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Frequently Asked Questions
Staff Interpretation Letter 2016-3
Identification Number
1145
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed Transaction.
 
According to the information you provided, the Company will issue convertible notes (the “Notes”) to several investors in a private placement (the “Transaction”). Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion could exceed 20% of the pre-transaction total shares outstanding. The Notes contain anti-dilution provisions; however, the effect of any anti-dilution adjustments will be limited such that the conversion price could never be reduced to below the greater of market and book value as of the date of the agreement to issue the Notes.
 
You have represented that Shareholder A holds an approximately 15% interest in the Company and is currently the Company’s largest shareholder. However, you have represented that Shareholder A is a registered investment adviser, and holds its entire 15% interest in the Company in this capacity. In this role, Shareholder A has the power and discretion to buy and sell, but not vote, the securities held in the accounts it manages. Accordingly, you have represented that in regard to its entire 15% interest in the Company, Shareholder A has no sole voting power, no shared voting power and no sole dispositive power, and it is deemed to be a beneficial owner solely due to the shared dispositive power over the shares held in the managed accounts.
 
You have represented that Shareholder A is also a registered broker-dealer. In this role, Shareholder A acts as custodian for many individual investment accounts, with shares within such investment accounts held in “street” name. The holders of these accounts make their own decisions regarding voting and disposition of the securities in their accounts. Shareholder A may vote such shares in limited circumstances described in SEC Rule 13d-3(d)(2), but Shareholder A is not deemed to be a beneficial owner of such shares.
 
You have represented that the Company adopted a stockholder rights plan that, among other things, limits the ability of any person to acquire ownership of 15% or more of the shares of the common stock of the Company by triggering special rights for all other stockholders if this ownership threshold would otherwise be exceeded by such person (the “Plan”). The Plan’s definition of the acquiring person specifically excludes certain shares held by Shareholder A. This exclusion would not apply to any of the shares that might be acquired or held with a purpose or effect of changing or influencing control of the Company, or in connection with or as a participant in any transaction having that purpose or effect. Furthermore, this exclusion applies only to shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest. Any single account holder or retail customer of Shareholder A, and any single broker at Shareholder A with respect to such broker’s personal trading account, remains subject to the 15% limitation on beneficial ownership.
 
You have represented that none of the Shareholder A’s managed and custodial account holders is part of any arrangement or agreement constituting a “group” within the meaning of SEC Rule 13d, and that all of the shares of common stock for which it serves as investment adviser have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect.
 
Shareholder A has negotiated the terms of the Notes with the Company. Shareholder A’s managed and custodial accounts will be allowed to acquire at least one half of the total principal amount of the Notes sold by the Company. The note purchase agreement will provide that the Notes will not be convertible into shares of common stock to the extent that after conversion any managed or custodial account would beneficially own more than 9.9% of the outstanding shares of common stock. All purchasers of the Notes, including Shareholder A’s managed and custodial accounts, will sign the note purchase agreement.
 
Following our review of the information you provided, we have determined that the Transaction does not require shareholder approval under the Rules. Although the potential issuance under the Notes exceeds 20% of the pre-transaction outstanding shares, shareholder approval would not be required under Listing Rule 5635(d) because the conversion price could not be less than the greater of book or market value per share as of the date of the agreement to issue the Notes. Shareholder approval also is not required under Listing Rule 5635(b). We have reached this conclusion because no individual shareholder or a group will have a control position following the Transaction given that (i) none of the purchasers, other than Shareholder A, will beneficially own more than 9.9% of the outstanding shares of common stock due to a beneficial ownership limitation in the note purchase agreement; (ii) Shareholder A is deemed to be a beneficial owner solely due to the shared dispositive power over the shares it holds in its managed accounts as an investment advisor and all such shares have been acquired in the ordinary course of business, were not acquired for the purpose of, and do not have the effect of, changing or influencing the control of the Company, and were not acquired in connection with or as a participant in any transaction having such purpose or effect; and (iii) the Plan limits any person, including Shareholder A, from acquiring 15% or more of the Company’s outstanding shares, excluding the shares as to which Shareholder A has only shared dispositive power or limited voting power of the type described in SEC Rule 13d-3(d)(2), and in which it has no direct or indirect pecuniary interest.
 
Publication Date*: 5/11/2016 Identification Number: 1145 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-8
Identification Number
726
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to a proposed issuance of securities in exchange for the Old Notes (the “Exchange”).  You asked about the potential applicability of Listing Rules 5635(b) and 5635(d)(2) (the “Rules”).
 
According to the information you provided, approximately one year ago the company issued the Old Notes, which are convertible into shares of the company’s common stock. In the Exchange, for each $1,000 principal amount of the Old Notes, the company would issue to each participating note holder: (i) a lesser principal amount of new notes (the “New Notes”) convertible into shares of common stock (the “Conversion Shares”); (ii) a specified amount of cash (the “Cash Component”); and (iii) a specified number of shares of common stock or warrants exercisable for such shares (the “New Common Shares”). The Conversion Shares include shares of common stock that could be issued: (i) in connection with interest payments on the New Notes; and (ii) as a result of adjustments to the conversion rate, other than adjustments relating to stock splits and similar events.
 
The total number of shares of common stock that could be issued as a result of the Exchange (the “Aggregate Issuance”), which is calculated as the sum of the Conversion Shares and the New Common Shares, exceeds 20% of the pre-transaction outstanding shares. However, the Aggregate Issuance would be subject to a maximum number of shares (the “Maximum”) such that the price per share (the “Price”), calculated as described below, would not be less than the greater of book or market value prior to entering into the agreement for the Exchange. The Price will be calculated by dividing the face amount of the Old Notes that are exchanged, less the Cash Component paid by the company, by the Aggregate Issuance. In addition, the company will not effectuate the Exchange if it could result in any stockholder owning 20% or more of the company’s outstanding stock or voting power (the “Ownership Maximum”). The holders of the New Notes would not have any board representation, and there would be no additional agreement between the company and the note holders.
 
You stated that following the issuance of the Old Notes, the company’s financial and liquidity positions have been negatively impacted as a result of the worsening global and national economic conditions, giving rise to the need for the company to seek additional sources of financing. The Exchange would decrease the amount of indebtedness, delay for at least two years payments that otherwise would be due under the Old Notes, provide greater operational and financial flexibility, and provide terms under the New Notes that would be more favorable than those under the Old Notes.
 
Following our review of the information you submitted, we have determined that the Exchange would not require shareholder approval under the Rules. Given that the Exchange would not result in any stockholder exceeding the Ownership Maximum, the Exchange would not result in a change of control and, therefore, would not require shareholder approval under Listing Rule 5635(b). In addition, the Exchange is considered to be a new transaction under Listing Rule 5635(d) because of the amount of time that has elapsed since the issuance of the Old Notes and the ensuing significant changes in circumstances giving rise to the company’s need to enter into the Exchange. As such, because the Exchange is structured such that the Price is not less than the greater of book or market value, the Exchange would not require shareholder approval under Listing Rule 5635(d). Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
 
Publication Date*: 7/31/2012 Identification Number: 726 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-5  
Identification Number
750
This is in response to your correspondence regarding a proposed issuance of securities to the Controlling Stockholder (the “Transaction”).  You asked about the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), and 4350(i)(1)(D)(ii) (the “Rules”).  In addition, you asked whether the Controlling Stockholder may vote the shares it currently owns in a shareholder vote to approve the Transaction.
 
According to the information you provided, in the Transaction the company would issue notes (the “Notes”) to the Controlling Stockholder.  The Notes would be convertible into common stock only if the company obtains shareholder approval of the issuance of common stock upon conversion.  The conversion price will be at a discount to the market value of the common stock at the time the company and the Controlling Investor enter into a definitive agreement to issue the Notes.  The number of shares that would be issued upon conversion equals approximately 32% of the pre-transaction outstanding shares.
 
Currently, the Controlling Stockholder owns approximately 73% of the company’s outstanding common stock, which it obtained approximately five years ago in a transaction unrelated to the Transaction.  The Controlling Stockholder has three representatives on the company’s board of directors.  These directors have an indirect pecuniary interest in the holdings of the Controlling Stockholder.
 
Following our review of the information you provided, we have determined that the Transaction complies with the Rules.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the Transaction will not result in a change of control given that the Controlling Stockholder will have a control position both before and after the Transaction.  Shareholder approval is required under Listing Rule 4350(i)(1)(A) because of the equity compensation that would result from a discounted issuance of common stock to directors.  Shareholder approval is also required under Listing Rule 4350(i)(1)(D) because the issuance of common stock would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  The Transaction complies with Listing Rule 4350(i)(1)(A) and Listing Rule 4350(i)(1)(D), however, because no shares of common stock could be issued until after shareholder approval.  Accordingly, the Notes may be issued prior to the receipt of such approval.  For purposes of complying with the Rules, the Controlling Stockholder is not prohibited from voting the shares it currently owns to approve the Transaction because those shares are not part of the Transaction.
 
Publication Date*: 7/31/2012 Identification Number: 750 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-3
Identification Number
748
This is in response to your correspondence regarding the applicability of the shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A) and 4350(i)(1)(B) (the “Rules”).
 
According to the information you submitted, in the Transaction the company would issue shares of common stock and warrants to the Investor at market value.  In the aggregate, the number of shares that would be issued, including those that could be issued upon the exercise of the warrants, would equal approximately 5% of the company’s pre-transaction outstanding shares.  The proceeds of the Transaction would be used to fund a strategic acquisition (the “Acquisition”).  As a result of prior transactions, the Investor currently beneficially owns 19.32% of the company’s outstanding common stock.  The company’s board of directors includes two members who are affiliated with the Investor.
 
The purchase price of the common stock and the exercise price of the warrants will equal the closing bid price immediately prior to entering into the binding agreement, and the purchase price of the warrants will be $0.125 for each share of common stock subject to the warrants.  You stated that the aggregate number of shares to be issued in the Transaction and the Acquisition would be significantly less than 20% of the shares outstanding before the Transaction.
 
Approximately three years ago, the company entered into an agreement to issue common stock and warrants to the Investor in a prior transaction (the “Prior Transaction”).  The company sought shareholder approval of the Prior Transaction for reasons including that the issuance would result in a change of control for purposes of Listing Rule 4350(i)(1)(B).  Following the approval of its shareholders (the “Shareholder Approval”) approximately two and one-half years ago, the company issued the securities in the Prior Transaction resulting in the Investor owning approximately 24.5% of the company’s then outstanding shares of common stock.  Subsequently, the Investor has acquired additional shares on the open market, and the company has issued additional shares to other investors in acquisitions and in a public offering, together resulting in a decrease in the Investor’s beneficial ownership to 19.32% of the shares outstanding.  The company’s second largest shareholder beneficially owns approximately 6.5%.
 
Following our review of the information you provided, we have determined that the Transaction will not require shareholder approval under the Rules.  Although two members of the board are affiliated with the Investor, shareholder approval under Listing Rule 4350(i)(1)(A) is not required because the purchase price is not at a discount to market value.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the company’s shareholders previously approved a change of control with regard to the Investor, and since that time: (i) the Investor’s ownership position has not significantly decreased and only recently has fallen below 20% to its current level of 19.32%; (ii) the decrease was not caused by any action of the Investor but rather was a result of issuances by the company to other investors; and (iii) the Investor has remained the largest shareholder.  You did not ask, and we do not express any opinion on whether the Acquisition would require shareholder approval under NASDAQ rules.
 
 
Publication Date*: 7/31/2012 Identification Number: 748 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-30
Identification Number
806
This is in response to your correspondence regarding the applicability of the shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Private Placement”) and to a tender offer for the company’s common stock.  Specifically, you asked whether Marketplace 4350(i)(1)(B) (the “Rule”) would require shareholder approval of the Private Placement or tender offer.  In addition, you asked whether the company could complete the Private Placement prior to the end of the 15-day notice period for the Listing of Additional Shares referenced in Marketplace Listing Rule 4310(c)(17)(D).
 
