the shareholder approval requirements in Listing Rule 5635(a) and IM-5635-2 (together, the “Rules”).

In the Acquisition the Company will purchase a privately-held target (the “Target”) for a combination of cash and securities. The amount of stock issued in the Acquisition will depend on the amount of cash consideration paid at closing. No director, officer, or Substantial Shareholder of the Company has a direct or indirect interest in the Target. In order to reduce the amount of securities to be issued in the Acquisition, the Company plans to complete a public offering consummated in accordance with IM-5635-3.

If the stock consideration to be issued in the Acquisition exceeds 20% of the Company’s voting power or total shares outstanding prior to the issuance, all of the stock consideration issued by the Company would be non-voting Preferred Stock (the “Convertible Preferred Stock”). The Convertible Preferred Stock would pay an annual cash dividend and the Convertible Preferred Stock holders would have approval rights with respect to certain corporate actions impacting the rights of the preferred shareholders.

Following consummation of the Acquisition, the Company would seek shareholder approval to convert the Convertible Preferred Stock into shares of the Company’s common stock. If shareholder approval is not obtained, the Company may call additional shareholder meetings to obtain approval of the conversion of the Convertible Preferred Stock into the shares of the Company’s common stock. Alternatively, the Convertible Preferred Stock may be converted, without shareholder approval, into a combination of shares of the Company’s common stock equal to 19.99% of the Company’s outstanding common stock prior to the issuance and shares of a different series of non-voting, non-convertible Preferred Stock (the “Non-Convertible Preferred Stock”). The Non-Convertible Preferred Stock would pay an annual cash dividend and the holders of the Non-Convertible Preferred Stock would have approval rights with respect to certain corporate actions impacting the preferred stock holders. You stated that following the conversion of the Convertible Preferred Stock into shares of common stock and Non-Convertible Preferred Stock, the Company will not seek shareholder approval for the conversion of the Non-Convertible Preferred Stock into shares of the Company’s common stock.

Following our review of the information you provided, we have determined that the structure of the securities issued in connection with the Acquisition comply with the Rules. Our conclusion is based on certain facts, including but not limited to the following: (i) no director, officer or Substantial Shareholder has a direct or indirect interest in the Target; (ii) the Convertible Preferred Stock and Non-Convertible Preferred Stock are non-voting; (iii) the Convertible Preferred Stock cannot be converted into greater than 19.99% of the voting power or total shares outstanding prior to the issuance unless shareholder approval is obtained; (iv) if shareholder approval is not obtained and the Company determines not to seek shareholder approval at subsequent meetings, the Convertible Preferred Stock will convert into a combination of the Non-Convertible Preferred Stock and an amount of common stock not greater than 19.99% of the voting power or total shares outstanding prior to the issuance; and (v) the Company will not seek shareholder approval to convert the Non-Convertible Preferred Stock into common stock. You did not ask and we have made no determination as to whether or not the proposed equity offering is a public offering in accordance with IM-5635-3.

Publication Date*: 8/4/2014 Identification Number: 1114 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-7
Identification Number
1110

This is in response to your correspondence asking whether a proposed amendment to the company’s Equity Plan (the “Amendment”) would be considered a material amendment requiring shareholder approval under Listing Rule 5635(c) (the “Rule”).

The Equity Plan, which was established prior to the company’s listing on the NASDAQ Stock Market, contains an annual award limit of 500,000 shares per person (the “Limit”). You indicated that the Limit is a plan feature used to preserve the deductibility of compensation to certain employees. You indicated that the company interprets the Equity Plan to require the Limit to be adjusted proportionately for certain changes in the company’s capitalization, including, but not limited to, a reverse stock split.

Just prior to listing, the company effected a one-for-five reverse stock split and, as a result, the Limit was adjusted proportionately downward to 100,000 shares. According to the information you provided, the Amendment would restore the Limit to 500,000 shares. The Amendment would not prevent other adjustments to the Limit due to future changes to the company’s capitalization, including future reverse stock splits. You stated that the Amendment will not result in any increase in the total number of shares available for issuance under the Equity Plan.

Following our review of the information provided, we have determined that the Amendment would not be a material amendment for purposes of the Rule. While the Amendment increases the Limit, there will be no increase to the maximum number of shares to be issued under the Equity Plan. As such, while the Amendment may affect the timing of when certain awards could be made, it will not increase the overall dilution possible under the Equity Plan. Furthermore, the Amendment does not result in any material increase in benefits to the participants or any material expansion in the class of participants eligible to participate in the plan. Finally, the Amendment does not result in any expansion in the types of awards provided under the Equity Plan.

Publication Date*: 3/5/2014 Identification Number: 1110 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-4  
Identification Number
1090

This is in response to your correspondence regarding whether certain proposed actions in connection with the payment by the Company of an extraordinary cash dividend would be considered material amendments to the Company's equity compensation plans, requiring shareholder approval under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”). You indicated that the Company is considering paying an extraordinary cash dividend, which would equal approximately 25% of the Company's current stock price.

Under the Company's stock plans (the “Stock Plans”), the Company currently has outstanding stock options, stocks appreciation rights (“SARs”), and restricted stock units (“RSUs”) (collectively, the “Awards”). The Company also maintains an ESPP, which is designed to qualify under Section 423 of the Internal Revenue Code of 1986, as amended.

The Company proposes to amend the Stock Plans to allow for adjustments of the Awards upon the payment of an extraordinary cash dividend by the Company (the “Plan Amendments”). Under the Plan Amendments, the Company would make a cash payment upon vesting of an outstanding RSU in an amount equal to the amount of the extraordinary cash dividend. Adjustments to options and SARs would vary based on the tax effect of the adjustment to the recipient. Wherever permissible under guidance issued by the IRS, the Company would reduce the exercise price of the option or SAR by the amount of the extraordinary dividend (the “Exercise Price Adjustment”). However, you stated that under this IRS guidance, where the post-adjusted exercise price of a stock option or SAR would be equal to or less than 30% of the underlying stock price immediately following the adjustment, the IRS would recharacterize the award, resulting in a change in the Award's tax status to the recipient. In these cases, the Company would reduce the Award's exercise price to the extent permissible under the IRS guidance without a change in the recipient's tax status (the “Partial Adjustment”). In addition, the Company will make a cash payment to the recipient in an amount equal to the difference between the amount of the extraordinary cash dividend and the Partial Adjustment. The Plan Amendments would be approved by the independent compensation committee of the Company's board of directors.

The Company also proposes to amend the ESPP to preserve the existing intrinsic value through a proportionate adjustment to the number of shares and purchase price for shares purchasable during the ESPP offering period when an extraordinary cash dividend is paid (the “ESPP Amendments”). The ESPP Amendments would be approved by the independent compensation committee of the Company's board of directors. You have represented that implementing the ESPP Amendments as proposed without shareholder approval would not affect the treatment of the ESPP under Section 423 of the Internal Revenue Code.

Following our review of the information provided, we have determined that the Plan Amendments you described would not be material amendments for purposes of the Rule. We note that the proposed Plan Amendments to provide cash payments to affected participants in the Plans are not subject to the Rule, which only applies to equity compensation. Further, reducing the exercise price of the outstanding stock options and SARs would not increase the intrinsic value of the Awards and such reduction would not provide any additional benefit to the recipients, other than that one-time adjustment to reflect the extraordinary dividend. Therefore, the Exercise Price Adjustment and Partial Adjustment would not result in a material increase in the benefits to the participants. In addition, the Plan Amendments would not result in: a material expansion in the class of participants; a material increase in the number of shares to be issued under the Stock Plans; or an expansion in the types of awards available. As a result, shareholder approval is not required for the Plan Amendments under the Rule.

Under Listing Rule 5635(c)(2) , shareholder approval is not required for the adoption or amendment of a tax qualified, non-discriminatory employee benefit plan, including a plan that meets the requirements of Section 423 of the Internal Revenue Code, if such plans are approved by a company's independent compensation committee. Since the ESPP and the ESPP Amendments are designed to satisfy the requirements of Section 423, and the ESPP Amendments will only be implemented with approval of the Company's independent compensation committee, shareholder approval is not required for the ESPP Amendments.

Publication Date*: 8/29/2013 Identification Number: 1090 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-3  
Identification Number
1080
This is in response to your correspondence regarding whether the proposed amendments to outstanding options and warrants would be considered a material amendment requiring shareholder approval under Listing Rule 5635(c) (the “Rule”).

Prior to the Company's listing on NASDAQ, the Company's subsidiary sold units consisting of one share of common stock and one warrant to purchase additional shares of common stock to certain of its officers, a non-executive employee and current and former directors. Separately, following a holding company reorganization, the Company sold warrants at fair market value based on the Black-Scholes valuation model to certain members of senior management and to certain directors. Finally, the Company issued options to purchase common stock under a shareholder approved equity plan (“Equity Plan”) to two non-executive employees. The warrants and options, which are not publicly traded, are exercisable into the Company's listed common stock and are owned by current or former officers, non-executive employees and directors of the Company or the subsidiary.

The Company is proposing to amend the terms of the warrants and the Equity Plan to allow for the adjustment of the exercise price of the warrants and options upon the distribution of an extraordinary cash dividend by the Company (the “Amendments”). Any adjustment under the Amendments would be at the discretion of a committee of the board of directors, provided, however, that no adjustment could increase the intrinsic value of a warrant or option as measured before the ex-dividend date of the extraordinary cash dividend.

Following our review of the information provided, we have determined that the Amendments you described would not be a material amendment for purposes of the Rule. In that regard, we note that the proposed Amendments would not increase the intrinsic value of a warrant or option and, therefore, would not result in an increase in the benefits to the participants. In addition, the Amendments would not result in: a material expansion in the class of participants; an increase in the number of shares to be issued under the Equity Plan or upon exercise of the warrants; or an expansion in the types of awards available. As a result, shareholder approval is not required for the Amendments under the Rule.

Publication Date*: 5/20/2013 Identification Number: 1080 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-1
Identification Number
1078
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from NASDAQ’s shareholder approval requirements with respect to proposed issuances of securities (the “Proposed Transaction”).

The Company, a bank holding company, conducts banking operations through its wholly owned subsidiary (the “Bank”). You stated that the Company has suffered significant operating losses for the fiscal years 2009, 2010 and 2011, and expects to report a loss for the fiscal year ended December 31, 2012. In its 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.

While the Bank had been considered “adequately capitalized” by bank regulators prior to October 30, 2012, based on its September 30, 2012 Report of Condition and Income, the Bank was deemed “undercapitalized.” Furthermore, based on preliminary year end results for 2012, the Company expects the Bank’s Tier 1 leverage ratio to continue to decrease, and the Bank is expected to be classified as “significantly undercapitalized” based on its December 31, 2012 financial information. The Company’s losses are expected to continue in the first quarter of 2013, which could result in the Bank being deemed “critically undercapitalized” as of March 31, 2013, thus triggering the process to appoint a receiver or conservator of the Bank. As the Bank is the only material asset of the Company, the receivership of the Bank would cause the loss of any remaining value to the Company’s shareholders.

In the Proposed Transaction, the Company would issue common stock in connection with an exchange of currently outstanding preferred stock and a private placement. The preferred stock was issued to the United States Treasury Department (the “Treasury Department”) under the Troubled Asset Relief Program. The Treasury Department has agreed to exchange the preferred stock for common stock in an amount equal to a substantial discount to the principal amount plus accrued and unpaid dividends (the “Exchange”). Following the Exchange, the Company would conduct a private placement of common stock issuing shares to outside investors (the “Investors”) at the same price as the Exchange (the “Private Placement”). The Treasury Department will enter into separate agreements to sell the shares of common stock it receives in the Exchange to the Investors. In addition, as a condition imposed by the Investors, officers and directors of the Company (the “Insiders”) will purchase shares in the Private Placement on the same terms as the Investors. The common stock issued in the Exchange and in the Private Placement will be priced at a significant discount to the current market value. Finally, as promptly as practicable following the closing of the Private Placement, the Company will conduct a rights offering for shareholders, including the Insiders, that owned shares prior to the Exchange and Private Placement, which would allow these shareholders to purchase shares of common stock at the same price as the Exchange. It is anticipated that the Insiders’ total investment would be no more than 3% of the Proposed Transaction.

Given the Bank’s critical capital levels and regulatory pressures, the Company requires a substantial investment in order to return the Bank to a “well-capitalized” regulatory position. As a result, the proposed issuance of common stock is significantly greater than 20% of the pre-transaction total shares outstanding. You stated that the Company has pursued multiple alternative financing strategies for over one year, and that there are no realistic alternatives to the Proposed Transaction. The Company did not anticipate that obtaining shareholder approval would be a significant hurdle, but delays caused by ongoing negotiations about the Proposed Transaction, a hostile takeover that did not proceed, and delays in receiving regulatory approval, as well as the Company’s continuing losses, have all contributed to a situation in which the time needed to obtain shareholder approval would seriously jeopardize the financial viability of the Company. In addition, the Investors’ willingness to participate in the Proposed Transaction is conditioned on the transaction being sufficient to return the Bank to a “well-capitalized” position, necessitating an issuance of stock in excess of 20% of the outstanding shares. You stated that if the Proposed Transaction is not completed in the very near term, the Company will be forced to file for bankruptcy protection or bank regulatory authorities may appoint a receiver or conservator for the Bank, which you indicated would result in a complete loss for the existing shareholders.

