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Libraries:
Staff Interpretation Letters
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Filters:
All Years; Shareholder Approval; Change of Control
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Identification Number
1145
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This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed Transaction.
According to the information you provided, the Company will issue convertible notes (the “Notes”) to several investors in a private placement (the “Transaction”). Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion could exceed 20% of the pre-transaction total shares outstanding. The Notes contain anti-dilution provisions; however, the effect of any anti-dilution adjustments will be limited such that the conversion price could never be reduced to below the greater of market and book value as of the date of the agreement to issue the Notes.
You have represented that Shareholder A holds an approximately 15% interest in the Company and is currently the Company’s largest shareholder. However, you have represented that Shareholder A is a registered investment adviser, and holds its entire 15% interest in the Company in this capacity. In this role, Shareholder A has the power and discretion to buy and sell, but not vote, the securities held in the accounts it manages. Accordingly, you have represented that in regard to its entire 15% interest in the Company, Shareholder A has no sole voting power, no shared voting power and no sole dispositive power, and it is deemed to be a beneficial owner solely due to the shared dispositive power over the shares held in the managed accounts.
You have represented that Shareholder A is also a registered broker-dealer. In this role, Shareholder A acts as custodian for many individual investment accounts, with shares within such investment accounts held in “street” name. The holders of these accounts make their own decisions regarding voting and disposition of the securities in their accounts. Shareholder A may vote such shares in limited circumstances described in SEC Rule 13d-3(d)(2), but Shareholder A is not deemed to be a beneficial owner of such shares.
You have represented that the Company adopted a stockholder rights plan that, among other things, limits the ability of any person to acquire ownership of 15% or more of the shares of the common stock of the Company by triggering special rights for all other stockholders if this ownership threshold would otherwise be exceeded by such person (the “Plan”). The Plan’s definition of the acquiring person specifically excludes certain shares held by Shareholder A. This exclusion would not apply to any of the shares that might be acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect. Furthermore, this exclusion applies only to shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest. Any single account holder or retail customer of Shareholder A, and any single broker at Shareholder A with respect to such broker’s personal trading account, remains subject to the 15% limitation on beneficial ownership.
You have represented that none of the Shareholder A’s managed and custodial account holders is part of any arrangement or agreement constituting a “group” within the meaning of SEC Rule 13d, and that all of the shares of common stock for which it serves as investment adviser have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
Shareholder A has negotiated the terms of the Notes with the Company. Shareholder A’s managed and custodial accounts will be allowed to acquire at least one half of the total principal amount of the Notes sold by the Company. The note purchase agreement will provide that the Notes will not be convertible into shares of common stock to the extent that after conversion any managed or custodial account would beneficially own more than 9.9% of the outstanding shares of common stock. All purchasers of the Notes, including Shareholder A’s managed and custodial accounts, will sign the note purchase agreement.
Following our review of the information you provided, we have determined that the Transaction does not require shareholder approval under the Rules. Although the potential issuance under the Notes exceeds 20% of the pre-transaction outstanding shares, shareholder approval would not be required under Listing Rule 5635(d) because the conversion price could not be less than the greater of book or market value per share as of the date of the agreement to issue the Notes. Shareholder approval also is not required under Listing Rule 5635(b). We have reached this conclusion because no individual shareholder or a group will have a control position following the Transaction given that (i) none of the purchasers, other than Shareholder A, will beneficially own more than 9.9% of the outstanding shares of common stock due to a beneficial ownership limitation in the note purchase agreement; (ii) Shareholder A is deemed to be a beneficial owner solely due to the shared dispositive power over the shares it holds in its managed accounts as an investment advisor and all such shares have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect; and (iii) the Plan limits any person, including Shareholder A, from acquiring 15% or more of the Company’s outstanding shares, excluding the shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest.
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Publication Date*:
5/11/2016
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Identification Number:
1145
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Identification Number
1130
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This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from Nasdaq’s shareholder approval requirements with respect to the proposed issuance of securities (the “Proposed Transaction”).
You have stated that since its inception, the Company has recorded net losses in every fiscal year but one. Additionally, in the most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You have stated that, without the Proposed Transaction, the Company has only enough cash to fund operations for the next four weeks.
In the Proposed Transaction, the Company will issue units consisting of common stock and convertible preferred stock (the “Preferred Stock”). The purchase price would be at a discount to the current market value of the units (when such value is determined by adding the current market values of the common stock shares issued as part of the units and common stock shares to be issued upon a future conversion of the Preferred Stock shares issued as part of the units).
You stated that investors in the Proposed Transaction would include officers and directors, as well as current and new shareholders of the Company (the “Proposed Investors”). Following completion of the Proposed Transaction and subject to conversion of the Preferred Stock, the Proposed Investors would own greater than 50% of the outstanding common stock shares, with the largest shareholder owning more than 20% of the outstanding common stock shares. The common stock shares issued or issuable as a result of the Proposed Transaction will represent more than 20% of the pre-transaction total number of outstanding common stock shares.
You stated that the Company has pursued multiple alternative financing strategies for over one year, including the potential sale of the Company, and that there are no realistic alternatives to the Proposed Transaction. You stated that if the Proposed Transaction is not completed in the very near term, the Company would be forced to cease operations and terminate most employees, and that the Company’s assets would be liquidated through an assignment for the benefit of creditors or through a bankruptcy process. You stated that there can be no assurance that any liquidation proceeds would remain for distribution to the Company’s shareholders. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
Without the requested exception, shareholder approval may be required pursuant to each of the following rules: Listing Rule 5635(b), because one of the Proposed Investors would own more than 20% of the shares of common stock outstanding upon completion of the Proposed Transaction; Listing Rule 5635(c), because the issuance at a discount of common stock shares to the officers and directors constitutes equity compensation; and Listing Rule 5635(d), because common stock shares issued or issuable as a result of the Proposed Transaction at a price less than the greater of book or market value would represent more than 20% of the pre-transaction number of outstanding common stock shares.
Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid the ceasing of operations. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration to be received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
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Publication Date*:
10/7/2014
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Identification Number:
1130
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Identification Number
1093
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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).
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Publication Date*:
10/23/2013
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Identification Number:
1093
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