According to the information you submitted, in the Private Placement, the company would sell to the Investor shares of its common stock and a debenture convertible into additional shares of common stock. The debenture would be subject to anti-dilution provisions only for any reclassification, recapitalization, merger, stock splits or other similar transactions. The aggregate potential issuance of common stock in the Private Placement would be less than 20% of the pre-transaction outstanding shares, such that the Investor would own no more than approximately 17% of the company’s outstanding common shares as a result of the issuance. The Investor would not have any special right to representation on the company’s board of directors. Currently, the Investor has no ownership position in the company.
 
The company and the Investor have agreed that simultaneously with the completion of the Private Placement, the Investor will commence a tender offer for all of the outstanding shares of the company’s common stock (the “Tender Offer”). The Tender Offer will contain a minimum tender condition of 50.1% of the company’s outstanding shares exclusive of any shares purchased by the Investor in the Private Placement. If the minimum is not met, then no shares would acquired by the Investor in the Tender Offer.
 
Following our review of the information you submitted, we have concluded that given the size of the Investor’s ownership that could result from the Private Placement, the Rule will not require shareholder approval.  Any change of control that occurs will be as a result of the Tender Offer. However, the Rule does not require shareholder approval of the Tender Offer because the Tender Offer is not an issuance of securities by the company.  In reaching this conclusion, we have relied on your representation that for the Tender Offer to be completed, at least 50.1% of the outstanding shares will have to be tendered, without regard to any shares that the Investor purchases in the Private Placement. Lastly, because we have completed our review, the company may close the Private Placement prior to the end of the 15-day notice period referenced in Listing Rule 4310(c)(17) provided that the company submits to NASDAQ all required documentation prior to closing.
 
 
Publication Date*: 7/31/2012 Identification Number: 806 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-25
Identification Number
801
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to proposed issuances of securities by the company (the “Transaction”) to the New Investor and the Prior Investor as described below.  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A),  4350(i)(1)(B), and 4350(i)(1)(D) (the “Rules”).  In addition, you asked whether the company would be required to provide notice of the Transaction to NASDAQ pursuant to Listing Rule 4310(c)(17).
 
According to the information you submitted, approximately two weeks ago the company entered into an agreement with the New Investor pursuant to which the New Investor will purchase newly issued shares of the company’s common stock in up to three separate closings.  As a result of a prior transaction with the Prior Investor, the Prior Investor has the right (the “Purchase Right”), but not the obligation, to purchase a portion of any new equity securities issued by the company to maintain its ownership position.  The Purchase Right would be triggered by each issuance to the New Investor.  The aggregate number of shares that could be issued to the New Investor in the three closings would equal approximately 5% of the pre-transaction total shares outstanding.  If the Prior Investor were to exercise the Purchase Right in full, an additional approximately 3% of the pre-transaction total shares outstanding would be issued to the Prior Investor, resulting in a total issuance equal to approximately 8% of the pre-transaction shares outstanding.
 
Two members of the company’s board of directors are executive officers of the Prior Investor.  The Prior Investor is currently the largest owner of the company’s outstanding common stock and will remain such following the issuances, with an ownership position of approximately 25% of the outstanding shares both before and after the Transaction.
 
Following our review of the information you provided, we have reached the following conclusions.  The issuances to the Prior Investor are subject to the provisions of Listing Rule 4350(i)(1)(A) because directors of the company are officers of the Prior Investor.  As such, for the Transaction to comply with Listing Rule 4350(i)(1)(A), the issuances to the Prior Investor cannot be at a discount to the market value of the common stock, unless shareholder approval is obtained.  That is, such issuances cannot be at a price less than the closing bid price immediately preceding the time the Prior Investor exercises the Purchase Right with respect to any investment by the New Investor.  Rule 4350(i)(1)(B) will not require shareholder approval because, given the ownership positions, the Transaction will not result in a change of control.  Rule 4350(i)(1)(D) is not applicable because the aggregate potential issuance is less than 20% of the pre-transaction outstanding shares.  With respect to Listing Rule 4310(c)(17), because the aggregate issuance in the Transaction will equal  less than 10% of the outstanding shares, notification to NASDAQ would not be required provided that: (i) the issuances to the Prior Investor are not at a price less than market value or (ii) the issuances to the Prior Investor, if at a discount to the market value, are approved by the company’s shareholders.
 
 
Publication Date*: 7/31/2012 Identification Number: 801 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-20  
Identification Number
796
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), and 4350(i)(1)(D) (the “Rules”).
 
According to the information you submitted, in the Transaction the company will issue convertible debentures (“Debentures”) to several investors.  Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion would equal approximately 10% of the pre-transaction total shares outstanding.  The Debentures contain anti-dilution provisions, however, which could reduce the conversion price to below market value and increase the number of shares that would be issued.  The effect of any anti-dilution adjustments will be limited by a provision of the Debentures which will prohibit conversion into more than 19.9% (the “Conversion Limitation”) of the pre-transaction outstanding shares at an average conversion price which is less than the closing bid price immediately prior to entering into the binding agreement (“Market Value”) unless shareholder approval is obtained.  The company’s market value exceeds its book value.
 
The investors will include two members (the “Directors”) of the board of directors (the “Board”) and two advisory directors (the “Advisory Directors”) who, although not members of the Board, provide consulting services to the company.  The conversion price for the Directors and the Advisory Directors will be limited so that it will not be less than Market Value (the “Conversion Price Limitation”).  The investors will not include any employees or officers of the company, or any other directors or consultants.
 
You stated that, as a result of the Transaction, no investor individually, or as part of a group, could beneficially own, or obtain the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis, and there would be no other related arrangements between the company and any of the investors (the “Ownership Limitation”, and together with the Conversion Limitation and the Conversion Price Limitation, the “Limitations”).
 
You stated that the Limitations may be removed only if shareholder approval is obtained.  The terms of the Transaction would not otherwise change as a result of a shareholder vote.
 
Following our review of the information you provided, we have determined that the Transaction complies with the Rules.  The Transaction would not require shareholder approval under Listing Rule 4350(i)(1)(A) because, due to the Conversion Price Limitation, no shares could be acquired by any officer, director, employee, or consultant of the company at a discount to market value.  Given the Ownership Limitation and the lack of any other related arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and therefore will not require shareholder approval under Listing Rule 4350(i)(1)(B).  Due to the Conversion Limitation, the Transaction could not result in the issuance of 20% or more of the pre-transaction outstanding shares or voting power at a discount to the greater of book or market value, and, therefore, shareholder approval would not be required under Listing Rule 4350(i)(1)(D).  The Limitations could be removed only after shareholder approval is obtained.  Please note that pursuant to IM-4350-2: (i) shares issued under a cap cannot be counted in the vote to approve the removal of the cap; (ii) a cap must apply for the life of the transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can change based on the outcome of the shareholder vote, then no shares of common stock may be issued prior to the vote.
 
 
Publication Date*: 7/31/2012 Identification Number: 796 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-19
Identification Number
795
This is in response to your correspondence regarding whether a proposed transaction (the “Proposed Transaction”) would be aggregated with a prior transaction (the “Prior Transaction”, and together with the Proposed Transaction, the “Transactions”) for purposes of the applicability of NASDAQ’s shareholder approval requirements.  Specifically, your question relates to Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”).
 
According to the information you submitted, in the Prior Transaction, which was completed approximately five months ago, the company issued shares of its common stock, at a discount to market value, and warrants to purchase additional shares in a private placement.  The number of shares of common stock was less than 20% of the pre-transaction total shares outstanding.  The warrants, if exercised, would result in an aggregate issuance of more than 20% of the pre-transaction outstanding shares in the Prior Transaction.  The warrants are exercisable for not less than the greater of book or market value and cannot be exercised until six months following closing.  The Prior Transaction did not require shareholder approval under the Rules.
 
In the Proposed Transaction, the company would sell shares of its common stock (the “Shares”) and warrants (the “Warrants”) to several investors.  The number of Shares would equal more than 20% of the pre-transaction outstanding shares, and the Warrants would be exercisable for additional shares of common stock.  The Shares would be issued at a price per share equal to the closing bid price immediately before the company enters into the binding agreement (the “Purchase Price”) plus $0.125 for each Warrant.  The Warrants would be exercisable for not less than the Purchase Price and would not have any anti-dilution adjustments other than for stock dividends, stock splits, and similar events.  The company’s market value exceeds its book value.
 
The company expects that one of the five investors (the “Prior Investor”) in the Prior Transaction will be among the approximately ten investors in the Proposed Transaction.  The Prior Investor purchased approximately 41% of the securities issued in the Prior Transaction and may purchase up to approximately 35% of the securities issued in the Proposed Transaction.
 
The proceeds of the Prior Transaction were used to fund a project safety study relating to products in development and for general corporate purposes.  The proceeds from the Proposed Transaction would be used to fund further stages of that development, to expand manufacturing capacity, and for general corporate purposes.
 
You stated that there are no contingencies between the Transactions, and that at the time of the Prior Transaction, there was no plan or agreement to initiate the Proposed Transaction.  You stated that, as a result of the Proposed Transaction, no investor individually, or as part of a group, could beneficially own, or obtain the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis (the “Ownership Limit”), and there would be no other related arrangements between the company and any of the investors.  To assure that the Ownership Limit is not exceeded, the exercise of the Warrants will be limited with respect to one investor whereby the investor will agree not to exercise Warrants if the number of shares issuable upon such exercise would result in the investor holding more than 19.9% of the post-transaction outstanding shares (the “Exercise Limit”).
 
Although the issuance under the Proposed Transaction would exceed 20% of the pre-transaction outstanding shares, shareholder approval would not be required by Listing Rule 4350(i)(1)(D) because the issuance would not be at a discount.  The Proposed Transaction also would not be aggregated with the Prior Transaction because the Proposed Transaction will not be at a discount to book or market value.  In addition, based on the information you provided, there are no linkages or contingencies between the Transactions, and there was no plan for the Proposed Transaction at the time of the Prior Transaction.  Further, given the ownership positions, the Exercise Limit, and the lack of any other arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and therefore will not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 795 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-18
Identification Number
794
This is in response to your correspondence regarding whether a proposed recapitalization (the “Recapitalization”) would require shareholder approval under Marketplace Listing Rule 4350(i)(1)(B) or 4350(i)(1)(D).
 
According to the information you submitted, the Notes were issued approximately 2.5 years ago.  The Holder owns all of the Notes and over half of the company’s voting stock.  The Notes are mandatorily convertible into common stock four years after issuance or earlier at the option of the Holder.  The initial conversion price is higher than the market value (and the book value) of the common stock immediately preceding the entering into of the binding agreement to issue the Notes.  Subsequent to the issuance of the Notes, shareholder approval was obtained of anti-dilution provisions that could cause the conversion price to be reduced to below that market value.
 
Approximately one month ago, the company entered into a new debt facility (the “New Debt Facility”) with new lenders (the “New Lenders”).  As a condition to entering into the New Debt Facility, the New Lenders required the Holder: (i) to subordinate its rights as a creditor of the company under the Notes to the New Lenders; and (ii) to fully convert the Notes within four months.  To induce the Holder to subordinate its rights, the company and the Holder entered into an agreement relating to the Recapitalization.  Pursuant to the Recapitalization, the Holder will convert the Notes within four months, and the company will pay the Holder a restructuring fee in a combination of cash and additional shares of common stock (the “Additional Shares”).  The number of shares that the Holder will receive upon conversion will give effect to the amount of payment-in-kind interest that would have been paid had the Notes been held to maturity.  The number of Additional Shares will equal less than 20% of the pre-transaction total shares outstanding.
 
The securities that will be issued to the Holder upon conversion will include not only shares of common stock but also warrants exercisable for common stock, for a nominal exercise price, to the extent necessary to prevent the Holder from exceeding restrictions on its ownership of the company’s voting power.  You stated that there are certain regulatory restrictions on the Holder’s permitted level of voting power.  The issuance of the warrants does not change the economics of the transaction because the warrants, due to their nominal exercise price, provide the economic equivalence of owning the common stock but without the voting power.  You stated that structuring the transaction in this manner, with the issuance of the warrants, will not cause an increase in the number of shares of common stock ultimately issuable.
 
The purpose of the New Debt Facility is to bring to the company additional funding to address a cash shortage caused by the acceleration of payments to certain key vendors and to allow for the refinancing of other debt.   No stock will be issued in payment of the New Debt Facility. Equity, not cash from the New Debt Facility, will be used to pay off the Note.  Following the New Debt Facility and the Recapitalization, the Holder will remain the company’s largest shareholder.
 
