This is in response to your correspondence regarding whether a proposed amendment (the “Amendment”) to the Plan would require shareholder approval pursuant to Listing Rules 5635(c) and IM-5635-1 (collectively, the “Rule”). 

According to the information you provided, eligible participants under the Plan include directors, employees, and certain consultants.  Awards available for issuance under the Plan are share units which give the participant the right to receive one common share of the company. The Plan provides for three-year vesting schedule with one-third of the award becoming vested annually upon the anniversary of the grant date, subject to terms and conditions the Company may set in its discretion.

Currently, a provision of the Plan prohibits the acceleration of vesting of awards. Pursuant to the Amendment, the board of directors of the Company (the “Board”) will be granted the authority to determine the vesting provisions of the awards issued pursuant to the Plan and to change such provisions, including the authority to accelerate the vesting provisions.

Following our review of the information you provided, we have determined that the Amendment would not be material under the Rule.  Generally, a change in the vesting terms for an award is not a material amendment, provided that the change does not result in either an extension in the term of the award beyond the maximum allowable term under the plan or in an addition to the aggregate shares available.  The Amendment would not change the Plan in either of the aforementioned ways.  Further, other provisions of the Plan permit the issuance of awards that could be subject to accelerated vesting.  Accordingly, the Rule does not require shareholder approval for the Amendment.

This is in response to your correspondence asking if an amendment to a shareholder approved employee stock purchase plan (the “Plan”) removing the term of the Plan, which is currently scheduled to expire in about six months, would require shareholder approval under Listing Rule 5635(c) and IM-5635-1 (collectively, the “Rule”).

You stated that the Plan is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended (the “Code”), and is available for participation by all employees of the Company and certain subsidiaries, subject to limited exceptions to eligibility as permitted under Section 423 of the Code. The Plan became effective approximately nine and a half years ago, following its approval by the shareholders of the Company as required by Section 423 of the Code. The terms of the Plan provide that it will continue in effect for approximately ten years following effectiveness, unless sooner terminated under the terms of the Plan (the “Term”).

You stated that the Company proposes to remove the Term (the “Amendment) but does not intend to increase the total number of shares authorized and available for purchase under the Plan. You stated that the Amendment will be approved by the independent members of the Company’s board of directors but does not require shareholder approval under the terms of the Plan. You also stated that Section 423 of the Code does not require that the Amendment be approved by the Company’s shareholders. Finally, you stated that the Amendment will not affect any of the other material terms of the Plan. 

Following our review of the information you provided, we have determined that the Amendment would not require shareholder approval under the Rule because following the Amendment the Plan will continue to be a tax qualified, non-discriminatory employee benefit plan that meets the requirements of Section or 423 of the Code and the Amendment will be approved by the Company's a majority of the Company's independent directors as required by Listing Rule 5635(c)(2).

This is in response to your correspondence asking if the Company may satisfy the disclosure requirements set forth in Listing Rule 5635(c)(4) (the “Rule”) related to the exception to the shareholder approval requirement for equity awards issued to certain new employees by issuing a press release disclosing the material terms of the inducement grant prior to the grant’s date.

The Company intends to grant equity awards to employees of certain businesses that the Company is acquiring (the “Acquisitions”), in each case as an inducement material to such employees entering into employment with the Company upon the closing of the Acquisitions (the “Inducement Awards”). The Company’s compensation committee approved the Inducement Awards and the terms of the Inducement Awards will be communicated to employees prior to the closing date of the Acquisitions.

You stated that for administrative reasons, the Inducement Awards will not be granted until approximately three months following the closing date of the Acquisitions. You further stated that such a delay is due to the Company’s preexisting policy of processing equity grants on a quarterly basis rather than on a rolling basis. Pursuant to this policy the Inducement Awards will be issued on the nearest scheduled grant date. You indicated that all material terms of the Inducement Awards will be determined prior the closing date of the Acquisitions and such terms, including the number of shares underlying the Inducement Awards and their vesting schedule, will not be impacted by the delay. There are no material conditions that grantees must satisfy after closing in order to receive an Inducement Award.

You indicated that the Company intends to issue a press release describing the Inducement Awards on the closing date of the Acquisitions, which will be after all material terms are determined and disclosed to the recipients, but before the grant date of the Inducement Awards. You confirmed that, given that the press release will be issued before the Inducement Awards are granted, if there is a subsequent material change with respect to the Inducement Awards, the Company would issue another press release updating the facts of the original press release.

This is in response to your correspondence asking whether the issuance of the Preferred Stock in a proposed transaction (the “Transaction”) would comply with the shareholder approval requirements in Listing Rule 5635 and IM-5635-2 (together, the “Rules”) as well as the Nasdaq policy guidance for Future Price Securities in Listing Rule IM-5635-4. You also asked whether the proposed issuance of the Preferred Stock would comply with the voting rights requirements in Listing Rule 5640 and IM-5640 with respect to the voting power of the Preferred Stock (the “Voting Power”) and the investor’s right to nominate members of the company’s board of directors and, in certain circumstances, to have a non-member board observer (the “Board Rights”).

In the Transaction the Company has agreed to issue and sell shares of the newly designated Preferred Stock (the “Preferred Stock”) at a price per share, paid in cash, equal to the stated value. The Transaction is subject to certain closing conditions and you stated that the parties have agreed to use reasonable best efforts to cause the closing conditions to be satisfied as promptly as reasonably practicable. You stated that the Company intends to use the net proceeds for working capital and general corporate purposes and not in connection with the acquisition of the stock or assets of another company. You also stated that the issuance will not be to officers, directors, employees, or consultants of the Company.