The Company expects that the Proposed Transaction would return the Bank to the regulatory category of “well-capitalized” and prevent it from falling into receivership. In addition, the Company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ.

Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(c) because the issuance of discounted common stock to the officer and directors would be considered equity compensation and Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price 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 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 bankruptcy and the appointment of a conservator or a receiver for the Bank. 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 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.

As an additional matter, this exception applies only to the Proposed Transaction and not to any other issuances of securities which you stated may occur following the completion of the Proposed Transaction.

Publication Date*: 4/15/2013 Identification Number: 1078 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-9  
Identification Number
1071
This is in response to your correspondence regarding whether an issuance of the Partnership’s common units to the New Company would be treated as a public offering for purposes of IM-5635-3 and, therefore, not subject to the shareholder approval requirements of Rule 5635.

The Partnership, whose common units (the “Units”) have been listed on NASDAQ for several years, is treated as a partnership for federal income tax purposes. As such, the Partnership pays no federal income tax but, instead, its income and deductions are allocated to the holders of the Units who, in turn, are taxed on their share of the Partnership’s net income. This tax treatment is unattractive to many investors due to the complexity and administrative burden it adds to the tax-filing process. In addition, you stated that this structure effectively precludes most tax-exempt investors (including IRAs and other tax-exempt retirement accounts) from investing in the Partnership’s Units because they would be subject to unrelated business income tax, which could cause them to lose their tax-exempt status. Similarly, you stated that this structure precludes most non-U.S. investors from owning Units because it would require that they file U.S. federal and state income tax returns and may cause them to be subject to taxes on other, unrelated, income. You stated that this tax treatment inhibits the Partnership’s ability to raise capital or finance acquisitions through Unit issuances. As explained below, the structure of the New Company and the sale of Units by the Partnership to the New Company (the “Unit Sale”) were designed to offer investors a means to indirectly invest in Units while avoiding the tax treatment associated with direct ownership.

The sole business function of the New Company, which is organized as a corporation, is to own Units, and it expects to have no assets or operations other than those related to its interest in the Partnership. The New Company is required under its governing documents to maintain a one-to-one relationship between the number of Units it owns and the number of shares of its common stock outstanding (the “Shares”). The holders of the Shares have voting and economic rights intended to put them in the same position as direct holders of the Units. For example, all matters submitted to a vote of the Units will also be submitted to a vote of the Shares, and the New Company is required to vote the Units it holds proportionately at the direction of the holders of the Shares (including non-votes and abstentions). In addition, holders of Shares will be entitled to receive dividends of the cash distributions that the New Company receives on the Units it holds, net of reserves for income taxes payable by the New Company.

The New Company recently completed an initial public offering (the “IPO”) using a syndicate of major investment banks, which was underwritten on a firm commitment basis. The prospectus relating to the IPO included the same information regarding the business, financial condition and results of operation of the Partnership, including historical financial statements, as is required for an offering of Units. The IPO was marketed as an indirect offering of Units, focusing on the business and operations of the Partnership and the distribution history associated with the Units. Under the federal securities laws, the IPO was considered a deemed offering of Units, and the registration statement used was a joint filing of the Partnership and the New Company, which also registered the sale of Units to the public. The entire net proceeds of the IPO were used to purchase a number of newly issued Units in the Unit Sale equal to the number of the New Company’s Shares sold in the offering. The price per Unit the New Company paid was equal to the net proceeds received per share in the offering.

Following our review of the information you submitted, we have concluded that the Unit Sale, as described above, was a public offering under the Rule, and, therefore, not subject to NASDAQ’s shareholder approval requirements. We have reached this conclusion because, as explained above: (i) the Unit Sale was, in all material respects, equivalent to a sale of those Units to the purchasers of Shares in the IPO, who enjoy all economic and voting rights associated with those Units; (ii) the sale of Shares in the IPO was a public offering, which was broadly marketed and conducted by a syndicate of investment banks on a firm commitment basis in reliance on a joint-registration statement fully describing both the IPO and the Unit Sale; and (iii) the price paid for the Units was substantially the same as if they had been sold by the Partnership in a typical follow-on offering.

Publication Date*: 2/19/2013 Identification Number: 1071 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-8
Identification Number
1069
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to proposed issuances of securities (the “Proposed Transactions”). In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”).

The Company, a savings and loan holding company, conducts banking operations through its operating subsidiary (the “Bank”) and does not have any significant business or assets apart from its ownership of the Bank. You stated that for the past several years, the Bank has experienced very substantial increases in loan delinquencies and defaults due primarily to unfavorable economic conditions including the downturn in the real estate market in its service area. As a result, the Company has reported substantial losses for each of the past two years and does not have sufficient cash to meet its operating expenses. In its report in the most recent Form 10-K, the Company’s independent auditor included the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern.

The banking regulators determined that the Company and the Bank are in “troubled condition” which is a regulatory designation resulting in substantial restrictions on the operations of both the Company and the Bank enforced through Cease and Desist Orders (the “Orders”). Pursuant to the Orders, the Company is required to maintain capital ratios higher than otherwise required and is not permitted to incur, make payments on, or increase any debt without the approval of its regulators. As a result, the Company is in default on a substantial amount of its outstanding debt, including a credit facility which is secured by the assets of the Company (the “Debt”). To preserve capital, the Company has closed two of the five branch offices of the Bank and has sold its headquarters building. In addition, the Company has sold other assets, including non-performing loans.

In the Proposed Transactions, the company would issue common stock, or securities which would be convertible into common stock (the “Convertible Securities”), in exchange for currently outstanding preferred stock and a portion of the Debt. The Convertible Securities would vote on an as-converted basis. The exchange for the preferred stock would be at a 50% discount to the liquidation preference and would also be in satisfaction of accrued but unpaid dividends. The U.S. Treasury Department would also exchange preferred stock it was issued under the Troubled Asset Relief Program and, as a result, would become the largest holder of the Company’s common stock. Concurrently with the completion of these exchanges, the Company would sell shares of common stock in a private placement to unrelated investors at a discount to the market value. You stated that the completion of each part of the Proposed Transactions is conditioned on the completion of each of the other parts. The Company plans to seek the necessary approval of the banking regulators to allow it to retain at the holding company level a substantial portion of the proceeds from the private placement and to invest the remainder in the Bank.

You stated the Company exhaustively explored possibilities to structure a transaction which would comply with the shareholder approval requirements but was unable to do so. Each participant in the Proposed Transactions demanded the contingency that all portions close concurrently. The investors in the private placement agreed to invest only if the improvements in the Company’s capital structure, which would result from the preferred stock exchanges, were certain to occur. The participants in the Proposed Transactions also insisted on full voting power and were unwilling to accept a non-voting security which would be convertible into common stock only after shareholder approval.

The Company’s financial advisory firm approached approximately 175 potential investors over the past 2 years but could not reach an agreement for another source of capital on different terms. Efforts to sell the Company in its entirety were not successful. You stated that based on these efforts, the Company believes that the Proposed Transactions are the only available alternative. In addition, you stated that if it is not able to complete the Proposed Transactions in the very near term, the Company will be forced to file for bankruptcy protection or bank regulatory authorities may appoint a receiver or conservator for the Bank.

The Company expects that as a result of the Proposed Transactions, it would avoid having to seek bankruptcy protection, and the Bank would no longer face the risk of the appointment of a receiver or conservator. In addition, the Company believes that following the closing of the Proposed Transactions it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the Company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) as the issuance could result in a change of control and pursuant to Listing Rule 5635(d) as the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the Convertible Securities would effectively have greater voting rights than the common stock since they would vote on an as-converted basis and would convert at a discount to the market value. You stated that the time that would be required to prepare for and conduct a meeting of stockholders would seriously jeopardize the Company’s continuing existence as an operating entity and that even more urgently, the Company does not have the cash that would be required to hold such a meeting.

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 bankruptcy and the appointment of a conservator or a receiver for the Bank. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the Proposed Transactions because both that rule and former Securities and Exchange Commission Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. 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 Transactions and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate 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.

This exception applies only to the Proposed Transactions and not to any other issuances of securities which you stated may occur following the completion of the Proposed Transactions.

Publication Date*: 1/17/2013 Identification Number: 1069 Mailto Link
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 Identification Number: 1068 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-6
Identification Number
1065

This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect 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 to the Proposed Transaction.

The Company is in the pharmaceutical industry and has invested substantially all of its efforts and financial resources into the development of a single new pharmaceutical product (the “Product”), which has not yet been approved by the Food and Drug Admiration (the “FDA”). The company expects that the FDA will complete the current stage of its review within approximately three months. The Company has not yet generated any product revenues and has funded its operations through credit facilities and the issuance of debt and equity securities. 

You stated that the Company has a working capital deficit of several million dollars and that without additional capital it is in imminent danger of being unable to meet its monthly debt service, office lease, payroll and other obligations. As part of its plan to reduce expenses, the Company has already reduced its workforce by approximately 50% and has temporarily amended its credit agreement to achieve additional liquidity. You also stated that due to the extent of the Company's payment delinquencies, certain vendors performing activities critical to the FDA’s review of the Product have informed the Company that they will cease performing services until past due payments are received. In addition, the Company faces the imminent risk of default under its secured credit facility, which could result in immediate insolvency. As such, you have stated that unless the Company can quickly complete the Proposed Transaction, it would likely have to cease operations or file for bankruptcy protection. 

You stated that over the past ten months the Company, together with its financial advisors, has unsuccessfully sought other financing sources and had discussions with over 50 prospective investors. The Company believes that its only viable alternative is the Proposed Transaction. In the Proposed Transaction, the Company would sell shares of voting preferred stock, convertible into shares of common stock, and warrants, exercisable for additional shares of common stock, to several purchasers including two current shareholders. Both the conversion price of the preferred stock and the exercise price of the warrants would be at discount to the market value of the common stock. The number of shares of common stock potentially issuable would equal approximately 65% of the Company’s outstanding shares on a post-transaction basis. The voting power of the preferred stock would be limited to that number of votes equal to the number of shares of common stock into which the preferred stock would be convertible if it were converted at market value on the date of the definitive purchase agreement. The purchasers would be entitled to appoint directors proportional with their ownership position. The number of directors they could appoint would decline proportionally with a decline in their ownership position in the Company. 

The Company expects that the Proposed Transaction would be sufficient to fund its operations for the next 12 months and that the Company would satisfy NASDAQ’s continued listing requirements throughout that time. In addition, the Company would be able support the FDA approval process for the Product. 

Without the requested exception, the Proposed Transaction would require shareholder approval pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. You stated that a delay in securing shareholder approval would seriously jeopardize the financial viability of the Company, that the purchasers in the Proposed Transaction are unwilling to structure the financing in a manner that would not require shareholder approval, and that the Company does not have sufficient cash to sustain it through a shareholders’ meeting. 

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 on your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. The exception is subject to the following: (i) the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the Company must 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 no later than ten days before the issuance of the securities. We note that the Proposed Transaction would comply with Listing Rule 5640 and IM-5640 and therefore does not require an exception from these requirements.

Publication Date*: 12/18/2012 Identification Number: 1065 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-5
Identification Number
1063

This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635 (the “Rule”) to a proposed rights offering.

Through the rights offering, the Company expects to raise between $50 and $100 million of equity capital to enhance its financial position and to fund a strategic business transformation. The rights offering will afford all of the Company’s shareholders the right to purchase, at the same price and on identical terms, shares of common stock in proportion to their ownership position as of the record date.  A special committee of the Company’s Board of Directors (the “Special Committee”), consisting of independent directors, will determine the terms of the rights offering, including the subscription price.  The subscription price may be at discount or at a premium to the market price.

The Company is currently considering two alternative backstop agreements, under which certain investors may agree to purchase all unsubscribed shares (the “backstop agreement”).  Any shares issued pursuant to the backstop agreement will be issued in a private placement transaction, exempt from the registration requirements, at the same price as the subscription price in the rights offering.  Under either alternative, the backstop agreement will provide for no fee or any other consideration payable to the backstop investor, although the Company will reimburse certain reasonable legal and out-of-pocket expenses incurred in connection with the backstop agreement.

Under the first alternative, the Company and Investor A would enter into an exchange transaction (the “Exchange”) concurrently with the backstop agreement.  According to the Company’s most recent beneficial ownership table, Investor A currently holds a 25% interest in the Company, as a consequence of prior purchases of the Company’s equity and convertible debt securities, and is currently the Company’s largest shareholder.  One of the members of the Company’s Board of Directors is affiliated with Investor A.  In the Exchange, the Company would transfer certain of its assets to Investor A in exchange for warrants, preferred stock, and notes of the Company held by Investor A.  The Special Committee will obtain a fairness opinion from its financial advisor prior to signing the Exchange agreement.  If the Company executes the backstop agreement with Investor A, and no other shareholder participates in the rights offering, Investor A would own approximately 35% of the post-transaction shares outstanding.

Under the second alternative, the Company would pursue only the rights offering and Investor B would sign a backstop agreement.  Investor B beneficially owns approximately 14% of the Company’s common stock.  One of the members of the Company’s Board of Directors is affiliated with Investor B. If the Company executes the backstop agreement with Investor B, and no other shareholder participates in the rights offering, Investor B would own approximately 35% of the post-transaction shares outstanding.