Following our review of the information you provided, we have determined that the Recapitalization will not require shareholder approval under the Rules.  With respect to Listing Rule 4350(i)(1)(D), we note that the company’s shareholders have approved the issuance of shares upon conversion of the Notes and that those Notes will be converted pursuant to those approved terms.  While the company will issue the Holder the Additional Shares, as an inducement for the Holder to enter into the Recapitalization agreement, we note that the Recapitalization agreement only recently became necessary and that the number of Additional Shares is less than 20% of the pre-transaction outstanding shares.  Therefore, shareholder approval of the Additional Shares is not required under Listing Rule 4350(i)(1)(D).  Shareholder approval will not be required under Listing Rule 4350(i)(1)(B) because the Holder, as the majority shareholder both before and after the Recapitalization, will remain the largest shareholder.
 
Publication Date*: 7/31/2012 Identification Number: 794 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-15
Identification Number
791
This is in response to your correspondence regarding whether a proposed transaction (the “Proposed Transaction”) would be aggregated with a prior transaction (the “Prior Transaction”, and together with the Proposed Transaction, the “Transactions”) for purposes of the applicability of NASDAQ’s shareholder approval requirements.  Specifically, your question relates to Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(C)(ii), and 4350(i)(1)(D).
 
According to the information you submitted, in the Prior Transaction, which was completed approximately seven weeks ago, the company issued shares of its common stock and warrants to purchase additional shares to several investors in a private placement.  The proceeds were raised to satisfy the company’s working capital needs through the end of 2008.  The Prior Transaction did not require shareholder approval under the Rules.
 
You stated that the purpose of the Prior Transaction was to effect a capital infusion without which the company would not have had sufficient cash to fund its ongoing operations for more than approximately seven months.  Approximately one month after the closing of the Prior Transaction, the company began to consider the Proposed Transaction when an acquisition opportunity (“Acquisition”) became available due to the actions of an independent third party.
 
In the Proposed Transaction, the terms of which have not been finalized, the company would issue up to 19.9% of its pre-transaction outstanding shares to one or more investors at a price that could be less than market value.  The proceeds from the Proposed Transaction would be used to partially fund the acquisition of the Target.  The remainder of the Acquisition funding would come from a term loan and not from the Prior Financing.  The investors in the Proposed Transaction would not include any of the investors in the Prior Transaction or any officers, directors, employees, or consultants of the company.
 
You stated that there are no linkages or contingencies between the Transactions.  The Proposed Transaction would be done solely to fund the Acquisition.  If the Acquisition does not take place, the Proposed Transaction will not be consummated.
 
You stated that the investors in the Proposed Transaction would hold less than 20% of the company’s outstanding shares in the aggregate and would not have any “control-type” arrangements with the company.  The investors would be granted the right to nominate one director to the company’s board of directors, which would then have six members.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not be aggregated with the Prior Transaction because there are no linkages or contingencies between the Transactions, there will be no commonality of investors, the proceeds will be used for different purposes, and the need for the Proposed Transaction arose only after the closing of the Prior Transaction.  Accordingly, provided the issuance is less than 20% of the pre-transaction outstanding shares, shareholder approval of the Proposed Transaction would not be required under either Listing Rule 4350(i)(1)(C)(ii) or Listing Rule 4350(i)(1)(D).  Please be advised that for purposes of the shareholder approval requirements, the Proposed Transaction would be considered to be in connection with the Acquisition meaning that the percentage thresholds of Listing Rule 4350(i)(1)(C) would apply without regard to whether the issuance is at a discount.  With regard to Listing Rule 4350(i)(1)(B), given the ownership positions and the lack of other arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and therefore would not require shareholder approval under that rule.
 
Publication Date*: 7/31/2012 Identification Number: 791 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-40  
Identification Number
849
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(B) to a proposed transaction (the “Proposed Transaction”), which you described.  You asked whether the Transaction would result in a change of control and, if so, whether the proposed alternative structure would comply with the requirements of the Rule.
 
According to the information you submitted, in the Proposed Transaction the company would sell shares of its common stock (the “Shares”) and warrants (the “Warrants”) to several investors. The number of Shares would equal more than 20% of the pre-transaction outstanding shares, and the Warrants would be exercisable into that number of shares of common stock equal to 25% of the number of Shares.  The Shares would be issued at a price per share equal to the closing bid price immediately preceding the entering into of the binding agreement (the “Purchase Price”), and the Warrants would be sold for $0.125 each.  The Warrants would be exercisable for not less than the Purchase Price and would not have any anti-dilution price adjustments other than for stock dividends, stock splits, and similar events.  The company’s market value exceeds its book value.
 
Currently, the company’s officers and directors own in the aggregate approximately 21% of the company’s outstanding shares of common stock (the “D&O Shares”).  No single shareholder, nor any holders reporting as a group, own as much as 20% of the outstanding shares.  Following the Proposed Transaction, the D&O Shares would represent approximately 18% of the then outstanding shares, and each of the two largest investors in the Proposed Transaction (the “Principal Investors) would own approximately 22%.  The company has agreed to appoint to its board of directors, on a one-time basis, an individual who is an affiliate of one of the Principal Investors (the “Limited Board Right”).
 
You stated that according to the terms of the Proposed Transaction, if shareholder approval is required under the Rule, the Principal Investors would be prohibited from owning in excess of 19.99% of the outstanding shares unless shareholder approval has been obtained (the “Limitation”) of a change in control.  Due to the allocation of the securities that would be sold, no other investor could acquire as much as 19.99% of the company’s outstanding shares.  If shareholder approval is obtained, there would be a second closing in which the Principal Investors would be the only purchasers.  There would be no change in the terms of the Proposed Transaction if the shareholders do not approve the removal of the Limitation.
 
Following our review of the information you submitted, we have concluded that without the Limitation the Proposed Transaction would require shareholder under Listing Rule 4350(i)(1)(B) because it would result in a change of control.  Although each Principal Investor would have the same ownership position as the other, Listing Rule 4350(i)(1)(B) would nonetheless apply because of the significant change in the ownership structure resulting from the Proposed Transaction, including two new ownership positions which would be over 20% of the shares then outstanding and each of which would be larger than the current largest ownership position, the D&O Shares.  By including the Limitation, however, the company has structured the Proposed Transaction in a manner that complies with Listing Rule 4350(i)(1)(B).  Specifically, due to the Limitation, no investor in the Transaction could own more than 19.99% of the company’s common stock without shareholder approval.  Further, other than the Limited Board Right, there are no relationships between any of the Principal Investors and the company.  Please be advised that pursuant to IM-4350-2: (i) shares issued under a cap (in this case, the cap is the Limitation that is applicable to the Principal Investors) cannot be counted in the vote to approve the removal of the cap; (ii) a cap must apply for the life of the transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can change based on the outcome of the shareholder vote, then no shares of common stock may be issued prior to the vote.
 
Publication Date*: 7/31/2012 Identification Number: 849 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-39  
Identification Number
848
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) to a proposed transaction (the “Proposed Transaction”) which you described.  
 
According to the information you provided, the company would issue shares of its common stock in exchange for a portion of the outstanding principal amount of indebtedness currently held by the Investor.  The Proposed Transaction would be structured such that either: (i) the shares would be issued at a price (the “Issuance Price”) not less than the closing bid price immediately preceding the entering into of the binding agreement (“Market Value”); or (ii) if the Issuance Price were to be less than the Market Value, the company would limit the issuance of common stock to less than 20% of its pre-transaction outstanding shares unless shareholder approval were obtained.  The company’s market value exceeds its book value. You have represented that the Investor is not an officer, director, employee, or consultant of the company, and that the investor is not an affiliate of any such person or entity.
 
The company’s officers and directors own in the aggregate approximately 26% of the company’s outstanding shares of common stock.  The Investor is the next largest stockholder with approximately 12% of the outstanding shares.  After the Proposed Transaction, each of these holdings would equal approximately 23% of the then outstanding shares with the officers’ and directors’ combined holdings being slightly larger than the Investor’s.  You stated that the Investor would not: (i) have any right to appoint or otherwise have a designee become a member of the company’s board of directors; (ii) have the right to participate in the management of the company; or (iii) be granted any other right in connection with the Proposed Transaction.  In addition, the company stated that: (i) based upon an inquiry of each current officer and director of the company, no such person intends to sell shares of the company’s stock in the near term; (ii) the Investor is acquiring the shares in the Proposed Transaction as an investment in the company and not with the intent of seeking to obtain control over the company; and (iii) the company does not intend to sell the Investor any shares other than those that would be sold in the Proposed Transaction.  In addition, based upon the negotiations between the Investor and the company regarding the Proposed Transaction, the company believes that the Investor does not intend to acquire shares of the company’s stock other than in the Proposed Transaction.
 
Following our review of the information you submitted and based on your representations, we have determined that shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the Proposed Transaction would not result in a change of control.  Following the Proposed Transaction, the officers’ and directors’ aggregate holdings would exceed the ownership position of the Investor, albeit by only a small amount.  In addition, as described above, there are no additional arrangements between the company and the Investor that would allow the Investor to acquire board representation or otherwise act to control the direction of the company.  Note that this conclusion is based on the specific ownership positions you provided, and that if those ownership positions change soon after the Proposed Transaction is completed (such, for example, as through a sale of shares by an officer or director, a departure of an officer of director, an acquisition by the Investor of additional stock, acquisition by the Investor of additional rights in the company, or other circumstances) our conclusion could be different and therefore shareholder approval would be required pursuant to Listing Rule 4350(i)(1)(B).  In addition, given the conclusion that the Investor will not control the company as a result of the Proposed Transaction, please be advised that any future issuance of shares by the company to the Investor, or the entering into of other arrangements with the Investor, could result in a change of control, which may require shareholder approval under Listing Rule 4350(i)(1)(B).
 
The Proposed Transaction would comply with Listing Rule 4350(i)(1)(D), subject to the restrictions contained in IM-4350-2, because if the Issuance Price was to be less than Market Value, the issuance would equal less than 20% of the pre-transaction outstanding shares, unless shareholder approval were obtained.  Please note that pursuant to IM-4350-2: (i) shares issued under a cap cannot be counted in the vote to approve the removal of the cap; (ii) a cap must apply for the life of the transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can change based on the outcome of the shareholder vote, then no shares of common stock may be issued prior to the vote.
 
Publication Date*: 7/31/2012 Identification Number: 848 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-34
Identification Number
843
This is in response to your correspondence regarding the applicability of the shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”).
 
According to the information you submitted, in the Transaction the company would issue shares of common stock (“Common Shares”) and warrants to purchase additional shares of common stock (“Warrants”) to several investors, none of whom is an officer, director, employee, or consultant of the company.  In addition, the company would issue Warrants to the placement agent (the “Placement Agent Warrants”).  The number of Common Shares would equal no more than 19.9% of the pre-transaction outstanding shares and would be sold at a discount to market value.  The number of shares of common stock that could be issued upon the exercise of the Warrants, including the Placement Agent Warrants, would equal approximately 6% of the pre-transaction outstanding shares.  The Warrants would be exercisable into common stock at a price not less than the closing bid price immediately preceding the entering into of the binding agreement notwithstanding any anti-dilution provisions except those relating to stock splits and similar events.  The Warrants will not be exercisable until 180 days after issuance.  The company’s market value exceeds its book value.
 
You stated that, as a result of the Transaction, no investor individually, or as part of a group, could beneficially own, or obtain the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis, and there would be no other related arrangements between the company and any of the investors.
 
Following our review of the information you provided, we have determined that the Transaction will not require shareholder approval under the Rules.  Rule 4350(i)(1)(D) will not require shareholder approval because the issuance of the Common Shares, although at a price less than market value, will equal less than 20% of the common shares and voting power outstanding on a pre-transaction basis.  Because the exercise price of the Warrants will not be less than the greater of book and market value as described above, and the Warrants cannot be exercised until 180 days after the date of closing, the Warrants will not require shareholder approval.  Further, given the ownership positions and the lack of any other arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and will not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 843 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-28  
Identification Number
838
This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to a proposed transaction (the “Proposed Transaction”) which you described.
 