The Preferred Stock will become convertible into shares of common stock, subject to a limit of 19.99% of the pre-transaction outstanding shares (the “Issuance Limitation”), at a price that could be less than the Minimum Price, as defined in Listing Rule 5635(d)(1)(A). The conversion price of the Preferred Stock is based on a formula linked to the market price of the common stock at the time of conversion and floats with the market price of the common stock, subject to a floor that is about a 10% discount to the Minimum Price (the “Floor Price”). No holder of the Preferred Stock is entitled to receive shares of common stock upon conversion, if the holder or group would beneficially own, or have the right to acquire, more than 19.99% of the company’s outstanding shares or voting power on a post-conversion basis (the “Ownership Limitation”). You stated that in the case either the Issuance Limitation or the Ownership Limitation is triggered, the excess, if any, of the conversion consideration otherwise payable upon conversion will be paid in cash.

The Preferred Stock will vote together with the common stock as a single class on all matters submitted to a vote of the holders of the common stock and will be entitled to a number of votes on an as-converted basis based on the Minimum Price, subject to the Ownership Limitation.

Pursuant to the Board Rights, the holders of the Preferred Stock would be entitled to appoint one or two directors to the board such that the investor’s board representation is consistent with its percentage ownership interest in the company. In that regard, you stated that the investor will be entitled to nominate the directors only if the quotient of the number of votes the Preferred Stock is entitled to as a percentage of the votes attributable to the total shares outstanding is greater than the quotient of the number of nominated directors as a percentage of the total number of directors on the Company’s board. If the investor is not entitled to nominate a director, it will be able to appoint a non-member board observer (the “Observer”) so long as it continues to own at least 30% of the common stock issuable or issued upon conversion of Preferred Stock originally issued to it in the Transaction. The Observer is entitled to attend board committee meetings, but you have confirmed that the members of each Nasdaq mandated committee, such as audit, nomination, and compensation committees have the absolute and sole discretion to exclude the Observer from the proceedings of the respective committee.

Following our review of the information you provided, we have determined that the Transaction, structured as you described, would not require shareholder approval under the Rules. Given the Ownership Limitation, shareholder approval is not required under Listing Rule 5635(b) because the issuance of the Preferred Stock could not result in a change control.  Given the Issuance Limitation, shareholder approval is not required under Listing Rule 5635(d) because the number of shares that could be issued is less than 20% of the pre-transaction outstanding shares and the Voting Power is not at a discount to the Minimum Price. Shareholder approval is not required under Listing Rule 5635(a) because the issuance is not in connection with the acquisition of stock or assets of another company. Shareholder approval is not required under Listing Rule 5635(c) because the issuance is not to officers, directors, employees or consultants of the Company. Although the Preferred Stock is a Future Priced Security under Listing Rule IM-5635-4, the issuance of the Preferred Stock does not result in a failure to comply with Nasdaq’s listing requirements. In that regard, we note that the Floor Price limits the maximum discount to the Minimum Price of the common stock issuable upon conversion at about 10%. We have also determined that the Voting Power and the Board Representation would satisfy the voting rights requirements because: (i) the Preferred Stock would not have higher voting power than as if converted at the Minimum Price immediately preceding the company entering into the binding agreement to issue the Preferred Stock, and (ii) the Board Rights will be consistent with the ownership interest attributable to the holder of the Preferred Stock and would decline proportionally if the ownership interest were to decline.

• pursuant to Listing Rule 5635(b) because the Proposed Transaction would result in a change of control of the Company due to the fact that the Investor will own greater than 20% of the common stock and voting power outstanding upon completion of the Proposed Transaction; and
• pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price that may be less than the greater of book or market value.

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.

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.

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.

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

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

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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. 

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

Following our review of the information you provided, we have determined that the Exchange Transaction does not require shareholder approval under the Rule and complies with the Voting Rights Requirements. Listing Rule 5635(a) requires shareholder approval in certain circumstances "prior to the issuance of securities in connection with the acquisition of the stock or assets of another company"; Listing Rule 5635(b) requires shareholder approval "prior to the issuance of securities when the issuance or potential issuance would result in a change of control of the company"; Listing Rule 5635(c) requires shareholder approval "prior to the issuance of securities when a stock option or purchase plan is to be established or materially amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers, directors, employees, or consultants"; and Listing Rule 5635(d) requires shareholder approval "prior to the issuance of securities" in connection with certain transactions at a price below the greater of book or market value. Each of these rules predicates the need for shareholder approval on an issuance of securities by the company. In the Exchange Transaction, while the Company is providing New Preferred Stock (convertible into shares of Common Stock) in exchange for Preferred Stock, the aggregate number of shares of Voting common stock and Non-Voting common stock issuable upon conversion is the same for the Preferred Stock and the New Preferred Stock. Further, the potential adjustment to the Maximum Board Size and the mechanics of adjustments for future common stock dividends do not materially alter the economic and governance rights of the holders of the Preferred Stock and the Common Stock. As such, the Exchange Transaction would not be considered an issuance of the company's securities for purposes of the Listing Rules and such corporate action does not disparately reduce or restrict the voting rights of Common Stock holders.

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.

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

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

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

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

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

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

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

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

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

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

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

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