Following our review of the information you provided, we have determined that the rights offering would be considered a “public offering” under the Rule and IM-5635-3.  We have reached this conclusion because the rights will be distributed generally to all shareholders of the Company pro ratably and all shareholders are entitled to participate on the same terms.  Further, the backstop agreements contemplated by the Company do not alter this determination because any purchases by the backstop provider will be made on the same terms available to all the Company’s shareholders and made only after those shareholders decline to participate.  In that regard, we note that the backstop investor will not be paid a fee to provide the backstop service. As a result, the rights offering, as described, would not require shareholder approval under the Rule.

Publication Date*: 11/30/2012 Identification Number: 1063 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-4
Identification Number
1062

This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”). 

In the Proposed Transaction, the Company would sell to the Investor shares of preferred stock, which would be convertible into common stock at a price below the current market value.  The Preferred Stock would vote on an as-converted basis resulting in the Investor owning approximately 73% of the Company’s outstanding shares of voting stock on a post-issuance basis.  The Investor would have the right to appoint 4 members of the board of directors which would consist of no more than 7 members.  The number of directors the Investor could appoint would decline proportionally with a decline in the Investor’s ownership position in the Company.  The Investor is not currently affiliated with the Company.  

You stated that, due to a variety of circumstances, the Company is in dire financial condition.  While the Company has experienced continuous net losses for approximately fifteen years, it has been able to continue operations through issuances of common and preferred stock and debt.  Recently, the Company lost a significant customer, which last year accounted for approximately 42% of its total revenue.  Subsequent negotiations with several prospective large customers ended without any sales agreements being reached.

You explained that as its condition has continued to deteriorate, the Company has released most of its employees and has delayed or withheld payments to vendors, resulting in its inability to obtain the products and services necessary to operate its business.   The Company has debt maturing in approximately 10 months, which under the current circumstances it would be unable to repay.  In addition, approximately five months ago, a patent infringement lawsuit was filed against the Company, significantly hindering its capital raising efforts due to the inherent uncertainty regarding any possible settlement.

The Company’s investment bankers have explored strategic alternatives, including a possible sale and potential sources of capital, and in the process have contacted over forty parties.  You stated that until the Proposed Transaction, however, there has not been any viable interest.   The Company’s bankruptcy counsel has begun preparing a bankruptcy petition in the event the Company is unable to quickly raise the needed funds.

The Company believes that if it completes the Proposed Transaction it would be able to continue operations for at least twelve months, during which time it would refocus its marketing efforts to compensate for the recent loss of the significant customer and have the opportunity to grow its sales and improve its prospects.  The Company would also use the proceeds of the Proposed Transaction to settle its debt for a significantly reduced cash amount and shares of common stock.  In addition, the Company agreed to a term sheet for the settlement of the patent infringement lawsuit, which would be funded from the proceeds of the Proposed Transaction.   The Company believes that following the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement for which it is currently within the 180-day compliance period (the “Compliance Period”).   You stated that the Company would take all steps necessary, including a reverse stock split, to regain compliance with the bid-price requirement by the expiration date of the Compliance Period.  In addition, the Company did not timely file its Form 10-Q for its most recently completed quarter.   The Company has stated that it expects to file that Form 10-Q within approximately three weeks.  In the meantime, the Company issued a press release containing detailed financial information for the quarter. 

Without the requested exception, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control; and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value of the common stock, thereby effectively affording it greater voting rights than the common stock.  In addition, depending on the number of directors on the Company’s board, the Investor’s percentage representation on the board could be greater than its percentage ownership in the Company.

You stated that a delay in securing shareholder approval would seriously jeopardize the financial viability of the Company, and the Proposed Transaction is the only available means to avoid an imminent bankruptcy filing.  You added that the Company’s current cash position is not sufficient to sustain it through the time that it would take to obtain shareholder approval.

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 on your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy.  In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Securities and Exchange Commission Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress.  The exception is subject to the following:  (i) the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the Company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.  

As an additional matter, you indicated that the Company is considering an investment in a company which is in a related business.  The exception granted herein does not apply to such investment, which would be fully subject to the shareholder approval requirements.  In that regard, you stated that the Company would not use any of the proceeds from the Proposed Transaction to fund the investment without the prior approval of its shareholders other than the Investor. 

Publication Date*: 11/30/2012 Identification Number: 1062 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-3
Identification Number
1061

This is in response to your correspondence regarding whether a proposed amendment to the terms of the Preferred Units (the “Amendment”) would require shareholder approval as equity compensation to the Director under Listing Rule 5615(a)(4)(H) (the “Rule”).  The Company is a limited partnership with its common units listed on NASDAQ.  The Preferred Units, which are not publicly traded, are convertible into the listed common units on a one-for-one basis.

Following the issuance of the Preferred Units to the Investor nearly two years ago, the Director, an affiliate of the Investor, joined the board of directors of the general partner of the Company.  Prior to the issuance, neither the Director nor the Investor was affiliated with the company.

Currently, the Company is permitted to pay quarterly distributions on the Preferred Units in cash or by issuing additional Preferred Units as payment-in-kind (the “PIK Distributions”).   Pursuant to the Amendment, the quarterly distributions would be payable only as PIK Distributions through the end of next year.  Currently, the original issuance price of the Preferred Units is used to calculate the number of Preferred Units issuable as PIK Distributions.  As such, the number of Preferred Units issuable as PIK Distributions is equal to the total dollar amount of the distributions divided by the original purchase price.  The current market price of the Company’s common units is greater than the original issuance price of the Preferred Units. 

Under the Amendment, instead of being based on the original issuance price, the PIK Distributions would be based on a fixed price equal to an approximate 10% discount to the current market price of the common units subject to a maximum and minimum threshold (“the Amended PIK Price”).  The Amended PIK Price would be capped at an amount which would be approximately 59% greater than the original issuance price, and would not be less than the original issuance price.  Thus, the Amendment could potentially increase, but could not reduce, the price applicable to the PIK Distributions and, correspondingly, could reduce the number of Preferred Units issued as PIK Distributions.  The Amendment would not change the minimum aggregate dollar amount of the quarterly distributions. 

Because it would pay quarterly distributions as PIK Distributions rather than in cash, the Company would achieve its purpose of having additional funds available for capital expenditures.  Likewise, the Investor would achieve its purpose of increasing its equity stake in the Company.

Following our review of the information that you provided, we have determined that the Amendment would not be material for purposes of the Rule and, therefore, would not require shareholder approval as equity compensation. We have reached the conclusion because the Amendment could potentially increase, but could not decrease, the price used to calculate the number of units to be issued with respect to PIK Distributions, and would not result in an increase in benefits available to the Investor.   In addition, the Amendment could reduce the number of Preferred Units issuable as PIK Distributions, resulting in fewer common units being issuable upon conversion.

Publication Date*: 11/30/2012 Identification Number: 1061 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-1
Identification Number
1040
This is in response to your interpretive request regarding an issuance of shares of common stock in the conversion of notes (the "Notes").  You asked whether the conversion would be considered to be at market value for purposes of determining the applicability of the shareholder approval requirements of Listing Rules 5635(c) and 5635(d) (the "Rules").
 
You advised us as follows.  The Notes were issued several years ago and are convertible, at the option of the holder, into a fixed number of shares of common stock for each $1,000 principal amount.  This conversion ratio would result in conversion at a premium to the common stock's closing market value at the time the company agreed to issue the Notes (the "Market Value").  The company's book value was less than the Market Value at that time.
 
In the proposed transaction, the company would offer all holders of the Notes the opportunity to receive for each $1,000 dollars in principal ("Par Value"): (i) the same number of shares into which the Notes are already convertible, plus (ii) a cash payment per Note equal to any accrued but unpaid interest (the "Accrued Interest"), plus (iii) an additional payment in cash designed to induce conversion (the "Additional Payment").   
 
Following our review of the information you provided, we have determined that, for the purposes of the Rules, the price at which the shares would be issued (the "New Conversion Price") would be calculated as (i) the Par Value minus the Additional Payment divided by (ii) the number of shares per Note issued to the tendering holder.  The Accrued Interest, also payable to the holder, would not be included in the calculation because, according to the information you provided, a holder is currently able to collect interest accrued on the Notes (normally payable semiannually) by effecting the conversion immediately after receiving the payment.  Under the Rules, shareholder approval would not be required for the proposed transaction if the New Conversion Price equals or is greater than the Market Value.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
Publication Date*: 7/31/2012 Identification Number: 1040 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-9
Identification Number
699
This is in response to your correspondence regarding whether an amendment to the Plan (the “Amendment”) would require shareholder approval under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”).
 
The company has two classes of common stock, one of which is voting (the “Voting Stock”) and the other is non-voting.  Both classes of common stock are listed on NASDAQ.
 
The Plan, which was approved by the company’s shareholders, provides for the issuance of equity awards to key employees, officers, consultants and advisors of the company.  While the Plan allows the issuance of both classes of the company’s common stock, awards with respect to the Voting Stock can be made only to the Former Recipient, who at the time the shareholders approved the Plan, was the company’s chairman of the board, president, chief executive officer (“CEO”), and the holder of a majority of the outstanding Voting Stock (the “Majority Stake”).  The Plan identifies the Former Recipient by name.
 
The Former Recipient has sold the Majority Stake to the Proposed Recipient and has stepped down from all positions with the company.  The Proposed Recipient is now the chairman of the board and CEO.
 
Pursuant to the Amendment, the name of the Proposed Recipient would replace the name of the Former Recipient in the Plan, such that the Proposed Recipient could receive awards with respect to the Voting Stock and the Former Recipient no longer could.
 
Following our review of the information you provided, we have determined that the Amendment would not be a material amendment for purposes of the Rule, and, therefore, would not require shareholder approval under the Rule.  The Amendment would not result in a material expansion in the class of participants because the Proposed Recipient, as CEO and holder of the Majority Stake, would have the same standing as that previously held by the Former Recipient. In addition, the Amendment would not result in an increase in the number of shares to be issued under the Plan, an increase in the benefits to participants, or an expansion in the types of awards available, which are given as examples of material amendments in IM-5635-1.   Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the Rule to the Amendment other than as addressed herein.
 
Publication Date*: 7/31/2012 Identification Number: 699 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-8  
Identification Number
698
This is in response to your correspondence regarding whether certain issuances of the company’s common stock to employees of the Target (the “Employee Issuances”) would require shareholder approval as equity compensation under Listing Rule 5635(c) or IM-5635-1 (collectively, the “Rule”).
 
The company plans to acquire the Target for a combination of cash and shares of common stock.  Specific provisions of the Target’s charter and its loan agreements set forth how consideration must be allocated between the Target’s shareholders and employees in the event the Target is acquired.  Specifically, these provisions require that upon the closing of an acquisition, the Target must distribute a portion of the proceeds: (i) to the Target’s Chief Executive Officer in exchange for shares issued to him upon the establishment of the Target; (ii) to the holders of the Target’s outstanding vested employee stock options; and (iii) to officers, directors, employees, and consultants of the Target in connection with the repayment of certain of Target’s bridge loans.  As a result of the acquisition, all of the Target’s employee stock options would be cancelled, and any shares previously issued upon exercise of options would be transferred to the company for no additional consideration.
 
You stated that these provisions were adopted approximately two years ago and were not adopted in contemplation of the Acquisition.  You also stated that the number of shares of common stock that would be issued in the acquisition, including the Employee Issuances, would be less than 20% of the Company’s pre-transaction outstanding shares.
 
Following our review of the information you provided, we have determined that the Employee Issuances would not require the approval of the company’s shareholders as equity compensation under the Rule because the issuances would be in satisfaction of arrangements which were entered into between the Target and its employees and which did not involve the company.  Our determination is based on the provision of IM-5635-1 which states that shareholder approval is not required under Listing Rule 5635(c) to convert, replace, or adjust outstanding options or other equity compensation awards to reflect an acquisition.  In addition, we note that the charter provisions requiring the Employee Issuances were not adopted in contemplation of the Acquisition.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
Publication Date*: 7/31/2012 Identification Number: 698 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-6  
Identification Number
696
This is in response to your correspondence regarding whether an issuance of securities in a potential private placement (the “Private Placement”) would be aggregated with an issuance of securities in a recently completed acquisition (the “Acquisition”) for determining whether shareholder approval would be required under Listing Rule 5635(a)(1) (the “Rule”).
 
You stated that approximately nine months ago, the company and the Target began preliminary discussions, which ultimately led to an agreement pursuant to which the company would acquire the Target for cash and shares of the company’s common stock.  The companies publicly announced the signing of a definitive merger agreement for the Acquisition approximately four months ago, and the Acquisition was completed approximately one month ago.
 
You stated that approximately six weeks ago, the company began to consider the possibility of the Private Placement to raise funds for general corporate purposes, including working capital and strategic transactions.  The company wishes to complete the Private Placement to strengthen its capital structure, in light of extended payment terms the company had granted to certain customers resulting in lower than expected cash levels, and to fund a major new product initiative. Additionally, the company received advice from its financial advisor that it likely could pursue the Private Placement on favorable terms.  The company’s board of directors (the “Board”) authorized the company to pursue the Private Placement approximately two weeks following the completion of the Acquisition.  The company has not yet entered into an agreement for the Private Placement.
 
You stated that the Acquisition did not cause the company to need the funds that would be raised in the Private Placement and that the purpose of the Private Placement would not be to fund either the acquisition of, or the ongoing operations of, the Target.  The Private Placement was not a condition of, and there was no financing condition to, the closing of the Acquisition.  Neither the Acquisition nor the Private Placement is contingent on the other.  The company did not even consider the possibility of the Private Placement until more than two months after the Board approved the Acquisition agreement.
 