According to the information you submitted, approximately two years ago the company issued the Notes, which are convertible into shares of the company’s common stock at a price in excess of the market value of that common stock at the time of issuance.  The indenture agreement contains certain restrictive covenants (the “Covenants”), and the repayment of the Notes is secured by a security interest (the “Security Interest”) in the company’s assets, including all real and personal property and all subsidiary equity interests.  At the time of the issuance of the Notes, you stated that the company anticipated developing a property (the “Property”) with Group 1.  As such, the indenture is structured such that the Security Interests and the Covenants terminate only upon achieving specified milestones in that development specifically with Group 1.  Due to a number of unanticipated events, however, Group 1 has been unable to proceed with the development of the Property.
 
More than a year after the issuance of the Notes, the company was approached by Group 2 and has since entered into an agreement with Group 2, which the company hopes will lead to the development of the Property.  In the Proposed Transaction, the company would amend the terms of the Notes to allow the Security Interests and the Covenants to terminate upon development of the Property with any Group.  Thus, the Note holders would give up their right to enforce the Security Interest and the Covenants with respect to the participation of Group 1, and the company could proceed with the development of the Property with Group 2.  As consideration for these modifications, the company anticipates it will have to reduce the conversion price on the Notes and issue warrants to the holders of the Notes.  The revised conversion price would be no less than the closing bid price of the company’s common stock immediately preceding the execution of the binding agreement to modify the Notes (the “Closing Bid”), plus $0.125 for each share of common stock issuable upon the exercise of the warrants.  In addition, the warrants would be exercisable for no less than the Closing Bid and would not have any anti-dilution price adjustments other than for stock dividends, combinations, and similar events.  The company’s market value exceeds its book value.  You stated that no Note holder could own as much as 20% of the company’s outstanding shares or voting power as a result of the Proposed Transaction, and there are no other arrangements between any of the Note holders and the company.
 
Following our review of the information you submitted, we have concluded that shareholder approval of the Proposed Transaction is not required pursuant to the Rules.  For purposes of determining whether the issuance price is at least as much as market value, it is appropriate to use the closing bid price immediately prior to the binding agreement for the Proposed Transaction, rather than that immediately prior to the initial issuance, because of the changes in circumstances since the company entered into the original agreement that led to the desire to consummate the Proposed Transaction and because of the changes in terms that would be reflected in the Proposed Transaction, as described above.  As such, although the issuance could exceed 20% of the pre-transaction outstanding shares, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D) because the issuance price will not be less than the greater of book or market value.  The Proposed Transaction will not result in a change of control because no Note holder could own as much as 20% of the company’s outstanding stock or voting power and there will be no other arrangements between any of the Note holders and the company.  Accordingly, shareholder approval of the Proposed Transaction is not required under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 838 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-19
Identification Number
829
This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to a proposed transaction (the “Proposed Transaction”) which you described.
 
According to the information you submitted, in the Proposed Transaction the company would enter into a new agreement (the “Agreement”) with the holders of the Notes (the “Note Holders”) pursuant to which the Note Holders would immediately convert the Notes.  Under the Agreement, the company would reduce the conversion price of the Notes and issue warrants to the Note Holders.  The number of common shares that could be issued upon conversion exceeds 20% of the company’s pre-transaction outstanding shares.  The conversion price would be no less than the closing bid price immediately preceding the entering into of the binding agreement (the “Closing Bid”), plus $0.125 for each share of common stock issuable upon the exercise of the warrants.  In addition, the warrants would be exercisable for no less than the Closing Bid and would not have any anti-dilution price adjustments other than for stock dividends, combinations, and similar events.  The company’s market value exceeds its book value.
 
You stated that the company has several reasons for entering into the Agreement.  In the last four months, the company has changed its executive management, which was responsible for using the Notes as a financing vehicle.  Further, the company’s board has implemented a new operating plan and funding strategy after assessing its funding needs.  An investment bank hired by the company has advised that the complexity and overhang created by the company’s existing securities, including the Notes, are a significant deterrent in attracting long-term equity investors.  As a result of the Proposed Transaction, the company would eliminate the obligation to pay principal and interest and would no longer be subject to covenants which restrict the company’s ability to: (i) incur liens or debt senior to or on par with the Notes; (ii) pay dividends or redeem common stock; and (iii) engage in certain change of control or other transactions materially affecting the company’s capital structure.  In addition, following the Proposed Transaction, the company would be free to sell assets that are pledged as collateral for the Notes.  The Note Holders, by agreeing to immediately convert and thereby foregoing the rights to future interest payments, will be able to convert at a lower price and will receive warrants.
 
You stated that the company will not consummate the Proposed Transaction if it would result in any stockholder owning 20% or more of the company’s outstanding shares or voting power.  The Note Holders do not, and will not, have any board representation or any rights to board seats, and no additional arrangement between the company and the Note Holders is contemplated.
 
Following our review of the information you submitted, we have concluded that shareholder approval of the Proposed Transaction is not required pursuant to the Rules.  For purposes of determining whether the issuance price is at least as much as market value, it is appropriate to use the closing bid price immediately prior to the binding agreement for the Proposed Transaction rather than that immediately prior to the original transactions.  The more recent closing bid is used because of the changes in circumstances since entering into of the original agreements that led to the desire to consummate the Proposed Transaction and because of the significant changes in terms that would be reflected in the Agreement, as described above.  As such, although the issuance could exceed 20% of the pre-transaction outstanding shares, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D) because the issuance price will not be less than the greater of book or market value.  The Proposed Transaction will not result in a change of control because no Note Holder could own as much as much as 20% of the company’s outstanding stock or voting power and there will be no other arrangements between any of the Note Holders and the company.  Accordingly, shareholder approval of the Proposed Transaction is not required under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 829 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-15    
Identification Number
825
This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked about the potential applicability of the voting rights requirements of Listing Rule 4351 (the “Voting Rights Rule”).
 
According to the information you submitted, in the Proposed Transaction, the company would issue shares of Preferred Stock (the “Initial Preferred Shares”) and a warrant (the “Warrant”) to purchase additional shares of Preferred Stock (the “Additional Preferred Shares”) to an investor (the “New Investor”).  The Initial Preferred Shares would be convertible into more than 20% of the pre-transaction outstanding shares, and the Additional Preferred Shares into approximately 10%.
 
The conversion price (the “Conversion Price”) of the Initial Preferred Shares and the Additional Preferred Shares would equal the closing bid price of the common stock immediately preceding the execution of the definitive purchase agreement (the “Closing Bid Price”).  In addition, the New Investor would pay $0.125 for each share of common stock that could be issued upon the exercise of the Warrant.  The exercise price (the “Exercise Price”) of the Warrant would be no less than the Closing Bid Price.  The Initial Preferred Shares, the Additional Preferred Shares, and the Warrant would not contain any “reset” or other price-based adjustments provisions.  The company’s market value exceeds its book value.
 
Currently, the largest shareholder (the “Largest Shareholder”) owns between 35% and 40% of the company’s outstanding shares.  On a post-transaction basis after giving effect to the to the total number of common shares that could be issued in the Proposed Transaction, the Largest Shareholder would own more than 25% of company’s outstanding shares, and approximately 1.5% more than the New Investor.
 
You stated that as a result of the Proposed Transaction, the New Investor would have the right to elect one member to the company’s board of directors, which will have six members.  There will be no additional arrangements between the company and the New Investor.  The Preferred Stock would vote on as-converted basis.  The proceeds of the Proposed Transaction would be used for general corporate purposes.  No officer, director, employee, or consultant of the company would be a purchaser in the Proposed Transaction.
 
Following our review of the information you submitted, we have concluded that shareholder approval of the Proposed Transaction is not required pursuant to the Rules.  Although the issuance would exceed 20% of the pre-transaction outstanding shares, the Conversion Price and the Exercise Price would not be less than the greater of book or market value.  Accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D).  Further, because the Largest Shareholder would remain the largest shareholder following the Proposed Transaction, the Proposed Transaction would not result in a change of control, and, accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B).  Additionally, the requirements of the Voting Rights Rule will be satisfied because: (i) the Preferred Stock will not have greater voting power than as if converted at market value on the date of issuance, and (ii) the percentage of the members of the board of directors that may be appointed by the New Investor will not exceed the New Investor’s relative contribution to the company.
 
 
Publication Date*: 7/31/2012 Identification Number: 825 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-10
Identification Number
820
This is in response to your correspondence regarding whether the company could complete the transaction you described (the “Proposed Transaction”) prior to the end of the 15-day notice period for the Listing of Additional Shares referenced in Marketplace Listing Rule 4310(c)(17)(D).  In addition, your question relates to the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(C), and 4350(i)(1)(D) (the “Rules”).
 
According to the information you submitted, in the Proposed Transaction the company would issue shares of common stock (“Common Shares”) and warrants (“Warrants”) to several investors, none of whom is an officer, director, employee, or consultant of the company.  The number of Common Shares would equal no more than 19.9% of the pre-transaction outstanding shares and would be sold at a discount to market value.  The number of shares of common stock that could be issued upon the exercise of the Warrants would be up to approximately 5% of the pre-transaction outstanding shares.  The Warrants would be exercisable into common stock at a price not less than the closing bid price immediately preceding the entering into of the binding agreement notwithstanding any anti-dilution provisions except those relating to stock splits and similar events.  The company’s market value exceeds its book value.  The Warrants will not be exercisable until six months after issuance.
 
You stated that as a result of the Proposed Transaction, no investor individually or as part of a group would obtain, or have the right to obtain, 20% or more of the voting power or total shares outstanding of the company.  No investor has been or will be offered board representation in connection with the Proposed Transaction, and there would be no other arrangements between the company and any of the investors.
 
The proceeds of the Proposed Transaction would be used to repay debt assumed in connection with an acquisition in May 2005.  You stated that the Proposed Transaction is not required by the transaction documents relating to the acquisition and that at the time of the acquisition, the company did not have a specific intention to conduct the Proposed Transaction or any other specified financing to pay down the debt incurred in the acquisition.  Instead, the company had intended to pay down the debt through cash from operations from the acquired entity.  You stated that other than in the normal course of business in connection with issuing securities in shareholder-approved employee benefit plans, the company has not issued shares in an equity financing since May 2005.
 
Following our review of the information you provided, we have determined that the Proposed Transaction will not require shareholder approval under the Rules.  Rule 4350(i)(1)(C) will not require shareholder approval because the issuance will not be in connection with an acquisition.  In that regard, we note that the most recent acquisition occurred approximately ten months ago and that at the time of that acquisition there was no plan or agreement to conduct any equity financing.  Rule 4350(i)(1)(D) will not require shareholder approval because the issuance of the Common Shares, although at a price less than market value, will equal less than 20% of the common shares and voting power outstanding on a pre-transaction basis.  Because the exercise price of the Warrants will not be less than the greater of book and market value, and the Warrants cannot be exercised until six months after the date of closing, the Warrants will not require shareholder approval.  Further, given the ownership positions and the lack of any other arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and therefore will not require shareholder approval under Listing Rule 4350(i)(1)(B).  Lastly, because we have completed our review, the company may close the Proposed Transaction prior to the end of the 15-day notice period referenced in Marketplace Listing Rule 4310(c)(17) provided that the company submits to NASDAQ all required documentation prior to closing.
 
Publication Date*: 7/31/2012 Identification Number: 820 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-6
Identification Number
817
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) to a proposed issuance of securities (the “Proposed Transaction”) expected to close within two weeks.  You asked whether the Proposed Transaction would be aggregated with a private placement completed six months ago (the “Prior Transaction”) for purposes of the applicability of the Rule.  In addition, your question relates to Marketplace Listing Rule 4350(i)(1)(B).
 
According to the information you provided, pursuant to the Proposed Transaction, the company would issue shares of its common stock to approximately eight purchasers at a price less than market value.  The number of shares that would be issued would equal less than 20% of the pre-transaction outstanding shares.  In the Prior Transaction, the company sold shares of its common stock equal to 19.9% of the pre-transaction outstanding shares to four purchasers at a discount to the market price.  There are no contingencies between the transactions.
 
You stated that the proceeds from the Prior Transaction were used primarily for: (i) research and development; (ii) commercialization expenses; (iii) potential licenses and acquisitions of complimentary products, technologies or businesses, and (iv) general corporate purposes.  You described a change in circumstances following the Prior Transaction giving rise to the need for the Proposed Transaction.  Specifically, at the time of the Prior Transaction the company had anticipated entering into a collaboration agreement with a third party relating to the marketing, distribution, and sales of the company’s products.  Because no such collaboration agreement has been reached, the company expects to use the proceeds from the Proposed Transaction to finance its own sales and marketing efforts.
 
You stated that the purchasers in the Proposed Transaction may include two investors (the “Prior Purchasers’) who purchased approximately 60% of the shares sold in the Prior Transaction.  In the Proposed Transaction, such purchasers would purchase no more than 30% of the shares that would be sold and would constitute no more than 25% of the number of purchasers.  Neither of the Prior Purchasers would be either the lead investor or the largest purchaser in the Proposed Transaction.  The purchasers in the Proposed Transaction will not include any company officer, director, employee, or consultant.
 
In addition, you stated that: (i) the Proposed Transaction would not result in any purchaser owning as much as 20% of the company’s outstanding shares; (ii) the purchasers would act as individuals and not as a group; (iii) there would be no additional arrangements between the company and any of the investors; and (iv) none of the purchasers currently has board representation and none would have any such representation as a result of the Proposed Transaction.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not be aggregated with the Prior Transaction for purposes of the Rule because: (i) a change in circumstances following the Prior Transaction gave rise to the need for the Proposed Transaction;
(ii) approximately six months would have passed between the transactions; and (iii) there are no contingencies between the transactions, and the Proposed Transaction was not contemplated at the time of the Prior Transaction.  As such, based on your representations, shareholder approval of the Proposed Transaction would not be required under Listing Rule 4350(i)(1)(D) because the issuance of common shares at less than market value would equal less than 20% of the common shares and voting power outstanding on a pre-transaction basis.  Further, given the ownership limitation and the lack of other arrangements between the company and the purchasers as described above, the Proposed Transaction would not result in a change of control and would not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 817 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-56  
Identification Number
903
This is in response to your letters regarding the applicability of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) to a proposed issuance of securities (the “Proposed Transaction”) expected to close within a month.  You asked whether the Proposed Transaction would: (i) be aggregated with a private placement completed approximately five months ago (the “Prior Transaction”) for purposes of the applicability of the Rule, and (ii) result in a change of control that will require shareholder approval under Listing Rule 4350(i)(1)(B).  While incorporated outside the United States, the company does not qualify as a Foreign Private Issuer. Its American Depositary Shares (“ADS”) are listed on The NASDAQ Capital Market, and the ratio of ADS to ordinary shares is one-to-one.
 
According to the information you provided, pursuant to the Proposed Transaction, the company would issue Exchangeable Preferred Shares (the “Preferred Shares”) to approximately eight investors.  Each Preferred Share would be convertible based on a conversion price which is expected to be a discount to the market price.  Each Preferred Share would carry an annual dividend payable in ADS for the first year only and thereafter only in cash.  The maximum number of ADS issuable upon the conversion of the Preferred Shares and the payment of the dividends would be 19.9% of the pre-transaction outstanding ADS.  In addition, in the Proposed Transaction, the investors would receive warrants representing 115% warrant coverage of the ADS issuable in the transaction.  The warrants would be exercisable for no less than the closing bid price immediately preceding the entering into of the binding agreement and would not be exercisable until six months following the date of closing.
 
In the Prior Transaction, the last tranche of which closed approximately five months ago, the company issued securities representing approximately 19.9% of the pre-transaction outstanding ADS at a discount to the market price.
 
You stated that at the time of the Prior Transaction, the Proposed Transaction was not contemplated, and the company did not anticipate the need to complete any type of additional financing until well into 2006 or later.  However, a line of credit, which had been secured and subsequently approved by shareholders in the 2nd quarter of 2005 is no longer available because the company’s stock price has fallen below the minimum allowable under the line of credit agreement.  As a result, the company needs the additional financing to be raised in the Proposed Transaction. The proceeds from both the Prior Transaction and the Proposed Transaction will be used for the company’s general working capital.
 
You stated that none of the investors that participated in the Prior Transaction will participate in the Proposed Transaction.  In addition, no officer, director, employee, or consultant of the company will participate in the Proposed Transaction.  You stated that there are no affiliates or groups among the investors and that pursuant to the terms of the Proposed Transaction, no investor will be permitted to hold more than 4.9% of ADS outstanding.  The Preferred Shares have no voting power, and the investors will not be entitled to any special board representation.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not be aggregated with the Prior Transaction for purposes of the Rule because: (i) the Proposed Transaction was not contemplated at the time of the Prior Transaction; (ii) there were no contingencies between the two transactions; (iii) none of the investors who participated in the Prior Transaction will participate in the Proposed Transaction; and (iv) approximately six months will have passed between the two transactions.  In addition, based on your representations regarding the Proposed Transaction, shareholder approval is not required for the Proposed Transaction under the Rule because the issuance of the ADS, although at a price less than market value, will equal less than 20% of the ADS and voting power outstanding on a pre-transaction basis.  Because the exercise price of the warrants will not be less than the greater of book and market value, and the warrants may not be exercised until six months after the date of closing, the warrants also do not require shareholder approval. Further, given the ownership limitation described above, the Proposed Transaction will not result in a change of control and will not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
 
 
Publication Date*: 7/31/2012 Identification Number: 903 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-48
Identification Number
895
This is in response to your letters regarding the applicability of the shareholder approval and voting rights requirements to the company’s proposed issuance of securities (the “Transaction”) which you described.  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), 4350(i)(1)(C), 4350(i)(1)(D), and 4351(the “Rules”).
 
According to the information you provided, in the Transaction, the company would sell to Investor approximately 24.8% of its pre-transaction outstanding shares of common stock (the “Private Placement Shares”).  You stated that as a result of the Transaction, the Investor would own 19.9 % of the company’s post-transaction outstanding shares (the “Ownership Position”).  You stated that the company has no current plans to issue any shares to the Investor in addition to the Private Placement Shares.  No officer, director, employee or consultant of the company would receive any of the company’s securities in the Transaction.  The proceeds will be used for general corporate purposes and will not be used in connection with the acquisition of the stock or assets of another company.  The Investor will not be entitled to any seat on the company’s board of directors, and the Private Placement Shares will not have any heightened voting power.
 
You stated that the shares would be sold at a premium to the closing bid price at the time the purchase agreement (the “Purchase Agreement”) relating to the Transaction was signed.  You stated that the conditions to closing include:
 
  • Compliance with the Hart-Scott-Rodino Antitrust Improvements Act and other applicable regulatory requirements;
  • The absence of litigation against the company or the Investor that relates to the issuance of the shares;
  • The accuracy of the representations and warranties made by the company;
  • The performance and compliance with all covenants, agreements and conditions contained in the Purchase Agreement to be performed or complied with by the company;
  • Delivery of a legal opinion from the company’s counsel;
  • The absence of a Material Adverse Effect as defined in the Purchase Agreement;*
  • The listing of the Private Placement Shares on the NASDAQ National Market; and
  • The Research Collaboration and License Agreement to be entered into between the company and an affiliate of the Investor shall have been executed as required by the Purchase Agreement upon satisfaction of the other conditions to closing.
 
Following our review of the information provided, we have concluded that by structuring the Transaction as you described, the company would comply with the Rules.  Specifically, Listing Rule 4350(i)(1)(A) is not applicable because no shares would be acquired by any officer, director, employee or consultant of the company.  Rule 4350(i)(1)(B) will not require shareholder approval because, given the size of the Ownership Position, the Transaction would not result in a change of control. Listing Rule 4350(i)(1)(C) will not require shareholder approval because the Transaction would not be in connection with the acquisition of the stock or assets of another company.  Even though the Transaction would result in an issuance of more than 20% of the company’s pre-transaction outstanding shares, Listing Rule 4350(i)(1)(D) will not require shareholder approval because the price would not be less than the greater of book or market value immediately preceding the entering into of the binding agreement (the signing of the Purchase Agreement).  The Transaction would not violate the voting rights requirements of Listing Rule 4351 because the Private Placement Shares would not have any heightened voting power.
 
*Pursuant to the Purchase Agreement, a Material Adverse Effect means a material adverse effect on the business, properties, financial condition or results of operations of the company and its Subsidiaries, taken as a whole; provided, however, that none of the following shall constitute, or shall be considered in determining whether there has occurred, a Material Adverse Effect: (a) changes that are the result of general economic or political factors affecting the national, or world economy or acts of war or terrorism (except to the extent that such changes have a disproportionate effect on the company and its Subsidiaries, taken as a whole); (b) changes that are the result of factors generally affecting the industries or markets in which the company operates (except to the extent that such changes have a disproportionate effect on the company and its Subsidiaries, taken as a whole); (c) any adverse change, effect or circumstance arising out of or resulting from actions contemplated by the parties in connection with this Agreement or the pendency or announcement of the transactions contemplated by this Agreement; (d) changes in law, rule or regulations or generally accepted accounting principles and (e) any action taken pursuant to or in accordance with this Agreement or at the request of the Investor.
Publication Date*: 7/31/2012 Identification Number: 895 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-38
Identification Number
885
This is in response to your letters regarding a proposed private placement of shares of the company’s common stock and warrants expected to be consummated in July 2005 (the “Proposed Transaction”).  Specifically, you asked whether the Proposed Transaction would be aggregated with a convertible note and warrant offering completed in December 2004, (the “Prior Transaction”) for purposes of Marketplace Listing Rule 4350(i)(1)(D) (the “Rule”).  Your question relates also to the applicability of Rules 4350(i)(1)(A) and 4350(i)(1)(B)
 
According to the information you provided, in the Prior Transaction, the company sold a convertible promissory note (the “Note”) and a related warrant (the “Warrant”), each having a term of five years.  The Note is convertible into approximately 19.9% of the pre-transaction outstanding shares, and the Warrant is exercisable for approximately 1.6% of the pre-transaction outstanding shares.  No officers, directors, employees or consultants of the company participated in the Prior Transaction.  Although both the Note and the Warrant contain anti-dilution provisions, the Note cannot be converted into more than 19.9% of the pre-transaction shares at a discount unless shareholder approval is obtained, and the exercise price of the Warrant is subject to a minimum price which is a premium to both the market and book value immediately preceding the signing of the definitive agreement.  Accordingly, shareholder approval of the Prior Transaction was not required by the Rule.  The use of the proceeds was for general working capital purposes, general corporate purposes, and the repayment of certain outstanding indebtedness.
 
You stated that in the Proposed Transaction, the company will sell shares of common stock equal to approximately 14% of the pre-transaction outstanding shares (the “Proposed Transaction Stock”) and warrants exercisable for up to 9% of the pre-transaction outstanding shares (the “Proposed Transaction Warrants”) to purchasers including three capital management firms, and three directors and three officers of the company (the “Insiders”).  The Insiders will purchase, in the aggregate, up to approximately 3% of the shares being issued, and no other officers, directors, employees, or consultants of the company will participate in the transaction.  The price paid by the Insiders will be no less than the greater of book and market value at the time of the definitive agreement.  The price paid for the common stock by the other purchasers will be at a discount to the market price, and the exercise price of the Proposed Transaction Warrants will be no less than the greater of book and market value immediately preceding the execution of the definitive agreement unless shareholder approval is obtained.  The Proposed Transaction Warrants will not be exercisable until six months after closing.
 
You stated that the Initial Investor had no involvement in the negotiation of the Proposed Transaction.  However, pursuant to the terms of the Prior Transaction, this investor has a right of first refusal with respect to any subsequent securities offering for two years.  Under this right, the Initial Investor has notified the company that it intends to participate in the Proposed Transaction, purchasing approximately 24% of the shares to be sold.
 
You stated that the company had not contemplated the Proposed Transaction at the time of the Prior Transaction and that there were no contingencies between the two transactions.  In addition, you stated that events subsequent to closing of the Prior Transaction gave rise to the need for additional financing.  Specifically, you stated that events identified by the company in its second quarter 2005 caused it to incur additional losses, resulting in the breach of financial covenants in its credit facility.  The covenants will be amended as part of the Proposed Transaction.
 