Following our review of the information you provided, we have determined that securities issued in the Private Placement would not be deemed to be in connection with the Acquisition for purposes of the Rule.  We have reached the conclusion because the proceeds from the Private Placement would be used for purposes unrelated to the Acquisition and because neither the Private Placement nor the Acquisition would be contingent on the other. Accordingly, the issuances in the Private Placement and the Acquisition would not be aggregated for determining whether shareholder approval would be required under the Rule.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
 
Publication Date*: 7/31/2012 Identification Number: 696 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-5  
Identification Number
695
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) (the “Rule”) with respect to a proposed issuance of convertible notes and convertible preferred stock (collectively, the “Securities”) in connection with the company’s financial restructuring (the “Restructuring”). Approximately 18 months ago, we granted an exception (the “Prior Exception”) under the Rule in connection with an issuance of common and preferred stock in exchange for outstanding debt (the “Debt Exchange”). For the reasons described below, we are unable to grant the currently requested exception.
 
The company provides freight transportation services. You stated that beginning approximately three years ago, the economic environment has had a substantial detrimental effect on the industry and the company, negatively impacting customers’ needs to ship and, therefore, negatively impacting the volume of freight the company ships and the prices it receives for its services. Although market conditions rebounded last year, the company believes it will continue to face operational issues stemming from excess capacity in the industry. It continues to experience declining revenue, operating losses, and net losses.
 
You stated that the company retains substantial indebtedness under additional notes it issued to retire debt securities still outstanding after the Debt Exchange, under its credit facilities, and under an agreement with its employees’ labor union (the “Union”) relating to its pension fund contributions. Although the company has entered into deferral agreements with its lenders, creditors, and the Union, you stated that a failure to complete the Restructuring within approximately six weeks could trigger events leading to the company’s liquidation. Upon such failure, you expect that the amounts deferred would become immediately payable, the creditors would declare an event of default causing cross-defaults under other agreements, and the Union would revoke previous wage and benefit concessions. You stated that as a result, the company would most likely need to seek protection under the United States Bankruptcy Code. The company expects that if it were to complete the Restructuring within the six-week timeframe, it would have sufficient liquidity to continue as a going concern and would not have to file for bankruptcy protection.
 
In the Restructuring, the company would issue the Securities at a discount to market value to its creditors, lenders, and the Union under agreements which would release the company from its obligations under existing credit agreements and satisfy the demands of its lenders and the Union. Following the Restructuring, the holders of the Securities would own approximately 97.5% of the company’s common stock on an as-converted basis, with the company’s existing shareholders owning the remaining approximately 2.5%. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance could result in a change of control and pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
 
Based on our review of the circumstances described in your correspondence, we have determined not to grant the requested exception. Under Listing Rule 5635(f), the financial viability exception may be available “when a delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise” and certain other specified criteria are satisfied. While the company may have presented a compelling case as to its financial distress, we are not convinced that the company did not have the time to secure the required stockholder approval. In that regard, according to its filings made with the Securities and Exchange Commission, at least nine months ago the company already expected that it would have to restructure its financial obligations. Moreover, agreements in principle relating to the Restructuring were reached more than four months ago and definitive agreements were reached approximately two months ago. NASDAQ Staff has had discussions with the company during this period about the company’s need for a transaction like the Restructuring and about its noncompliance with certain listing requirements.
 
In addition, we are troubled that this is the company’s second request for an exception under the Rule in a short period. While the Rule does not preclude such a request, it is now clear that the transactions completed pursuant to the Prior Exception did not restore the company’s financial viability, and it remains unclear whether the Restructuring would restore its viability. Our concerns are exacerbated by the massive dilution of current shareholders’ interest, which would occur as a result of the Restructuring. The financial viability exception is meant to preserve some value for a company’s existing shareholders when the alternative is the likely failure of the company. However, in this case the existing shareholders’ interest would be essentially eliminated following the Restructuring.
 
 
 
Publication Date*: 7/31/2012 Identification Number: 695 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-4  
Identification Number
694
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635(c) (the “Rule”) to awards under the Plan (the “Awards”).  Specifically, you asked whether the company could make Awards prior to obtaining shareholder approval.
 
The company conducts all of its operations through a limited liability company which holds substantially all of the company’s assets (the “LLC”).  The company owns substantially all of membership units of the LLC (the “LLC Units”).
 
The Awards would be made to members of the company’s senior management to provide them with the ability to receive cash or, following shareholder approval, equity based on the company’s level of return to shareholders over a specified period of time.  After the Awards vest, they could be redeemed for cash from the company at a price based on the price of the company’s common stock.  Following approval by the company’s shareholders, the Awards could become redeemable for LLC Units, instead of cash.  In addition, after the passage of a specified period of time, and only following approval by the company’s shareholders, the Awards, or the LLC Units into which they may be have been converted, would also be redeemable for shares of the company’s common stock on a one-for-one basis.
 
Following our review of the information you submitted, we have determined that the company may grant the Awards prior to seeking shareholder approval because no shares of the company’s common stock could be issued until after shareholder approval has been obtained.  This determination is based upon your representation that unless such approval has been obtained: (i) the Awards could not be convertible into LLC Units, and (ii) no shares of the company’s common stock could be issued under the Plan.
 
 
Publication Date*: 7/31/2012 Identification Number: 694 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-2    
Identification Number
692
This is in response to your correspondence asking whether securities to be issued in a proposed private placement (the “Proposed Transaction”) would be aggregated with certain prior security issuances (the “Prior Transactions”) in determining whether shareholder approval would be required of the Proposed Transaction under Listing Rule 5635.
 
The Prior Transactions related to the company’s acquisition of Target, which closed approximately two weeks ago.  In the Prior Transactions, the company issued securities directly to Target’s shareholders as consideration for the acquisition and, additionally, to other investors in a private placement, the closing of which was contingent on the closing of the acquisition. The proceeds from the private placement were used primarily to pay down Target’s debt, which was assumed by the company in the acquisition. In the aggregate, the number of shares of common stock issuable in the Prior Transactions is less than 20% of the company’s pre-transaction outstanding shares of common stock. The agreements relating to the acquisition and the private placement were entered into approximately one month ago and three weeks ago, respectively.
 
While the company did not contemplate another transaction when it completed the Prior Transactions, approximately one week later the company received unsolicited correspondence from the Investor expressing interest in investing in the company. The ensuing discussions resulted in the Proposed Transaction pursuant to which the company would issue to the Investor less than 20% of its pre-transaction outstanding shares of common stock at a price less than market value. The proceeds from the Proposed Transaction would be used for working capital and to fund the company’s growth strategy.  The Investor did not participate in the Prior Transactions. The company expects that the Proposed Transaction would close approximately four to six weeks after the closing of the Prior Transactions.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not be aggregated with the Prior Transactions for purposes of determining whether shareholder approval would be required under Listing Rule 5635. We have reached this conclusion because: (i) there is no commonality of investors between the transactions; (ii) the transactions are not contingent on each other; (iii) the funds from the transactions will be used for different purposes; (iv) the Proposed Transaction was not contemplated at the time of the closing of the Prior Transactions; and (v) the opportunity for the Proposed Transaction arose unexpectedly after the closing of the Prior Transaction and was at the initiation of the Investor, not the company. Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
 
Publication Date*: 7/31/2012 Identification Number: 692 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-1
Identification Number
691
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635(c) and IM-5635-1 (collectively, the "Shareholder Approval Rule") and the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the "Voting Rights Rule") to certain actions which the company would take in connection with a reorganization (the "Reorganization").
 
Currently, the company's authorized capital stock consists of common stock (the "Common Stock"), which is listed on NASDAQ, and preferred stock (the "Preferred Stock"), which is closely-held and not publicly traded. The Preferred Stock carries higher voting power relative to the Common Stock including the right to elect a majority of the members of the board of directors. This dual structure was implemented more than twenty years ago and pre-dates the company's listing on NASDAQ.
 
In the Reorganization, the company would create a holding company structure to replace its current structure. Each outstanding share of the Common Stock and Preferred Stock would be converted into one share of common stock or preferred stock, respectively, of the newly formed holding company, with rights and preferences identical to those prior to the Reorganization. No additional shares of either common stock or preferred stock would be issued in connection with the Reorganization. As such, following the Reorganization, holders of the Common Stock and Preferred Stock would hold shares in the same amounts and percentages, and would have the same voting power, as before the Reorganization. You asked whether this dual class structure of the holding company would comply with the Voting Rights Rule.
 
Additionally, in connection with the Reorganization, the company would adopt certain amendments (the "Amendments") to an equity compensation plan which currently provides for awards of treasury shares of the company's common stock to non-employee members of the company's board of directors (the "Plan"). The awards are typically subject to a vesting period during which the holders of awards have the right to vote and to receive dividends and other cash distributions. The Amendments would: (i) permit the use of authorized but unissued shares as well as treasury shares but would not increase the total number of shares that would be available under the Plan; (ii) authorize the award of restricted stock units ("RSUs"); (iii) permit an equivalent payment to the holders of RSUs when dividends are paid to holders of common stock (the "Dividend Equivalent"); and (iv) provide for certain other changes to more closely conform the Plan's provisions with Section 409A of Internal Revenue Code ("409A").  The 409A changes would: (i) increase the voting power of the company's shares that would need to be required to constitute a change of control from 30% to 50%; (ii) require that changes in the board that might constitute a change in control occur within a twelve-month period rather than over an unspecified period of time; and (iii) implement a delay as required by 409A for the payment of benefits to participants following their separation of service from the board. You asked whether the Amendments would require shareholder approval under the Shareholder Approval Rule.
 
Following our review of the information you provided, we have determined that the holding company's dual class structure would comply with the Voting Rights Rule and that the Amendments would not require shareholder approval under the Shareholder Approval Rule.
 
The dual class structure would comply with the Voting Rights Rule because the issuance of shares in the holding company in exchange for the currently outstanding shares would not disparately reduce or restrict the voting rights of existing shareholders. The voting rights of the holders of both the Common Stock and Preferred Stock would be unaffected by the Recapitalization.
 
The Amendments would not require shareholder approval because they would not be considered material amendments to the Plan under the Shareholder Approval Rule. The change to permit the use of newly issued shares to fund awards under the Plan would not be material because the Plan already permits the issuance of treasury shares.  The Shareholder Approval Rule does not distinguish between treasury shares and newly issued shares largely because an issuance of treasury shares has the same dilutive effect with respect to outstanding shares as an issuance of new shares. The addition of RSUs would not be a material amendment because awards of RSUs would be substantially equivalent to awards of restricted stock, which are already permitted under the Plan. The Dividend Equivalent that would be paid to the holder of RSUs likewise would not be material because the Plan already permits dividends to be paid to holders of restricted stock awards. The 409A changes are not material because they generally restrict, rather than enhance, benefits under the Plan. As such, the Amendments would not result in: (i) an increase of the number of shares that could be issued under the Plan; (ii) a material increase in the benefits to participants; (iii) any expansion of the classes of eligible participants; or (iv) a material expansion in the types of awards available.
 
Publication Date*: 7/31/2012 Identification Number: 691 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-19
Identification Number
718
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).
 
The facts of the matter as they have been submitted to us, and upon which we have based our consideration of this issue, are summarized below.
 
The company, a bank holding company, conducts banking operations through its principal operating subsidiary (the “Bank”). The Bank (and, consequently, the company) has been severely affected by economic conditions and has been particularly exposed to the downturn in the real estate market. As a result, the company experienced substantial losses from continuing operations for its most recently completed fiscal year and in each quarter of the current year. The losses were due largely to impairment charges on certain of the Bank’s mortgage-backed securities and other non-performing assets as well as provisions for credit losses and loan-principal write-downs.
 
Due to its weakened financial status, the Bank has experienced a decline in deposits, and it believes that unless it resolves its difficulties in the near-term, additional depositors may move their funds elsewhere, further weakening the financial condition of both the company and the Bank. In addition, the company has been forced to suspend interest payments on its outstanding trust preferred securities, and it is in default of its credit agreement.
 
The cumulative effect has been to erode the company’s equity account and to materially and adversely affect the Bank’s compliance with applicable banking regulations. Consequently, pursuant to Cease and Desist Orders (the “Orders”), the banking regulators have imposed stringent enforcement actions requiring the company and the Bank to raise additional capital in the near-term or else face additional regulatory actions. Thus far the company has been unable to raise the amount of capital required under the Orders, and as a result, the Bank is not in compliance with certain provisions of the Orders. The company also expects that at the end of the current year, the Bank will fall below the level required to be adequately capitalized, absent the Proposed Transaction. As a result, the Bank would be unable to hold certain deposits (that currently account for over 75% of its total deposits) and would face a liquidity crisis that it believes would lead to the regulator recommending the seizure of the Bank, resulting in the liquidation of the company. The company believes that the Proposed Transaction is the only viable option available to it.
 
You stated that the Proposed Transaction is the result of an extensive process pursuant to which the company’s investment banking advisers conducted over 30 meetings with potential investors. In the Proposed Transaction, the company would issue shares of common stock and warrants exercisable for additional shares. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) as the issuance could result in a change of control and pursuant to Listing Rule 5635(d) as the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
 
The company expects that as a result of the Proposed Transaction, it would satisfy the applicable banking regulatory requirements and would no longer face the prospect of the Bank being seized or the company being liquidated.  In addition, the company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
The company believes that it does not have the time or the ability to withstand the delay in consummating the Proposed Transaction that would result from seeking shareholder approval and that without the requested exception, its ongoing prospects would be dire, leading the company to file for protection under the federal bankruptcy laws and probably resulting in a total loss to the company’s shareholders.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined that NASDAQ should 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 seizure of the Bank and the possible liquidation of the company.  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 and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate 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*: 7/31/2012 Identification Number: 718 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-18  
Identification Number
717
This is in response to your correspondence regarding whether certain proposed awards of shares of common stock (the “Awards”) would require shareholder approval under Listing Rule 5635(c) (the “Rule”).
 
Pursuant to the proposal, three significant shareholders of the company (the “Holders”), including the company’s Chief Executive Officer (the “CEO”), would award shares that they currently hold in the company to certain of the company’s executive officers or other members of senior management (the “Managers”). The company has not adopted a shareholder-approved plan pursuant to which it could issue shares of common stock as equity compensation. As such, the proposal is designed to reward and incentivize the Managers, given their role in producing extraordinary operating results for the company and the resulting benefits accruing to the Holders.
 
You indicated that the Holders would determine which of the Managers would receive Awards, and the number of shares each would receive, and that the Awards would be transferred from the Holders directly to the Managers. You stated that while no new shares would be issued by the company, and the Holders would not receive any payment or reimbursement for the shares being transferred, the Awards would nonetheless be accounted for as if actually made by the company, with a compensation charge taken in the company’s income statement for the fair market value of the stock involved.
 
Following our review of the information you provided, we have determined that the Awards are equity compensation. We reached this conclusion based on the accounting treatment of the proposal, pursuant to which the company will treat the Awards as compensation, and because the purpose of the Awards is stated to be to reward the Managers for their service to the company. We also considered that the CEO, as one of the Holders, will be involved in administering the program and choosing the recipients. While no new shares are being issued by the company, given that this compensation is being paid to the Managers in the form of shares of common stock, we believe it is appropriate to treat the Awards as equity compensation and apply the Rule. Accordingly, the Awards would require shareholder approval under the Rule as equity compensation.
 
 
Publication Date*: 7/31/2012 Identification Number: 717 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-17
Identification Number
716
This is in response to your correspondence regarding whether a proposed amendment to the Plan (the “Amendment”) would require shareholder approval under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”). The Amendment would affect the timing of the availability of awards as determined under the Plan’s formula for automatic annual increases to the number of shares reserved for issuance (the “Evergreen Provision”).
 
The facts of the matter as they have been submitted to us, and upon which we have based our consideration of this issue, are summarized below.
 
The Plan, which was adopted approximately seven years ago and approved by the company’s shareholders, will terminate on the tenth anniversary of its adoption and contains a provision limiting the aggregate number of shares that may be issued (the “Plan Maximum”). Under the Evergreen Provision, but subject to the Plan Maximum, the number of shares reserved for issuance automatically increases annually by the lesser of a specified percentage of the total shares outstanding (“Annual Percentage Limit”) or a specified fixed number of shares (“Annual Share Limit”).   
 
For the first several years of the Plan, the company’s total shares outstanding (“TSO”) was such that the Annual Percentage Limit resulted in fewer shares being reserved for issuance than would have been reserved under the Annual Share Limit. As a result of increases in the TSO over time, however, the Annual Percentage Limit now exceeds the Annual Share Limit to such an extent that in all likelihood, the remaining annual increases will be limited to the Annual Share Limit.
 
Under the Amendment, on the date of the next scheduled annual increase, the company would be permitted to increase the number of shares available for issuance under the Plan by the aggregate number of shares that otherwise would have been added pursuant to the three remaining annual increases under the Annual Share Limit (the “Final Increase”). That is, the Final Increase would equal the Annual Share Limit multiplied by three. After the Final Increase, the Evergreen Provision would no longer be operative and, accordingly, no additional shares would be added to the Plan in subsequent years absent shareholder approval. The Final Increase would not cause the Plan to exceed the Plan Maximum.
 
You have submitted that the company’s purpose in adopting the Amendment would be to gain increased flexibility in structuring its compensation programs in furtherance of its business needs and hiring plans over the coming months. Awards under the Plan would be broad-based and would not be limited to officers and directors.
 
Following our review of the information that you have provided, we have determined that the Amendment is not material for purposes of the Rule and, therefore, would not require shareholder approval under the Rule. The Amendment would affect only the timing of the availability of awards over the Plan’s final three years and would not increase the potential dilutive effect over the life of the Plan. It would not cause the number of shares issuable to exceed the shareholder-approved Plan Maximum. In addition, the Amendment would not result in a material increase in the benefits to participants, a material expansion of the class of eligible participants, or an expansion in the types of awards available.
 
 
Publication Date*: 7/31/2012 Identification Number: 716 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-16  
Identification Number
715
This is in response to your correspondence regarding whether a proposed private placement (the “Proposed Transaction”) would be aggregated with certain prior transactions (the “Prior Transactions”) for purposes of the shareholder approval requirements of Listing Rule 5635(d) (the “Rule”). The Prior Transactions consisted of three private placements that were completed approximately eight months ago (the “First Transaction”), five months ago (the “Second Transaction”), and two months ago (the “Third Transaction”).
 
You stated that there are no contingencies between the Proposed Transaction and any of the Prior Transactions. Although the investors (the “Investors”) in the Proposed Transaction would be the same as those in each of the Prior Transactions, you stated that there has never been an agreement or understanding between the company and the Investors which would have required the company to issue additional securities to the Investors following any of the Prior Transactions. Moreover, at the time of each of the Prior Transactions, the company had no plan to engage in any of the subsequent Prior Transactions or the Proposed Transaction. In each case, the company was approached by a placement agent indicating that the Investors were interested in making an investment in the company. Each of the Prior Transactions was approved separately by the company’s board of directors at the time of the transaction, and the company expects that the Proposed Transaction will be approved by the board at an upcoming meeting.
 
You stated that the purpose of both the First Transaction and Second Transaction was to raise capital for general corporate purposes. Following the Second Transaction and prior to the Third Transaction, the Food and Drug Administration granted the company approval to market a medical device, giving rise to the company’s need for additional capital. Accordingly, the purpose of the Third Transaction was, and the purpose of the Proposed Transaction will be, to provide funding for sales and marketing of the device and continuing product development as well as for general corporate purposes.
 
Each of the Prior Transactions involved the issuance of common stock at a discount to the market value, and the company expects that the Proposed Transaction would likewise result in the issuance of common stock at less than market value. No investor in the Proposed Transaction, either individually or as part of a group, could beneficially own or have the right to acquire more than 19.99% of the company’s outstanding common stock or voting power.
 
Following our review of the information you provided, we agree with the company’s belief that the Proposed Transaction should not be aggregated with the First Transaction for purposes of the Rule.  We have reached this conclusion in view of the amount of time between the transactions, the absence of contingencies, the different uses of proceeds, and the lack of any agreement between the company and the Investors that would have required the company to issue additional securities to the Investors following any of the Prior Transactions.  We are expressing no opinion as to whether either or both of the Second and Third Transactions would be aggregated with the Proposed Transaction.  Further, we are expressing no opinion as to whether any transaction that may be undertaken subsequent to the Proposed Transaction, particularly transactions involving the Investors, would raise potential aggregation issues.
 
Publication Date*: 7/31/2012 Identification Number: 715 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-15
Identification Number
714
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”). In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”).
 
The company, a bank holding company, conducts banking operations through its wholly-owned subsidiary (the “Bank”) and has minimal assets beyond its ownership of the Bank. You stated that over the past three years, the Bank (and, consequently, the company) has been severely affected by economic conditions and has been particularly exposed to the downturn in the real estate market, suffering a high level of delinquencies on its outstanding loans. As a result, the company has experienced significant losses, severely impacting its capital and liquidity positions, and it continues to project significant charge-offs and operating losses due to losses in its loan portfolio. The company has instituted cash conservation measures including deferring interest payments on its outstanding trust preferred securities and suspending dividends on its outstanding preferred stock but, nevertheless, expects to have only “nominal” cash within 45 days unless it is able to raise additional capital. You stated that unless the company can resolve its financial difficulties, the Bank faces the potential for the withdrawal of significant customer deposits which could trigger a “run on the bank.” The company’s financial condition makes it more difficult to retain vendor and other contracts necessary to serve customers and thereby avoid customer flight which would further harm the company.
 
The losses and declining capital position have resulted in stringent enforcement actions by the applicable banking regulators requiring the company and the Bank to raise additional capital in the near-term or else face additional regulatory actions which could include seizure of the Bank and result in the bankruptcy of the company. Over the past several months, the company has attempted to resolve its regulatory problems and improve its capital position through the unsuccessful pursuit of possible financing alternatives. The company abandoned a planned public offering due to market considerations on the advice of its investment banking firm, and it has experienced increasing difficulty attracting outside sources of capital as its financial condition has continued to deteriorate.  
 
In the Proposed Transaction, the company would issue to the Investor shares of common stock, convertible preferred stock, and a warrant exercisable for additional shares during the 18-month period following closing. The securities would be issued, convertible, or exercisable at a discount to the market value of the company’s common stock at the time the Proposed Transaction is consummated. The preferred stock would vote on an as-converted basis.
 
The company expects that as a result of the Proposed Transaction, it would satisfy the applicable banking regulatory requirements and would no longer face the prospect of the Bank being seized or having to file for bankruptcy.  In addition, the company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance would result in a change of control and pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in its effectively having greater voting rights than the common stock.
 
You stated that the delay resulting from securing shareholder approval would seriously jeopardize the financial viability of the company and that the Proposed Transaction is its only available means to avoid the possibility of regulatory consequences that would likely result in the seizure of the Bank and a bankruptcy filing by the company. In addition, you stated that the company has been unable to structure a transaction that complies with the shareholder approval requirements and that the Investor demanded full voting rights, on an as-converted basis, as a condition into entering into the Proposed Transaction.
 
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 on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid the seizure of the Bank and the company’s declaring bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) 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 to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 714 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-14
Identification Number
713
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to the Investor’s proposed voting power (the “Voting Power”) and board representation.
 
In the Proposed Transaction, the company would sell shares of non-convertible preferred stock and warrants to the Investor for cash.  The warrant exercise price would equal the closing bid price of the common stock immediately prior to entering into the definitive agreement for the Proposed Transaction, and the number of shares of common stock that could be issued upon exercise of the warrants would exceed the number of currently outstanding shares.  Shareholder approval would otherwise be required pursuant to Listing Rule 5635(b) because the issuance would result in a change of control.
 
The Voting Power of the Investor would be based on the dollar value of the investment, as a percentage of the company’s overall market value immediately post-transaction, not to exceed 45% of the votes outstanding.  The Investor would also have the right to designate 25% of the company’s board of directors upon closing.  If the Investor’s ownership position were thereafter to decline to below 25%, the number of directors so appointed would decline such that the percentage of the board that it could appoint would remain approximately equal to its declining percentage ownership interest in the company.  Below 7.5% ownership, the Investor’s right to designate a director would be eliminated.
 
You have indicated that the company is in dire financial condition as a result of a variety of factors, including criminal activity by former executives, earnings restatements and the overall decline in commodity prices, and that as a result, the company is over-leveraged and facing imminent default under its subsidiaries’ credit facilities.  For more than a year, the company attempted unsuccessfully to restructure its credit facilities and raise needed capital.  Pursuant to the terms of those credit facilities, only cash on hand in a subsidiary can be used to repay that subsidiary’s debt.   In that regard, you have advised that the credit facility of one subsidiary matures in approximately one week, requiring a lump-sum payment of approximately $20 million.  The subsidiary, however, has less than $2 million in available cash.   The company expects that a default on that credit facility would lead to cross-defaults on other subsidiary credit agreements.
 
Without the Proposed Transaction, the company has no way to cure the impending defaults, or to restructure its debt, so that its only available option would be to file for bankruptcy protection.  However, the company’s lenders have agreed to a restructuring of the outstanding debt, contingent on the closing of the Proposed Transaction, which would reduce the interest rate, and provide the company one year until the next debt-reduction payment would be due.  The company thus expects that the Proposed Transaction would resolve its short-term financial issues and ensure its long-term financial viability.  In addition, the Investor has committed to make additional funds available to the company, as needed, for 18 months following the closing of the Proposed Transaction.  The company expects that, following the closing, it will remain in compliance with all of NASDAQ’s continued listing requirements.
 
You have also advised us that the company was unable to structure the Proposed Transaction such that it would not require shareholder approval.  The company also explored with the Investor the possibility of limiting the issuance of warrants to 19.9% of the pre-transaction outstanding shares and then obtaining shareholder approval for the remainder of the issuance, but the Investor rejected that approach.  In any event, the amount of any correspondingly smaller initial investment would not be adequate either to satisfy the lenders or to sustain the company for the time that it would take to seek shareholder approval.
 
Based on the foregoing, we have determined to grant the requested exception to the shareholder approval rules.  This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid declaring bankruptcy.  This exception is subject to the following conditions:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) 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 to be in the letter as promptly as possible, but no later than ten days before the issuance of the securities.
 
With respect to the Voting Rights Rule, we have determined that no exception is necessary because the Voting Power would be consistent with the Investor’s ownership position in the company, as would the board designation rights.
 