According to a Schedule 13G filed with the Securities and Exchange Commission, four shareholders, with aggregate holdings equal to approximately 20.5% of the company’s outstanding shares of commons stock, constitute a group (the “Group”) within the meaning of Rule 13d-5(b).  The Group is the largest holder of the company’s common stock; the next largest owns approximately 10%.  Members of the Group will participate in the Proposed Transaction, and the Group will remain the largest shareholder following the Pending Transaction.
 
Following our review of the information you provided, we have determined that the shares to be issued in the Proposed Transaction will not be aggregated with the shares issued in the Prior Transaction for purposes of the Rule because: (i) the Proposed  Transaction was not contemplated at the time of the Prior Transaction; (ii) there were no contingencies between the two transactions; (iii) the investor in the Prior Transaction will participate in the Prior Transaction only to limited extent and only because of the right of first refusal; and (iv) approximately seven months will have passed between the two transactions.  In addition, based on your representations regarding the Proposed Transaction, shareholder approval is not required under Listing Rule 4350(i)(1)(D) because less than 20% of the common shares and voting power outstanding on a pre-transaction basis will be issued at a price less than market and book value .  In that regard, while approximately 22% of the pre-transaction shares outstanding could be issued in the Proposed Transaction, the Proposed Transaction Warrants may not be exercised until six months after the date of closing and the exercise price of those warrants will be greater than book and market value.  As such, the Proposed Transaction Warrants will not count towards the 20% calculation for purposes of Listing Rule 4350(i)(1)(D).  Shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(A) because the shares issued to the Insiders will not be at a discount.  In addition, given the size of the Group’s current ownership position and because the Group will remain the largest shareholder, the Proposed Transaction will not result in a change of control and, therefore, will not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 885 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-33  
Identification Number
880
This is in response to your letters regarding the applicability of The NASDAQ Stock Market’s shareholder approval requirements to an issuance of securities in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Listing Rule 4350(i)(1)(B) (the “Rule”).
 
According to the information you provided, in the Transaction the company expects to issue to institutional investors shares (the “Shares”) equal to approximately 12.5% to 15.7% of the pre-transaction outstanding shares of common stock, at a discount to the market value.  No officer, director, employee, or consultant of the company will participate in the Transaction.  Among the investors who may participate is “Fund”, which currently owns approximately 21% of the company’s outstanding common stock.  The Fund acquired its holdings by participating in private placements and by open market purchases.  Currently, no other stockholder or group of affiliated stockholders, including the company’s officers and directors as a group, has a larger beneficial ownership interest in the company’s common stock than the Fund, and according to the company’s last proxy statement, no other investor holds a position as large as 5% of the company’s common stock.  Depending on its level of participation, the Fund’s holdings in the company may go up or down, or even remain constant, as a result of the Transaction.  No other stockholder or group of stockholders will have a larger interest in the company than the Fund following the Transaction.
 
Following our review of the information you submitted, we have concluded that the Transaction, as described in your correspondence, does not require shareholder approval under the Rule because it will not result in a change of control.  The Fund, the largest current shareholder, will remain the largest shareholder upon the completion of the Transaction, and there is no other significant shareholder.  Further, at the time the Fund made the open market purchases that resulted in its ownership increasing from approximately 18% to approximately 21%, the company had not had any discussions with the Fund regarding the Transaction or other equity financing.
 
Publication Date*: 7/31/2012 Identification Number: 880 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-32
Identification Number
879
This is in response to your letters regarding a proposed private placement of shares of the company’s common stock expected to be consummated in July 2005 (the “July Offering”).  Specifically, you asked: (i) whether the shares to be issued in the July Offering would be aggregated with the shares issued in a  private placement in January 2005 (the “January Offering”) for purposes of Marketplace Listing Rule 4350(i)(1)(D) (the “Rule”); and (ii) whether the July Offering will require shareholder approval under the Rule. Your question relates also to the applicability of Listing Rule 4350(i)(1)(B).
 
According to the information you provided, in the January Offering, the company issued shares of common stock equal to 19.99% of the total number of shares outstanding prior to the transaction. The proceeds from the January Offering were used for working capital purposes.
 
You stated that in the July Offering, the number of shares of common stock (the “Common Shares”) issued will equal less than 20% of the pre-transaction outstanding shares, and the price will be less than market value. In addition, the July Offering may include warrants (the “Warrants”). The shares of common stock issuable upon the exercise of the Warrants, together with the Common Shares, could result in an issuance equal to greater than 20% of the pre-transaction outstanding shares. The Warrants (i) will not be exercisable for less than the greater of book or market value; (ii) will not be exercisable prior to six months after the closing of the July Offering; and (iii) will contain no anti-dilution or price protection provisions. The company plans to use the proceeds from the July Offering for clinical studies.
 
You stated that since the completion of the January Offering, there have been changes in the company’s circumstances, which led to the planning of the July Offering.  These changes included delays in the receipt of certain regulatory approvals for a drug product and in the establishment of a collaboration agreement and resulted in increased expenses and the lack of expected additional funding.  The company’s management first presented the prospect of the July Offering to the board of directors in May 2005.
 
No officer, director, employee, consultant of the company will be permitted to purchase shares in the July Offering, and none of the investors who participated in the January Offering will participate in the July Offering. No purchaser will own, or have the right to acquire, 20% or more of the company’s outstanding shares of common stock or outstanding voting power as a result of the July Offering. For the July Offering, the company will use a placement agent different from the one used for the January Offering. You further stated that there are no contingencies between the January Offering and the July Offering and that the July Offering was not contemplated at the time the company completed the January Offering. Prior to the January Offering, the company’s most recent issuance of common shares in a financing had been in March 2004.
 
Following our review of the information you provided, we have determined that the shares to be issued in the July Offering will not be aggregated with the shares issued in the January Offering for purposes of the Rule because: (i) the July Offering was not contemplated at the time of the January Offering; (ii) there were no contingencies between the two transactions; (iii) none of the investors who participated in the January Offering will participate in the July Offering; and (iv) approximately six months time passed between the two transactions. In addition, based on your representations regarding the July Offering, shareholder approval is not required for the July Offering under Listing Rule 4350(i)(1)(D) because the issuance of the common shares, although at a price less than market value, will equal less than 20% of the common shares and voting power outstanding on a pre-transaction basis. Because the exercise price of the Warrants will not be less than the greater of book and market value, and the warrants may not be exercised until six months after the date of closing, the Warrants do not require shareholder approval. Further, given the ownership restrictions described above, the July Offering will not result in a change of control and will not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 879 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-29
Identification Number
876
This is in response to your letters regarding the applicability of The NASDAQ Stock Market’s shareholder approval requirements to issuances of securities contemplated by the company.  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D)(ii) (the “Rules”).
 
According to the information you provided, the company will issue secured promissory notes (the “Series B Notes”) to two Purchasers.  The proceeds from the Series B Notes are expected to be used for working capital purposes and for potential future acquisitions.  No shares of common stock are issuable unless shareholder approval is obtained.
 
The company intends to seek shareholder approval of the conversion of the Series B Notes into Series B Convertible Preferred Stock (the “Series B Preferred”) and warrants exercisable for 25% of the number of shares of common stock issuable upon conversion of the Series B Preferred (collectively, the “Conversion”).  The Series B Preferred will be convertible into shares of common stock at a discount to the market value, although the voting rights will be contractually limited to ensure that the votes that may be cast by the holders of the Series B Preferred do not exceed the number of votes equal to the principal plus interest of the Series B Notes converted into the Series B Preferred, divided by the closing bid price of the shares of common stock immediately preceding the issuance of the Series B Notes.  If shareholder approval is not obtained for the Conversion, no shares of common stock will be issuable.
 
The issuance of the securities in the Conversion could result in one of the Purchasers becoming the largest shareholder in the company, with an ownership position of greater than 20%.
 
Previously, in a private placement, the company sold to the Purchasers shares of Series A Convertible Preferred Stock (the “Series A Preferred”) and warrants to purchase shares of common stock (the “Prior Transaction”).  Although the Series A Preferred contains anti-dilution price adjustment provisions, the aggregate issuance upon conversion is limited to 19.9% of the pre-transaction outstanding shares.  The Series A Warrants are exercisable for no less than market value immediately preceding the execution of the definitive agreement, and they were not exercisable until six months after issuance.  No officer, director, employee, or consultant was a purchaser in the Series A transaction.  The company was not required to obtain, and did not seek, shareholder approval of the Series A financing.
 
You stated that the Series A and Series B financings were not contingent on each other and that the Series B financing was not contemplated at the time of the Series A financing.
 
Further, you stated that the proxy statement relating to the approval of the conversion feature of the Series B Notes would include: (i) a description of the Series B Notes and the proposed conversion feature, including the use of a portion of the proceeds to fund working capital and potential future acquisitions; (ii) a statement that approval of the Series B conversion feature would also constitute approval of any change of control deemed to occur in connection with the Series B financing; and (iii) a statement that shareholder approval of the Series B conversion feature would constitute approval of an issuance of more than 20% of the pre-transaction outstanding shares or voting power for less than the greater of book or market value.
 
The issues you raised in your correspondence relate to: (i) whether the issuance of securities in the Series A financing would be aggregated with the Series B financing for purposes of Listing Rule 4350(i)(1)(D); and (ii) whether the holders of the securities issued in the Series A financing may vote to approve the Conversion.
 
Following our review of the information you submitted, we have concluded that the Series A financing and the Series B financing will not be aggregated for purposes of Listing Rule 4350(i)(1)(D) because: (i) over 11 months  time passed between the two financings; (ii) neither was contingent on the other, and (iii) the Series B financing was not contemplated at the time of the Series A financing.  Therefore, the Rule will not prohibit the holders of any voting securities issued in the Series A transaction from voting those securities in the vote to approve the Conversion.  With regard to Listing Rule 4350(i)(1)(B), you stated that the proxy proposal will include a statement that the approval of the Series B conversion feature would also constitute approval of any change in control deemed to occur in connection with Series B financing.  Accordingly, the company will have complied with the requirements of Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 876 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-26  
Identification Number
873
This is in response to your letters regarding the potential applicability of The NASDAQ Stock Market’s shareholder approval requirements to a proposed issuance of securities in connection with a proposed Exchange Offer (the “Exchange Offer”) involving the company’s Convertible Notes due 2007 (the “Notes”).  Specifically, your question relates to Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D)(ii) (the “Rules”).
 
According to the information you provided, the Notes were initially issued in 2003 with each $1,000 principal amount convertible into a fixed number of shares of common stock plus $500 cash.  In the Exchange Offer, for each $1,000 principal amount, the company will offer the holders of the Notes the same number of shares of common stock, plus an amount of cash that is not less than $500 and not more than the difference between the $1,000 principal amount and the market value of the shares exchanged immediately prior to the expiration of the exchange offer.  You stated that the total consideration to be paid by the company in the exchange will be less than the original principal amount of the notes tendered.  As a result of the exchange, the company will not have the obligation to pay interest on the tendered notes and will retire the debt for less than the principal amount.
 
In addition, you stated that as a result of the Exchange Offer, no participant will own, or have the right to acquire, 20% or more of the outstanding common stock of the company on a post-transaction basis.
 
You stated that the offer is subject to the federal tender offer laws and that based on guidance the SEC has provided via No Action letters, the value of the shares issued in the Exchange Offer will be determined based on the closing bid price two business days prior to the expiration of the offer.
 
Following our review of the information you submitted, we have concluded that the issuance of securities in connection with the Exchange Offer does not require shareholder approval pursuant to the Rules.  NASDAQ views the Exchange Offer to be a new transaction for purposes of the Rules because the company is receiving additional benefits by entering into the Exchange Offer.  Specifically, the Notes will be retired for less than their principal amount and the company will save the interest otherwise payable on the notes.  In addition, based on your representations regarding the applicability of the federal tender offer laws, it is not inappropriate to determine market value as the closing bid price two days prior to the expiration of the tender offer.  As a result, shareholder approval is not required under Listing Rule 4350(i)(1)(D)(ii) because the issuance of the common stock will be at market value.
 
Furthermore, shareholder approval is not required for the transaction pursuant to Listing Rule 4350(i)(1)(B) because the transaction will not result in a change of control.  This conclusion is based on your representation that the Exchange Offer will not result in any participant owning, or having the right to acquire, 20% or more of the outstanding common stock of the company on a post-transaction basis.
 
 
Publication Date*: 7/31/2012 Identification Number: 873 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-24
Identification Number
871
This is in response to your letters regarding the applicability of The NASDAQ Stock Market’s shareholder approval requirements to an issuance of securities in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”).
 
According to the information you provided, in the Transaction the company would issue notes convertible into shares of the company’s common stock at a price not less than the closing bid price immediately preceding the execution of the definitive agreement (“Market Value”).  The conversion price will not be subject to any adjustment provision that could reduce it to less than Market Value.  Based on the current bid price and assuming full conversion, the issuance of common stock would equal approximately 36% of the company’s pre-transaction outstanding shares.
 
You stated that  no investor individually, or as part of a group, can beneficially own, or have the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis.  The proceeds will be used for working capital purposes and to repay a loan.
 
Following our review of the information you submitted, we have concluded that the Transaction as described in your correspondence does not require shareholder approval under the Rules.  Specifically, the Transaction does not require shareholder approval under Listing Rule 4350(i)(1)(D) because the issuance of the Shares, although in excess of 20% of the pre-transaction outstanding shares, will be at a price that is not less than the greater of book or market value.  Further, given the ownership restrictions described above, the Transaction will not result in a change of control and will not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 871 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-21
Identification Number
868
This is in response to your letters regarding the applicability of The NASDAQ Stock Market’s shareholder approval requirements to an issuance of securities in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to the Transaction.
 
According to the information you provided, in the Transaction, the company expects to issue to institutional investors shares of common stock (the “Shares”) and warrants to purchase additional shares of common stock (the “Investor Warrants”).  The Shares will equal approximately 19.6% of the pre-transaction outstanding shares of common stock, and the warrants, approximately 4.9%.  In addition, the company will issue to the placement agent warrants to purchase shares of common stock (the “Placement Agent Warrants”, and collectively with the Investor Warrants, the “Warrants”). The exercise price of the Warrants will not be less than the closing bid of the common stock immediately preceding the execution of the definitive agreement (the “Market Value”).  The Warrants may not be exercised for 180 days following closing and will not be subject to any adjustment provision that could reduce the exercise price to less than Market Value.  You stated that no officer, director, employee, or consultant of the company will participate in the Transaction.  In addition, no investor individually, or as part of a group, can beneficially own, or have the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis.
 
Following our review of the information you submitted, we have concluded that the Transaction as described in your correspondence does not require shareholder approval under the Rules.  Specifically, the Transaction does not require shareholder approval under Listing Rule 4350(i)(1)(D) because the issuance of the Shares, although at a price less than market value, will equal less than 20% of the common shares and voting power outstanding on a pre-transaction basis.  The exercise price of the Warrants will be not be less than the greater of book and market value, and the Warrants may not be exercised until 180 days from the date of closing.  Further, given the ownership restrictions described above, the Transaction will not result in a change of control and will not require shareholder approval under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 868 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-19
Identification Number
866
This is in response to your letters regarding the company, whose common stock is listed on The NASDAQ SmallCap Market.  You asked about the applicability of NASDAQ’s shareholder approval requirements to a transaction (the “Proposed Offering”), which you described.  Specifically, your question relates to Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) and whether the shares issued in the Proposed Offering would be aggregated with the company’s 2004 private placement (the “Prior Financing”).
 
According to the information you provided, pursuant to the Proposed Offering, the company intends to raise funds through the sale of units.  Each unit is comprised of one share of newly designated convertible preferred stock (the “Preferred Stock”) and one warrant to purchase shares of common stock.  The Preferred Stock and warrants are convertible into and exercisable for shares equal to 21% of the company’s pre-transaction outstanding common shares.  The Preferred Stock and warrants are subject to anti-dilution protection such that the conversion and exercise prices could be reduced if the company issues securities in the future at a lower price.  The Proposed Offering will consist of two closings.  The First Closing is limited to 19.99% of the pre-transaction outstanding shares (the “Limitation”).  The Second Closing, but not the First Closing, is subject to obtaining shareholder approval.
 
Pursuant to the Limitation, prior to seeking shareholder approval, no holder of the Preferred Stock may convert its Preferred Stock, and no person holding the warrants can exercise such warrants, such that the issuance of common shares would be more than 19.99% of the company’s common stock on a pre-transaction basis or to the extent that such issuance would constitute a change of control under Marketplace Listing Rule 4350(i)(1)(B).  In addition, prior to shareholder approval, no one shareholder or affiliated group could own more than 20% of the shares or voting power or have the right to acquire more than 20% of the shares or voting power of the company.  In the event the company does not receive shareholder approval, the terms of the transaction do not change.  None of the purchasers in the Proposed Offering are officers, directors, consultants or employees of the company.
 
The Preferred Stock shares are voting shares; however, the Certificate of Designation prohibits holders of the Preferred Stock from voting such shares at a greater rate than as if converted at market value on the date of the First Closing.  The Preferred stockholders cannot vote to approve the Proposed Offering.
 
You stated that the Proposed Offering and the Prior Financing are significantly different in the uses of proceeds.  There were five investors who invested approximately 33% in the aggregate of the Prior Financing and who will invest approximately 36% in the aggregate of the Proposed Offering.  There were a total of 14 investors in the Prior Financing and the company expects 22 investors to participate in the Proposed Offering.
 
Following our review of the information you provided, we have determined that the Proposed Offering will not be aggregated with the Prior Financing for purposes of Listing Rule 4350(i)(1)(D).  Although there is some commonality of investors, the transactions will be separated by over eight months and neither was contingent on the other.  In addition, given the ownership restrictions described above, the Proposed Offering cannot result in a change of control prior to shareholder approval.  Accordingly, the Proposed Offering as you described it complies with the Rules.
 
Publication Date*: 7/31/2012 Identification Number: 866 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-18
Identification Number
865
This is in response to your letters regarding the applicability of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to a proposed sale of securities by the company (the “Proposed Financing”).  Specifically, you asked whether the Proposed Financing would be aggregated with the company’s private placement completed in 2004 (the “Prior Financing”) for purposes of the Rules.
 
According to the information you provided, in the Prior Financing the company issued approximately 17% of the then outstanding shares of common stock, to accredited investors (the “Prior Investors”), at a discount to the market price.  In addition, the Investors in the Prior Financing received warrants (the “Prior Warrants”) to purchase 8.5% of the outstanding shares of the company’s common stock at a premium to the market price.  The Prior Warrants are not exercisable until six months following their issuance at a price not less than the greater of book and market value as of the date of the definitive agreement.  Shareholder approval was not required of the Prior Financing under 4350(i)(1)(D), because the issuance at less than market value was less than 20% of the pre-transaction outstanding shares; or under 4350(i)(1)(B), because no purchaser could reach a control position as a result of the transaction.
 
In the Proposed Financing, the company expects to issue convertible notes due between 2008 and 2010 (the “Notes”).  The Notes will be issued with warrants to purchase common stock.  The Notes will be convertible into common stock, at a conversion price that will be no less than the sum of: (i) the closing bid price immediately prior to the execution of the definitive agreement (the “Closing Bid”) and (ii) an amount to allow for the attribution of $0.125 for each full warrant.  The exercise price of the warrants will be no less than the Closing Bid.  Based on the recent market price, the resulting issuance would be up to 36% of the pre-transaction outstanding shares as a result of the conversion of the Notes and up to 22% as a result of the exercise of the Warrants.
 
Through a right of first refusal (the “Right”), investors in the Prior Financing have the right to participate in the Proposed Financing.  You stated that by terms of the Right, approximately 82% of the Proposed Financing is available for purchase by investors other than the Prior Investors.  You also stated that there are no contingencies between the Prior Financing and the Proposed Financing.  There is a provision included in both the Notes and the Warrants that will prevent any holder of the Notes or warrants from converting any Note or exercising any Warrant if such conversion or exercise would result in acquisition of beneficial ownership of 9.9% of the company’s common stock.  You stated that this limitation may be amended only with the approval of the company’s shareholders, and that if such approval is sought and not obtained, there would be no changes in the terms of the Proposed Financing.
 
Following our review of the information you provided, we have determined that the Proposed Financing will not be aggregated with the Prior Financing for purposes of Listing Rule 4350(i)(1)(D) because the price will not be less than the greater of book or market value.  Accordingly, because the price will not be at a discount, shareholder approval of the Proposed Financing will not be required pursuant to Listing Rule 4350(i)(1)(D) provided that the terms remain as described in your submission.  Further, given the ownership restrictions described above, the Proposed Financing will not result in a change of control, and shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 865 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-17  
Identification Number
864
This is in response to your letters regarding the applicability of The NASDAQ Stock Market’s shareholder approval requirements to the company’s proposed private placement (the “Transaction”).  Specifically, you asked about the potential applicability of NASDAQ Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) and IM-4350-2.
 
According to the information you provided, in the Transaction the company will issue Convertible Senior Notes due 2011 (the “Notes”).  The Notes are convertible into common stock initially at a price that is greater than the company’s market and book value per share as of the execution date of the definitive agreement (the “Execution Date”).  Based on the conversion price, the Notes would be convertible into shares of common stock equal to approximately 35% of the currently outstanding shares of common stock.  The conversion price, although subject to certain adjustments, would not be reduced to a price less than the greater of book and market value as of the Execution Date without shareholder approval.
 
One of the purchasers in the Transaction (the “Shareholder’”) has beneficial ownership of more than 20% of the company’s common stock and is the largest beneficial owner of the company’s common stock.  Following the Transaction, the Shareholder would still be the largest beneficial owner with over 30% of the common stock.  Currently, no other shareholder owns as much as 10% of the company’s common stock.  If shareholder approval of the Transaction is required but not obtained, the company would have to pay a termination fee.  No common shares are issuable, however, prior to obtaining shareholder approval if such approval is required.
 
Following our review of the information provided, we have concluded that by structuring the Transaction as you described, the company will comply with the Rules and IM-4350-2.  The Transaction does not result in a change of control for purposes of Listing Rule 4350(i)(1)(B), because the Shareholder will be the largest shareholder both before and after the Transaction.  We note that with current ownership of over 30%, the Shareholder’s holding significantly exceeds those of any other shareholder.  The Transaction complies with Listing Rule 4350(i)(1)(D) because the issuance will not be at a price less than the greater of book and market value without prior shareholder approval.  The termination fee is similar to an alternative outcome as defined under IM-4350-2, but because no shares of common stock can be issued prior to obtaining shareholder approval if such approval is required, IM-4350-2 is not implicated.
 
Publication Date*: 7/31/2012 Identification Number: 864 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-16  
Identification Number
863
This is in response to your letter regarding your client, the company, whose common stock is listed on The NASDAQ National Market.  You asked about the applicability of NASDAQ’s shareholder approval requirements to a proposed transaction, and in particular, the application of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”).
 
According to the information you provided, the company intends to raise funds through the sale of common stock and warrants in a private placement to institutional investors (the “Transaction”).  In the Transaction, the company will sell shares of common stock equal to more than 20% of its pre-transaction shares, and warrants exercisable for additional common shares (i.e., 10% warrant coverage).
 
The issuance price (the “Issuance Price”) per share of the common stock will be the sum of: (i) the closing bid price of the common stock immediately preceding the execution of the definitive agreement (the “Agreement”) and (ii) $0.0125 to allow for the attribution of $0.125 for each full warrant (i.e., 10% multiplied by $0.125 equals $0.0125).  The warrants will be exercisable at a higher price than the Issuance Price.  The warrants will expire five years after issuance, and contain anti-dilution protection for stock splits and similar events, but will not contain price adjustments or economic dilution adjustment features.  No investor individually, or as part of a group, can beneficially own, or have the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis.
 
Following our review of the information you submitted, we have concluded that shareholder approval is not required pursuant to the Rules.  Although the issuance will exceed 20% of the pre-transaction outstanding shares, the Issuance Price and the exercise price of the warrants will not be less than the greater of book or market value.  Accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D).  Further, given the ownership restrictions described above, the Transaction will not result in a change of control and shareholder approval in not required pursuant to Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 863 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-110
Identification Number
965
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval … prior to the issuance of designated securities … in connection with the acquisition of the stock or assets of another company…when the issuance or potential issuance will result in a change of control of the issuer.
 