Publication Date*: 7/31/2012 Identification Number: 713 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-12
Identification Number
711
This is in response to your correspondence requesting certain exceptions from NASDAQ Rules. Specifically, the company is requesting an exception from NASDAQ’s shareholder approval requirements under Listing Rule 5635(f), as well as a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), both with respect to a proposed issuance of preferred stock (the “Preferred Stock”). The Acquirer would acquire the Preferred Stock in order to influence the outcome of an upcoming vote of the company’s shareholders to approve the proposed merger of the company with a wholly-owned subsidiary of the Acquirer (the “Acquisition”). The company is a bank holding company, and its primary subsidiary is a commercial bank (the “Bank”).  For the reasons described below, we are unable to grant the requested exceptions.
 
You stated that the financial condition of the Bank (and consequently the company) has severely deteriorated. The company has experienced substantial losses over the past two years and continues to project substantial losses on a going forward basis; the company’s and the Bank’s credit ratings have been downgraded by all rating agencies to “junk” status; the Bank is not in compliance with mandatory banking regulatory capital ratios; and the applicable federal banking regulators have instituted enforcement actions that make it necessary for the company to raise a significant amount of capital within a limited period of time. Failure to raise the necessary capital would result in additional regulatory actions, which could include seizure of the Bank. You indicated that the company’s attempts to raise the required capital have failed and that the company is left with no practical alternative to the Acquisition.
 
Pursuant to the Acquisition agreement, the company’s common shareholders would be able to elect to receive either cash or shares of the Acquirer’s common stock in exchange for their shares of the company’s common stock.  In addition, the United States Department of the Treasury has agreed to sell to the Acquirer, at a discount, company securities that the Treasury previously purchased as part of its Capital Purchase Program. The closing of the Acquisition is subject to the approval of the company’s shareholders, and it is contemplated by the parties that the Acquirer would have the ability to vote its newly acquired shares of Preferred Stock in favor of the Acquisition. The Preferred Stock would represent 39.9% of the voting power of the company. As consideration for the Preferred Stock, the company would receive 1,000 shares of the Acquirer’s common stock, which, based on current prices, has a value of approximately $70,000.
 
You indicated that the Acquirer sought the Preferred Stock as a way to reduce the uncertainty regarding the outcome of the company's shareholder vote on the Acquisition. You suggested that reducing the uncertainty surrounding the vote would also help address regulators’ and depositors’ concerns about the Bank. You advised that if the company does not receive the requested exceptions, the Acquirer would have the contractual right to terminate the agreement with the company and not proceed with the Acquisition.
 
Without the requested exceptions, the issuance of the Preferred Stock would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance would result in a change of control and pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction voting power at a price less than the greater of book or market value. Additionally, without the requested exceptions, the issuance of the Preferred Stock would violate the Voting Rights Rule because the voting power of the Preferred Stock would be disproportionally high relative to the dollar value of the Acquirer’s investment.
 
Based on our review of the circumstances described in your correspondence, we have determined not to grant the requested exceptions. We have made this determination because we do not believe that the proposed issuance of the Preferred Stock meets the specific requirements of Listing Rule 5635(f), which you cited as the basis for your request.
 
Under Listing Rule 5635(f), the financial viability exception may be available “when a delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise” and certain other specified criteria are satisfied. Thus, in a typical situation, relief under this rule is granted in anticipation of a capital-raising transaction when a company might not survive financially if the transaction to provide the needed capital were to be delayed long enough to allow the company to hold a shareholder vote.
 
The facts here are fundamentally different. The company would need to solicit shareholder approval of the Acquisition and would not receive material new capital before such vote is held even if the financial viability exception were to be granted with respect to the Preferred Stock issuance. While the company may have presented a compelling case as to its financial distress, its financial position would not improve until the Acquisition closed because the company would raise only a nominal amount of capital through the issuance of the Preferred Stock.
 
Given these facts, we conclude that “the delay in securing stockholder approval” for the Preferred Stock would not by itself “jeopardize the financial viability of the company. [See Listing Rule 5635(f)]. This is the case because eliminating such a delay with respect to the Preferred Stock issuance would neither accelerate the availability of needed capital nor advance in time the proposed ultimate resolution of the company’s difficulties. At the same time, the understandable desire of the Acquirer to achieve greater certainty with respect to the outcome of the shareholder vote on the Acquisition or to influence such outcome is not an acceptable basis for an exception under Listing Rule 5635(f). Accordingly, it would not be appropriate to grant a financial viability exception on these facts, and issuing the Preferred Stock without obtaining shareholder approval would violate the Rules. For the same reasons, we do not believe it is appropriate to grant an exception to the Voting Rights Rules for the issuance of the Preferred Stock.
 
Publication Date*: 7/31/2012 Identification Number: 711 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-11  
Identification Number
710
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from the shareholder approval requirements and from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) with respect to the proposed transactions described below (the “Proposed Transactions”).
 
According to the information you provided, in the Proposed Transactions the company would: (i) issue shares of common stock and convertible preferred stock to the Investor in a private placement (the “Investment”); and (ii) issue shares of common stock and/or convertible preferred stock to the United States Department of Treasury (the “Treasury”) in exchange for shares of the company’s non-convertible preferred stock currently held by the Treasury (the “Treasury Exchange”).  The issuance price of the common stock and the conversion price of the preferred stock both would be less than the market value of the common stock, and the convertible preferred stock would vote on an as-converted basis. You stated that the Treasury Exchange is a condition precedent to the Investment.
 
You indicated that the company is a bank holding company, and its subsidiary is a nationally chartered bank (the “Bank”). The Bank has been drastically impacted by economic deterioration in the markets its serves and by declining asset quality, and the company, therefore, has experienced significant losses and projects substantial additional losses going forward. As a result, the Bank is not in compliance with mandated regulatory capital ratios, and the applicable federal banking regulators have implemented enforcement actions, which resulted in the company and the Bank entering into agreements with those regulators requiring them to increase their leverage and capital ratios. In order to satisfy these agreements, the company must raise a significant amount of capital within a limited amount of time. The agreements also provide that if the company fails to meet the prescribed capital ratios within the prescribed timeframes, it must submit a plan to sell, merge or liquidate the Bank, which you stated would likely result in a complete loss to the company’s shareholders, or face additional regulatory action having the same effect. Recently, several rating agencies have downgraded the company’s credit ratings and the Bank’s deposit ratings.
 
You stated that over the past several months, the company unsuccessfully attempted to develop other capital raising opportunities or identify a merger partner. Despite these efforts, which resulted in several dozen prospective counterparties entering into confidentiality agreements and conducting due diligence, the company has been unable to generate any firm proposal other than the Proposed Transactions. The company believes that the Proposed Transactions are its only available means of addressing its capital needs within the timeframe available and that the delay in seeking shareholder approval could result in it having to seek bankruptcy protection. In that regard, you stated that there is a very high risk of depositor attrition, and the attendant risk of near-term regulatory action against the company, resulting from the delay and uncertainty associated with obtaining shareholder approval. With respect to voting rights of the preferred stock, the company believes that such rights are consistent with an investor’s reasonable expectations for protection of its investment in the context of this type of transaction.
 
The company expects that as a result of the Proposed Transactions it would satisfy the banking regulatory requirements and would no longer face the prospect of having to liquidate or file for bankruptcy. In addition, the company believes that following the consummation of the Proposed Transactions, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
Without the requested exceptions, the Proposed Transactions would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance would result in a change of control and Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in its effectively having greater voting rights than the common stock.
 
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 on your representations that the company needs to quickly proceed with the Proposed Transactions to avoid additional regulatory actions and the loss of additional deposits, either of which could lead to the company’s declaring bankruptcy or facing regulatory action having the same effect. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) 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 to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 710 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-8  
Identification Number
707
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from the shareholder approval requirements and from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) with respect to the proposed transactions described below (the “Proposed Transactions”).
 
According to the information you provided, in the Proposed Transactions the company would: (i) sell shares of convertible preferred stock to institutional investors; (ii) issue shares of convertible preferred stock to the United States Department of Treasury (the “Treasury”) in exchange for shares of the company’s non-convertible preferred stock currently held by the Treasury; (iii) change the exercise price of an existing warrant held by the Treasury to purchase common stock; and (iv) potentially, pay a fee to the Treasury in shares of the company’s common stock in connection with the exchange. The preferred stock would be convertible into common stock at a conversion price that would be less than the market value of the common stock and would vote on an as-converted basis. You stated that each component of the Proposed Transactions is conditioned upon the substantially concurrent consummation of each of the other components.
 
You indicated that the company, a bank holding company, faces challenges resulting from current and prior year losses, driven by credit quality issues, and is categorized as being under-capitalized under applicable banking regulatory guidelines. You further stated the company has been adversely impacted by severe declines in housing prices and property values in its primary market areas as approximately 75% of its loan portfolio is secured by real estate. The company has experienced increased loan delinquencies and foreclosures and decreased demand for its products and services. The company incurred significant losses over the last five quarters, and it began deferring interest payments on its outstanding trust preferred securities approximately six months ago. The company’s principal banking subsidiary (the “Subsidiary”) is currently in default under an agreement with its primary banking regulators to raise additional capital.  The company has been informed by the Federal Deposit Insurance Corporation (the “FDIC”) that if it does not raise capital in the very short term, the FDIC will place the Subsidiary into receivership. You stated that such receivership would result in the company’s becoming insolvent and filing for bankruptcy.
 
You also stated that for so long as uncertainty as to its financial viability continues, the company risks negative impact on its ability to attract new deposits and faces the possibility of additional deposit outflows. In addition, the company expects to face increasing drains on its liquidity over the next three to six weeks as a result of limitations imposed under agreements with its banking regulators.
 
The company expects that as a result of the Proposed Transactions, it would satisfy the banking regulatory guidelines applicable to both the company and the Subsidiary, and would no longer face the prospect of having to file for bankruptcy. In addition, the company believes that for at least one year following consummation of the Proposed Transactions, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
Without the requested exceptions, the Proposed Transactions would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance could result in a change of control and Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in it effectively having greater voting rights than the common stock.
 
You stated that the company is unable to structure a transaction that would satisfy NASDAQ’s shareholder approval and voting rights requirements, in large part because of the amount of capital it needs to raise to meet the regulatory capital requirements. In addition, you stated that the company believes that the Proposed Transactions may be its final opportunity to raise the capital necessary to successfully address its difficulties and that the delay in seeking shareholder approval could result in it having to seek bankruptcy protection.
 
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 on your representations that the company needs to quickly proceed with the Proposed Transactions to avoid the FDIC placing the Subsidiary into receivership and the company declaring bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) 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 to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
 
 
Publication Date*: 7/31/2012 Identification Number: 707 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-7  
Identification Number
706
This is in response to your correspondence asking whether the shareholder approval that the company previously obtained with respect to the Proposed Transactions is sufficient for purposes of Listing Rules 5635(b) and 5635(d) (the “Rules”).
 
According to the information you provided, the Proposed Transactions would consist of: (i) an exchange transaction with the United States Department of Treasury (the “Treasury”) (the “Treasury Exchange”); and (ii) an exchange offer, which would be made to the holders of the company’s outstanding trust preferred securities (the “Trust Preferred”) (the “Trust Preferred Exchange”). Currently, as a result of its investment in the company under the Troubled Asset Relief Program, the Treasury owns shares of the company’s non-convertible preferred stock (the “Preferred Stock”) and a warrant (the “Warrant”) exercisable for shares of common stock. The Warrant cannot be exercised for 20% or more of the company’s pre-transaction outstanding shares of common stock at a discount, or if such exercise would result in a change of control, unless shareholder approval is first obtained. The Trust Preferred is held by investors other than the Treasury.
 
At a shareholders’ meeting held approximately three months ago, the company received shareholder approval for the Trust Preferred Exchange under Listing Rule 5635(d) and for the issuance of its common stock to the Treasury in exchange for the Preferred Stock under Rules 5635(b) and (d). In the proposal in its proxy statement, the company said that it would complete the Trust Preferred Exchange within three months of the date of shareholder approval.
 
Following the shareholders’ meeting and before consummating the Treasury Exchange, the company and the Treasury continued to negotiate terms. As a result, the final terms of the Treasury Exchange differ in some respects from what was presented to shareholders. Under the final terms, the company would issue shares of convertible preferred stock (the “New Preferred”) to the Treasury, rather than shares of common stock. The conversion price, and the maximum number of shares of common stock that could be issued upon conversion, would be consistent with the terms of the common stock issuance that shareholders approved. In addition, the company would issue a new warrant (the “New Warrant”) to the Treasury in exchange for the Warrant. The New Warrant would contain a provision that would allow its exercise only to the extent such exercise is consistent with NASDAQ’s Rules (the “Exercise Limitation”).
 
The company had been waiting to finalize the Treasury Exchange before commencing the Trust Preferred Exchange. As such, the company will not complete the Trust Preferred Exchange within three months of the receipt of shareholder approval; instead, it now expects to complete the Trust Preferred Exchange within approximately six months of such approval. Otherwise, the Trust Preferred Exchange would be on the same terms as approved by shareholders.
 
Following our review of the information you provided, we have determined that NASDAQ will not require further shareholder approval of the Proposed Transactions under the Rules. We have reached this conclusion because in the Treasury Exchange the issuance of the common stock upon the conversion of the New Preferred would be on the same terms as the common stock issuance approved by the shareholders, including the pricing and the maximum number of shares that could be issued. Because of the Exercise Limitation, the New Warrant could not be exercised if such exercise could result in either a change of control or an issuance of 20% or more of the pre-transaction outstanding shares at a discount without shareholder approval. As such, the requirements of the Rules would be satisfied with respect to the New Warrant.  The Trust Preferred Exchange would not require further shareholder approval because it would be on the terms which were approved by the company’s shareholders. We do not believe that the additional time required in this case to complete the Trust Preferred Exchange requires the company to seek additional shareholder approval under NASDAQ rules.
 
Publication Date*: 7/31/2012 Identification Number: 706 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-4    
Identification Number
703
This is in response to your correspondence regarding whether a proposed equity financing facility (the “Proposed Facility”) would be aggregated with a prior equity financing facility (the “Prior Facility”) for purposes of the shareholder approval requirements of Listing Rule 5635(d) (the “Rule”). The company develops pharmaceutical products.
 
According to the information you provided, the company entered into the agreement with Investor One for the Prior Facility (the “Agreement”) approximately five months ago. Under the Prior Facility, the company, at its discretion, was entitled to sell to Investor One, and Investor One was obligated to buy, shares of the company’s common stock from time to time over an eighteen-month period. The number of shares that could be sold under the Prior Facility was limited to 19.9% of the shares outstanding prior to the execution of the Agreement (the “Share Maximum”), and the aggregate dollar value of the shares issued was limited to a specified amount (the “Dollar Maximum”).
 
You stated that at the time the company entered into the Agreement, it was nearing completion of its Phase 3 trial for a specific product then under development (the “Product”). You stated that the purpose of the Prior Facility was to assure the availability of funding in the event the completion of the Phase 3 trial was delayed. You further stated that the Prior Facility was never intended to be the company’s primary source of funds and that the company planned to undertake an underwritten public common stock offering (the “Public Offering”) to fund further development and potential marketing of the Product following its expected favorable completion of the Phase 3 trial.
 
Approximately three months after entering into the Agreement, the Phase 3 trial was completed, and the results did not meet the company’s expectations. On the day the results were announced, the company’s stock price declined approximately 75%. You stated that as a consequence of the unexpected results, the company’s capital raising needs and planned use of capital changed drastically. Following the announcement of the results, the company was required to provide comfort to its lenders that a “material adverse change,” which would have constituted an event of default under its secured credit facility, had not occurred. To satisfy the lenders, the company completed two draw-downs under the Prior Facility, the more recent of which was approximately six weeks ago. The proceeds from the draw-downs were used to provide working capital to fund the company’s operations while it worked to redefine its strategy following the negative Phase 3 results. Following the draw-downs, the Agreement automatically terminated because the Share Maximum had been reached. As such, no additional funding was available under the Prior Facility even though the aggregate dollar amount of the draw-downs was only approximately 23% of the Dollar Maximum.  The company believes that the Public Offering is no longer a viable alternative given the negative Phase 3 results.
 
The company plans to enter into the Proposed Facility in approximately three weeks with Investor Two, who is not affiliated with Investor One. Similar to the Prior Facility, the Proposed Facility would be available over a specified time period and would be limited to 19.9% of the pre-transaction outstanding shares and to an aggregate dollar amount.  The proceeds of the Proposed Facility would be used to effect the company’s redefined strategy. Specifically, the company will use the proceeds to conduct regulatory and clinical activities designed to target the Product towards a specific group of patients for which the Phase 3 data showed potential benefits and to secure a strategic partner or other transaction to allow it to continue to develop the Product. You stated that the need for funds for these purposes only arose following the negative Phase 3 trials.
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Following our review of the information you provided, we have determined that the Prior Facility and the Proposed Facility will not be aggregated for purposes of the applicability of the Rule.  We have reached this conclusion because: (i) circumstances have changed significantly since the company entered into the Prior Facility resulting in its having to significantly alter its capital raising plans; (ii) the use of proceeds from the Proposed Facility would be different from that of the Prior Facility; (iii) approximately six months will have passed following the execution of the Agreement before the execution of the agreement for the Proposed Facility; (iv) there are no contingencies between the Prior Facility and the Proposed Facility; and (v) there is no commonality of investors between the facilities. NASDAQ is expressing no opinion on whether shareholder approval is required under any other provision of Listing Rule 5635.
 
Publication Date*: 7/31/2012 Identification Number: 703 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-1  
Identification Number
700
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635(a) (the “Rule”) to the company’s proposed issuances of securities in a proposed acquisition (the “Acquisition”) and in a proposed private placement (the “Private Placement”).  Specifically, you asked: (i) whether the Private Placement would be considered to be in connection with the Acquisition under the Rule; (ii) whether certain shares issuable under warrants and options assumed in the Acquisition would be included in determining whether shareholder approval is required under the Rule; and (iii) whether the Shareholder would be considered to have a 5% or greater interest in the company to be acquired or the consideration to be paid under Listing Rule 5635(a)(2).
 
According to the information you provided, in the Acquisition the company, a financial institution, would acquire the outstanding common shares of another financial institution (the “Target”) in exchange for shares of its common stock (the “Exchange Shares”).  The company would replace the Target’s outstanding non-convertible preferred stock, which was issued to the United States Treasury under the Troubled Asset Relief Program, with new shares of the company’s own non-convertible preferred stock, and would replace a related warrant of the Target with a company warrant (the “Warrant”).  Following the Acquisition, the Warrant would be exercisable into the company’s common stock at approximately 1700% of the current stock price.  The company would also replace outstanding options issued by the Target with the company’s own newly issued options, which would have an effective exercise price in excess of 10 to 20 times the company’s current stock price (the “Options”).  The company expects that in the aggregate, the number of Exchange Shares and the shares underlying the Warrant and the Options (the “Acquisition Shares”) would equal less than 5% of its pre-transaction outstanding shares of common stock.
 
The company expects that a condition to the approval of the Acquisition by its banking regulator would be that the company be “well capitalized” following the Acquisition. In order to satisfy this condition, the company would close the Private Placement shortly before closing the Acquisition. Due, in part, to the expected increase in the company’s total assets in connection with the Acquisition, a substantial portion of the proceeds of the Private Placement would be needed to maintain the company’s well-capitalized status following the Acquisition. As such, the Private Placement (or a similar transaction that would result in the company being considered well capitalized following the Acquisition) would be a condition to the completion of the Acquisition. The number of shares that would be issued in the Private Placement, together with the Acquisition Shares, could exceed 20% of the pre-transaction outstanding shares.
 
The Shareholder owns approximately 6% of the outstanding common shares of each of the company and the Target. These shares are predominately held for pension funds, exchange traded funds, and the Shareholder does not have any direct economic interest in these shares. As noted above, the Target has issued preferred stock to the U.S. Treasury (the “Preferred Stock”). Under the terms of the Acquisition, the consideration to be paid by the company would include the Acquisition Shares and the assumption of the Preferred Stock and certain other securities. As such, the Shareholder would receive less than 5% of the consideration that would be paid in the Acquisition and, after giving effect to this preferred stock, the Shareholder has less than a 5% interest in the Target’s equity capital.  The Shareholder would not participate in the Private Placement and would receive the same merger consideration as all other common equity stockholders of the Target.
 
Following our review of the information you provided, we have determined that for purposes of the Rule, the portion of the Private Placement that the company believes will be necessary for it to be considered “well capitalized” following the Acquisition would be considered to be in connection with the Acquisition under the Rule. As such, these shares would be included in determining whether shareholder approval would be required for the Acquisition.  We have reached this conclusion because the completion of the Acquisition would be contingent on that portion of the Private Placement and because that portion of the Private Placement would be issued for the purpose of raising an amount of capital sufficient for the company to maintain its well-capitalized status after merging with the Target.  Shares issued in the Private Placement that the company does not believe would be necessary for the company to be considered well capitalized after giving effect to the Acquisition would not be counted in determining whether shareholder approval is required under the Rule. In addition, we note that the shares of common stock underlying the Warrant and the Options would be included in calculating the number of shares issuable in the Acquisition, even though both the Warrant and the Options are significantly out of the money. Finally, we have determined that Listing Rule 5635(a)(2) does not apply because when giving effect to the Preferred Stock, the Shareholder would have an interest of less than 5% in the Target and in the consideration that would be paid in the Acquisition.
 
Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the Rules in any way other than as addressed herein.This interpretation provides guidance based on the rules in effect at the time of issuance.  
Publication Date*: 7/31/2012 Identification Number: 700 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-27
Identification Number
745
This is in response to your correspondence requesting: (i) an exception under Listing Rule 5635(f) from the shareholder approval requirements, and (ii) an exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue shares of its common stock and convertible preferred stock in exchange for certain of its outstanding debt securities (the “Notes”). The issuance price of the common stock, and the conversion price of the preferred stock, would be less than the market value of the common stock. The preferred stock would vote on an as-converted basis. The holders of the Notes (the “Noteholders”) do not include any officers or directors of the company.
 
The company provides freight transportation services. You stated that the overall economic conditions and credit crisis beginning last year have had a significant detrimental impact on the company’s financial condition and continue to negatively impact its customers’ needs to ship goods which, in turn, causes a reduction in the volume of freight the company ships and in the price it receives for its services. In addition, shipping volumes have declined as a result of customers’ switching to other carriers due to their concerns regarding the company’s financial stability. For each of its most recently completed two fiscal quarters, the company’s operating revenues were down approximately 50% compared to the year-earlier periods. The company continues to experience reduced revenue, operating losses, and negative cash flow, and did not make the most recently due interest payment on the Notes. As a result of its financial condition, the company is restricted from accessing a significant portion of its revolving credit facility (the “Credit Facility”).
 
You stated that the Proposed Transaction is a necessary step for the company to address its near-term liquidity issues and to stabilize its financial condition. Subject to the completion of the Proposed Transaction, the company’s lenders under the Credit Facility have agreed to allow the company to defer the payment of interest and fees otherwise due (the “Deferral”). After the completion of the Proposed Transaction, and subject to compliance with certain borrowing conditions, the lenders will allow the company to again access the blocked portion of the Credit Facility. In addition, the company has obtained significant concessions from its unionized employees who have agreed to wage reductions and to allow the company to defer contributions to pension funds (the “Concessions”). You stated that the Concessions are essential to the company’s remaining a going concern, and the continuation of the Concessions is contingent on the completion of the Proposed Transaction in the near-term. Other measures the company has taken include the consolidation of operations and the sale of excess property and equipment.
 
Without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control; and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common stock because it would vote on an as-converted basis and would convert at a discount to the market value.
 
You stated that the delay in securing shareholder approval would seriously jeopardize the company’s financial viability and that unless the Proposed Transaction is completed within approximately three weeks, the company will likely file for bankruptcy. The company does not have cash sufficient to sustain it for the time that it would take to get shareholder approval of the Proposed Transaction. Moreover, the Noteholders were unwilling to enter into a transaction that would satisfy the shareholder approval and voting rights requirements.
 
The company believes that if it completes the Proposed Transaction, it will have sufficient liquidity to continue in business as a going concern and to continue operations for at least approximately nine months. The company expects that the benefits of the Proposed Transaction, which include the Deferral, the Concessions, and the availability of the Credit Facility, as well as the elimination of future interest payments associated with the Notes, will further improve the company’s liquidity position and overall financial condition. In addition, the company believes that following the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
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 on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. The exception is subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 745 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-26
Identification Number
744
This is in response to your correspondence requesting: (i) an exception under Listing Rule 5635(f) from the shareholder approval requirements, and (ii) an exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue to the Investor: (i) preferred stock convertible into common stock, (ii) warrants exercisable for additional common shares, and (iii) a non-convertible senior secured note. The conversion price of the preferred stock and the exercise price of the warrants would be at a discount to the market value of the common stock. The preferred stock would vote on an as-converted basis. As a condition to closing, the Investor requires that members of the company’s management (the “Insiders”) purchase securities in the Proposed Transaction.
 
You stated that for the past several years the company has experienced net losses and negative working capital as its current liabilities have exceeded its current assets. The company has been able to operate under these conditions due primarily to advance payments made to it by its largest customer (the “Customer”) and to a credit facility (the “Credit Facility”) provided by a bank (the “Bank”).  Both of these arrangements, however, recently changed in ways detrimental to the company.  Approximately four months ago, the Customer notified the company that it was reducing the amount of business it does with the company and, as a result, would require the company to repay a significant amount in advance billings.  The company had not anticipated this business reduction or the repayment requirement because it was unprecedented over the course of a long relationship with the Customer. In addition, approximately six months ago, the Bank suspended the Credit Facility as a result of the company’s failure to comply with various covenants.
 
You stated that as a result of the foregoing factors, the company is currently in severe financial distress and has been required to delay substantial payments past due to its clients and vendors, negatively impacting the company's business and its ability to generate revenues. On several recent occasions, the company was able to meet its payroll obligations only after the receipt of funds from clients within 24 hours of the time such obligations were due. Currently, the amount of the company’s accounts payable exceeds its available cash.
 
Approximately six months ago, the company began considering various financing alternatives and believed that it would be able to raise sufficient funds in a transaction that would not require shareholder approval. As its financial condition continued to deteriorate, however, the company concluded that it would need to raise more funds than would be provided by the transactions then under consideration. As a result, the company entered into negotiations with the Investor leading to the Proposed Transaction. The Investor was unwilling to enter into a transaction that would satisfy the shareholder approval and voting rights requirements.
 
Without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control; (ii) Listing Rule 5635(c) because the issuance at a discount to the Insiders would be considered equity compensation; and (iii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common stock because it would vote on an as-converted basis and would convert at a discount to the market value.
 
You stated that the company has concluded that a delay in closing the Proposed Transaction to secure shareholder approval would seriously jeopardize its financial viability. The company believes that if it does not consummate the Proposed Transaction as soon as possible, its financial position will continue to deteriorate and it will be unable to meet its current obligations, resulting in the company being forced to cease all or a substantial portion of its operations and/or file for bankruptcy.
 
The company believes that if it is able to consummate the Proposed Transaction, its working capital deficit would be significantly reduced immediately and then eliminated within approximately five months as a result of projected earnings. In addition, the company believes that following the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ.
 
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 on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and that the Insiders did not negotiate the terms of the Proposed Transaction and are participating only at the insistence of the lead investor and on the same terms as that investor. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. The exception is subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 744 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-25
Identification Number
743
This is in response to your correspondence regarding whether an issuance of securities in a potential private placement (the “Private Placement”) would be aggregated with an issuance in a pending acquisition (the “Acquisition”) for purposes of determining whether shareholder approval would be required under Listing Rule 5635(a)(1).
 
According to the information you provided, approximately six weeks ago the company entered into the agreement for the Acquisition, pursuant to which it will acquire certain property and equipment from the Target in exchange for approximately $200,000 in cash and shares of the company’s common stock equal to approximately 10% of its pre-transaction outstanding shares and voting power. The company first considered the Acquisition over one year ago and held initial discussions with the Target more than ten months ago. On multiple occasions, the company’s board of directors considered the Acquisition and directed management to continue its efforts to reach an agreement with the Target. The Acquisition is expected to close within approximately two months.
 
The company has not yet determined whether it will proceed with the Private Placement nor has it settled on a precise structure. The Private Placement would be part of the company’s overall corporate financing strategy and the use of the proceeds from the Private Placement would be for general corporate purposes, working capital, and possible future acquisitions. The company anticipates that if it chooses to proceed, the Private Placement would occur within approximately three months. You stated that the company is considering the Private Placement at this time because it believes that the equity markets have strengthened, making this an opportune time to undertake such a financing. If, however, the equity markets were to weaken materially in the near future, or the company's stock price were to decline, you indicated that the company might not proceed with the Private Placement and would not be forced to sell equity on unfavorable terms in order to raise cash to fund its operations.
 
You stated that the Acquisition is not linked to, or conditioned upon, the Private Placement and that, likewise, the Private Placement would not be linked to or conditioned upon the Acquisition. The company is obligated to close the Acquisition without regard to whether it chooses to pursue the Private Placement. The Target will be the sole recipient of the company’s shares in the Acquisition and will not be a purchaser in the Private Placement. The proceeds from the Private Placement would not be used to replenish any cash expended on the Acquisition. The company’s management concluded that the company could complete the Acquisition and still have sufficient cash to meet the anticipated needs of the combined businesses without raising additional capital.
 
Following our review of the information you provided, we have determined that the issuance in the Private Placement would not be deemed to be in connection with the Acquisition. We have reached the conclusion because: (i) the Private Placement would not be conducted to raise funds to be used as consideration for the Acquisition or to fund the company’s cash needs arising from the Acquisition; and (ii) neither the Private Placement nor the Acquisition would be contingent on the other. As such, the issuances in the Private Placement and the Acquisition would not be aggregated for purposes of determining the applicability of Listing Rule 5635(a)(1). Accordingly, the issuance of shares to the Target in the Acquisition will not require shareholder approval under Listing Rule 5635(a)(1) because the issuance will be less than 20% of the pre-transaction outstanding shares and voting power.  Please note that we are not providing any guidance as to whether shareholder approval will be required under Listing Rule 5635 for the Private Placement because the terms of that transaction have not yet been determined.
 
Publication Date*: 7/31/2012 Identification Number: 743 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-24
Identification Number
742
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed transaction (the “Proposed Transaction”). According to the information you provided, in the Proposed Transaction the company would issue shares of its common stock, and warrants exercisable for additional shares, to its primary lender (the “Lender”) as part of a restructuring of the company’s debt held by the Lender (the “Debt”).
 
You stated that the company has recently experienced significant losses and cash flow deficits and that as a result its current financial position is precarious and its operational viability is uncertain. Over the past year, the unfavorable conditions of the global financial and credit markets have negatively impacted the company’s business leading to repeated defaults by the company on certain covenants of the Debt, thereby triggering higher interest rates on the Debt, which the company is no longer able to cover. Additionally, the company is experiencing difficulties with certain of its vendors who are requiring prepayments or significantly reducing credit terms and limits, thereby inhibiting the company’s ability to keep its supply lines open. To conserve cash, the company has reduced its workforce, limited business travel, reduced the payment of fees to members of its board of directors, suspended most of its marketing programs, and refocused its business on productive customers in lieu of under-performing accounts.  You stated that notwithstanding these efforts, without the Proposed Transaction the company will run out of cash in the next few weeks and would face almost certain insolvency and a likely bankruptcy. The company has already retained bankruptcy counsel.
 
Over the past eight months, the company has unsuccessfully sought additional financing utilizing the services of two investment banking firms.  The company believes that such efforts failed because potential investors were unwilling to invest in the company given the defaults on the covenants of the Debt. As a result, the company entered into negotiations with the Lender leading to the Proposed Transaction. In the Proposed Transaction, a portion of the Debt would be converted into equity, and the terms on the remaining debt would be amended to be more favorable to the company, thereby reducing its monthly interest obligations. In addition, as a result of the Proposed Transaction, the company would have increased cash available under a credit line agreement with the Lender.
 
Without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control; and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. You stated that the Lender was unwilling to enter into a transaction that would satisfy the shareholder approval requirements. Moreover, you stated that the company’s current cash is not sufficient to sustain it through the time that it would take to secure shareholder approval.  As a result, you stated that the company has concluded that the Proposed Transaction is the only alternative available in the timeframe necessary to avoid a shut-down of the business.
 
The company expects that the Proposed Transaction will enable it to fund operations at least through the third quarter of its next fiscal year, at which time the company expects to have positive cash flows from its business operations. The company believes that it will meet the requirements for continued listing on NASDAQ upon closing of the Proposed Transaction and over the long term. You stated that the company was prepared to effect a reverse stock split to maintain compliance with the bid price requirement, if necessary.
 
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 rule.  This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
Publication Date*: 7/31/2012 Identification Number: 742 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-23
Identification Number
741
This is in response to your correspondence wherein you asked that the company be granted an exception from the shareholder approval requirements pursuant to Listing Rule 5635(f) for a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue shares of common stock and warrants exercisable for additional shares in exchange for indebtedness (the “Outstanding Debt”) owed by the company to a lender (the “Lender”).  Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control, and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  In connection with the Proposed Transaction, the lender also would provide collateral support for a loan from a financial institution, which would be funded at the closing of the Proposed Transaction (the “Loan”).
 
You stated that the company is unable to meet its current obligations, that its short-term liabilities are approximately four times the amount of its cash and cash equivalents, and that the company would have been forced to have sought bankruptcy protection already if not for the forbearance of certain of its vendors.  You also stated that if the company delays the Proposed Transaction for the time necessary to seek shareholder approval, it would likely be forced to seek bankruptcy protection and that the Proposed Transaction is its last available alternative to secure financing before it must seek such protection.
 
You stated that unfavorable global economic conditions have created liquidity problems for certain of the company’s customers, which has caused them to default on their commitments to the company under long-term contracts.  In addition, the company has been unable to secure additional contracts due to a significant decline in the market price of the company’s primary product.  Finally, you noted that the company was negotiating a transaction whereby it would be acquired, which recently unexpectedly fell through.
 
The company believes the Proposed Transaction would solve its financial troubles.  The company would be relieved of the obligation, which it would be unable to meet, to repay in cash the Outstanding Debt upon maturity.  The Loan would provide sufficient liquidity to pay down past due accounts payable thereby enabling the company to avoid immediate foreclosure and bankruptcy and deliver on the significant contracts it already has in place.  The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement.  In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with that requirement.
 
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.  This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy.  The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must  make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 741 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-22
Identification Number
740
This is in response to your correspondence wherein you asked that the company be granted an exception from the shareholder approval requirements pursuant to Listing Rule 5635(f) for a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue shares of common stock to multiple investors. Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control, and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
 
You stated that without the Proposed Transaction, the company would run nearly out of cash in approximately two weeks and, as a result, would face almost certain insolvency and a likely bankruptcy filing. You stated that the company’s predicament is attributable to several factors including significant losses and cash flow deficits in recent years and the recent conditions of the global financial and credit markets, which have made it difficult for the company to obtain additional loans. The company’s lead secured lender has suspended an expansion of the company’s line of credit but retained its interest in the company collateral.  As a result, the company does not have sufficient unencumbered collateral to enter into an arrangement with any replacement lender. You further stated that the sharp decline in discretionary consumer spending has also contributed to the company’s financial struggles and has negatively impacted its financial performance. As a result of its difficulties, the company has become significantly behind in its payments to its vendors. Without the Proposed Transaction, the company may be forced to default on the principal and interest due to its primary lender in approximately two weeks, and such a default would trigger a cross-default on the company’s obligations to another lender. To conserve cash, the company has consolidated operations and reduced its workforce.
 
The company believes the Proposed Transaction would raise capital sufficient to provide for its financial rescue, funding its ongoing operations and enabling it to meet its obligations to its lenders and vendors. The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with that requirement. You stated that the investors in the Proposed Transaction were not willing to enter into a transaction that would comply with the shareholder approval requirements and that the company unsuccessfully attempted to obtain alternative sources of funding.
 
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. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid insolvency. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must  make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 740 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-20
Identification Number
738
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to the issuance of shares of common stock in exchange for shares of currently outstanding preferred stock (the “Exchange”). Specifically, you asked about the applicability of Listing Rule 5635(c) if officers and directors (the “Officers and Directors”) of the company participate in the Exchange.
 
According to the information you provided, the company issued preferred stock in private placements approximately fifteen months ago to multiple investors including the Officers and Directors in a shareholder-approved transaction.  The preferred stock is currently convertible into common stock at the option of the holders. The company is planning the Exchange in response to the adverse economic and market conditions over the past several months that have resulted in the need for financial institutions, such as the company, to raise equity capital to maintain financial strength and meet regulatory requirements. In the Exchange, the company would replace the preferred stock with common stock.
 
Under the terms of the Exchange, the number of shares of common stock that would be issued for each share of preferred stock is the sum of: (i) the number of shares into which it is currently convertible (the “Conversion Shares”), and (ii) the number of shares equal in value to 75% of the value of future dividends that that would be payable if the preferred stock were to remain outstanding (the “Dividend Shares”). The aggregate number of shares that could be issued in the Exchange, including both the Conversion Shares and the Dividend Shares, would be less than 20% of the pre-transaction outstanding shares of common stock.
 
Pursuant to Listing Rule 5635(c), shareholder approval would be required if the Exchange could result in common stock being issued to the Officers and Directors at a price less than market value at the time of the Exchange (the “Market Value”). For this purpose, the Market Value would be the last closing consolidated bid price of the common stock prior to the closing of the Exchange. The price at which the common stock would be issued in the Exchange would be determined by dividing: (i) the amount which the company received for each share of preferred stock and at which the company reflects each preferred share on its balance sheet, by (ii) the aggregate number of Conversion Shares and Dividend Shares issued in the Exchange for each preferred share (such quotient being the “Offer Price”). Based on the information you submitted, the issuance to the officers and directors in the Exchange would not require shareholder approval under the Rule if the Offer Price, calculated as described above, is not less than the Market Value. Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
Publication Date*: 7/31/2012 Identification Number: 738 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-18
Identification Number
736
This is in response to your correspondence regarding the applicability of the shareholder approval requirement of Listing Rule 5635(d) (the “Shareholder Approval Rule”) and the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) to a proposed issuance of securities (the “Proposed Offering”).
 
According to the information you provided, in the Proposed Offering the company would offer shares of a newly designated senior common stock (the “Senior Common”) at a fixed price (the “Offering Price’) in a continuous private placement on a best-effort basis over a twenty-four month period (the “Offering Period”). The company expects that during the Offering Period, it will accept subscription agreements which would become effective twice monthly. In addition, each holder of the Senior Common would be entitled to reinvest distributions that would be paid on the Senior Common for additional shares of Senior  Common at the Offering Price. Except where required by law, the Senior Common would be non-voting.
 
The Senior Common would be convertible into shares of the company’s class of common stock which is listed on NASDAQ (the “Common Stock”). The number of shares of Common Stock that could be issued exceeds 20% of the pre-offering outstanding shares. The conversion price would be equal to the greater of the highest book or market value per share during the Offering Period. The book value would be that value attributable to the company’s common stockholders’ equity and would not give effect to the company’s outstanding preferred stock.
 
Following our review of the information you provided, we have determined that the Proposed Offering, structured as you described, would satisfy the Shareholder Approval Rule and the Voting Rights Rule. Although the potential issuance exceeds 20% of the pre-offering outstanding shares, shareholder approval would not be required under the Shareholder Approval Rule because the conversion price could not be less than the greater of book or market value per share. The Proposed Offering would comply with the Voting Rights Rule because the issuance of the Senior Common would not disparately reduce or restrict the voting rights of existing shareholders in that it is non-voting, except as required by law. Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the Listing Rules in any way other than as addressed herein.
 
Publication Date*: 7/31/2012 Identification Number: 736 Mailto Link