Rule 4350(i)(1)(C)(ii):  Each issuer shall require shareholder approval … prior to the issuance of designated securities …in connection with the acquisition of the stock or assets of another company …where, due to the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, other than a public offering for cash: (a) the common stock has or will have upon issuance voting power equal to or in excess of 20% of the voting power outstanding before the issuance of stock or securities convertible into or exercisable for common stock; or (b) the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the stock or securities.
 
Rule 4350(i)(1)(D):  Each issuer shall require shareholder approval … prior to the issuance of designated securities in connection with a transaction other than a public offering involving:  (i) the sale, issuance or potential issuance by the issuer of common stock (or securities convertible in to or exercisable for common stock) at a price less than the greater of book or market value which together with sales by officers, directors or substantial shareholders of the company equals 20% or more of common stock or 20% or more of the voting power outstanding before the issuance; or (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company is considering a private placement (the “Proposed Transaction”).  Approximately one year earlier, the company issued shares and warrants to an investor (“Investor A”).  The proceeds from the sale of this transaction (the “Prior Transaction”) were used to purchase shares of a target company (the “Target”).  The company also received shareholder approval to issue additional shares in exchange for more shares of the Target (the “Share Exchange”).
 
Investor A would not participate in the Proposed Transaction, and no one investor could own more than 4.99% of the company’s outstanding ordinary shares as a result of the Proposed Transaction.  In addition, no officers, directors, employees or consultants of the company will purchase shares in the Proposed Transaction.  The purpose of the Proposed Transaction is to provide the company with financing to support the business of Target.
 
Issue: Would the Proposed Transaction be aggregated, for purposes of NASDAQ’s shareholder approval rules, with either the Prior Transaction or the Share Exchange?
 
Determination:  The Proposed Transaction would not be aggregated with the Share Exchange for purposes of Rules 4350(i)(1)(C)(ii) or 4350(i)(1)(D) because the shareholders approved the Share Exchange.  In addition, the Prior Transaction and the Proposed Transaction will not be aggregated for purposes of these rules because: (i) a substantial length of time has elapsed between the transactions; (ii) there is no commonality of investors; and (iii) the transactions are not contingent on each other.  In addition, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B) because the Proposed Transaction will not result in a change of control since no participating investor will be permitted to own more than 4.99% of the company’s ordinary shares as a result of the Proposed Transaction.
 
Publication Date*: 7/31/2012 Identification Number: 965 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-106
Identification Number
963
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval … prior to the issuance of designated securities … in connection with the acquisition of the stock or assets of another company…when the issuance or potential issuance will result in a change of control of the issuer.
 
Rule 4350(i)(1)(C)(ii): Each issuer shall require shareholder approval … prior to the issuance of designated securities …in connection with the acquisition of the stock or assets of another company …where, due to the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, other than a public offering for cash: (a) the common stock has or will have upon issuance voting power equal to or in excess of 20% of the voting power outstanding before the issuance of stock or securities convertible into or exercisable for common stock; or (b) the number of shares of common stock to be issued is or will be equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the stock or securities.
 
Rule 4350(i)(1)(D):  Each issuer shall require shareholder approval prior to the issuance of designated securities…in connection with a transaction other than a public offering involving … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  The company proposes an issuance of convertible debentures with 50% warrant coverage to 10 to 15 institutional investors (the “Proposed PIPE”).  The debentures will be convertible at an initial conversion price equal to the greater of: (i) 105% of the closing bid price of the company’s common stock on the trading day immediately preceding the closing date of the Proposed PIPE, which is when the company and investors will enter into a definitive agreement (the “Closing Bid”), or (ii) the sum of the Closing Bid and $0.0625.  The warrants will be exercisable at the greater of: (i) a set price or (ii) the Closing Bid.  The warrants are not exercisable until 181 days after closing.  The conversion price and the exercise price will be subject to adjustment in the event of a future stock split, merger, or reorganization and similar changes affecting holders of the common stock generally, but neither the debentures nor the warrants will contain “market-price” or “exercise-price” anti-dilution adjustment provisions.
 
The company will not at any time issue shares in payment of interest on, or in redemption of, debentures at a price below the Closing Bid if such shares, when aggregated with all prior issuance of shares pursuant to the debentures (excluding warrant shares), represent more than 19.9% of the outstanding common stock as of the closing of the Proposed PIPE, unless shareholder approval has been obtained.  No officers, directors, employees, or consultants of the company will be among the purchasers in the Proposed PIPE.
 
The company completed a PIPE in October (the “First PIPE”).  None of the investors in the First PIPE will participate in the Proposed PIPE.  Substantially all of the proceeds of the First PIPE have been used to pay the initial price of the company’s acquisition of Entity A.  The proceeds from the Proposed PIPE will be used for general corporate purposes that are largely unrelated to the acquisition.  There are no contingencies between the First PIPE and the Proposed PIPE.  No purchaser in the Proposed PIPE will be permitted to own more than 4.99% of the company’s common stock by means of conversion or exercise.
 
Issue:  Will the Proposed PIPE be aggregated with the First PIPE, for purposes of determining whether shareholder approval is required pursuant to Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(C)(ii) and 4350(i)(1)(D)?
 
Determination:  NASDAQ determined that the First PIPE and the Proposed PIPE will not be aggregated for purposes of Listing Rule 4350(i)(1)(D) because the investors in each transaction are different, the purposes of the transactions and the uses of proceeds are different, and the two transactions are not contingent upon each other.  In the Proposed PIPE, the company cannot issue shares at a discount prior to obtaining shareholder approval when such shares, aggregated with all prior issuances pursuant to the debentures, would represent more than 19.9% of the pre-transaction outstanding shares.  The warrants cannot be exercised at a price less than the greater of book or market value as of the date as of the definitive agreement.  Accordingly, the Proposed PIPE will meet the requirements of Listing Rule 4350(i)(1)(D).  In addition, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B) because the Proposed PIPE will not result in a change of control since no participating investor will be permitted to own more than 4.99% of the company’s common stock as a result of the Proposed PIPE.  Further, Listing Rule 4350(i)(1)(C) is not implicated by the Proposed PIPE because the issuance is not in connection with an acquisition.
 
Publication Date*: 7/31/2012 Identification Number: 963 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-95
Identification Number
961
Rule 4350(i)(1)(C)(i):  Each issuer shall require shareholder approval … prior to the issuance of designated securities … in connection with the acquisition of the stock or assets of another company if: (i) any director, officer or substantial shareholder of the issuer has a 5% or greater interest (or such persons collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in outstanding common shares or voting power of 5% or more.
 
Relevant Facts:  A company proposes a transaction (the “Transaction”) involving an entity controlled by its chairman of the board (the “Entity”). The Entity beneficially owns more than 30% of the company’s outstanding common stock.  In the proposed transaction, the Entity would be merged into a newly formed subsidiary of the company.  In exchange, the company would issue the same number of shares of the company’s common stock to the shareholders of the Entity that the Entity now holds.  The shares currently held by the Entity would be distributed to the company and immediately cancelled.  As a result, there would be no change in the number of outstanding shares of the company.  The sole change would be that the shares of the company’s common stock that were held by the Entity would now be held directly by the Entity’s shareholders.
 
Issue:  Is shareholder approval for the Transaction required under NASDAQ’s rules?
 
Determination:  NASDAQ determined that the Transaction would not require shareholder approval under the Rule because it will not result in an increase of the number of outstanding common shares or voting power.
 
Publication Date*: 7/31/2012 Identification Number: 961 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-58
Identification Number
942
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval ... prior to the issuance of designated securities … in connection with a transaction other than a public offering involving: … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company and its primary lender (the “Bank”) have an existing credit arrangement (the “Agreement’).  The Bank subsequently entered into junior participation agreements (the “Participation”) with certain investors (the “Junior Participants”).  In connection with the Participation, the Bank advanced approximately $10,000,000 to the company, pursuant to the Agreement, and the Junior Participants acquired 100% participation in the Bank’s loan to the company.  Effectively, the Junior Participants loaned the $10,000,000 to the company.  Officers and directors of the company hold approximately $5,000,000 principal amount of the Participation.  The company is proposing to issue common stock, at market value, to satisfy the $10,000,000 Participation, thus converting the original debt to equity (the “Proposed Transaction”).  The issuance would be less than 20% of the company’s pre-transaction outstanding shares.
 
Issue:  Is shareholder approval required for the Proposed Transaction under NASDAQ’s rules?
 
Determination:  No.  In this case, NASDAQ determined that shareholder approval under Listing Rule 4350(i)(1)(D) is not required because the issuance will equal less than 20% of the company’s pre-transaction outstanding shares.  Since no investor will, alone or as a member of a group, own or otherwise control 20% or more of the company’s common stock or voting power as a result of the Proposed Transaction, no change of control, as set forth in Listing Rule 4350(i)(1)(B), will occur.   Although officers and directors will receive shares in the Proposed Transaction, the issuance will be at a price that is not less than market value.  Finally, the company represented that its audit committee, as required by Listing Rule 4350(h), had reviewed and approved the Proposed Transaction.
 
Publication Date*: 7/31/2012 Identification Number: 942 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-38
Identification Number
930
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval ... prior to the issuance of designated securities … in connection with a transaction other than a public offering involving: … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company is considering a public offering (the “Public Offering”) of its common stock.   Approximately one year earlier, the company’s shareholders had approved a private placement of Series A Convertible Preferred Stock and warrants (the “Financing”).  Shareholder X was one of the participants in the private placement.  Upon the closing of the Financing, Shareholders X and Y beneficially owned approximately 25% and 32%, respectively, of the company’s outstanding shares.  One year later, Shareholder X has become the largest beneficial owner as a result of open market purchases.  At the time of the proposed Public Offering, Shareholders X and Y beneficially own 24.7% and 24.5%, respectively.
 
Pursuant to the terms of the Financing, all of the investors were afforded the right to participate in future equity offerings by the company up to an amount that would enable them to maintain their pre-transaction beneficial ownership percentage.  If Shareholder X was to exercise its right, this investor could purchase up to 11.6% of the company‘s pre-transaction outstanding shares.  Any shares bought by Shareholder X would be: (i) purchased in the public offering at the same terms available to all other purchasers; and (ii) covered by the same registration statement as all other shares in the Transaction.
 
Issue:  Is shareholder approval required for the investors’ participation in the Public Offering under NASDAQ’s rules?
 
Determination:  No.  In accordance with NASDAQ’s shareholder approval requirements, shares issued in a public offering are not subject to shareholder approval.  In addition, Shareholder X’s participation in the Public Offering would be pursuant to the terms of the participation rights from the Financing, a shareholder approved transaction.  As such, NASDAQ determined that Shareholder X’s participation in the proposed Public Offering would not require shareholder approval under Listing Rule 4350(i)(1)(D).  In addition, prior to the Public Offering Shareholder X was the largest beneficial owner of the company’s outstanding stock as a result of open market purchases, which are not considered for purposes of NASDAQ’s shareholder approval requirements.  Accordingly, shareholder approval, pursuant to Listing Rule 4350(i)(1)(B), would not be required since a change of control would not result from the proposed Public Offering.
 
 
Publication Date*: 7/31/2012 Identification Number: 930 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-20
Identification Number
918
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval ... prior to the issuance of designated securities … in connection with a transaction other than a public offering involving: … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company proposes a private placement (the “Unit Offering”).  Pursuant to the Unit Offering, the company intends to sell units consisting of one share of common stock and one warrant exercisable into a fractional share of common stock.  The common stock and warrants represent approximately 25% and 15%, respectively, of the company’s pre-issuance total shares outstanding.
 
The price of the units will equal the market value of the common stock immediately preceding the signing of the definitive agreement, plus an additional cost to allow for the attribution of $0.125 for each full share purchasable under a warrant.  The warrants will contain anti-dilution provisions for stock splits and similar events, including transactions affecting all shareholders generally, but will not contain other adjustments affecting either the price or the number of shares.  The exercise price of the warrants would be set at a 25% premium (or higher) to the price per unit.
 
Additionally, the company states that no participating investor, alone or as a member of a group, will own or otherwise control greater than 19.9% of the company’s common stock or 19.9% of the voting power of the company on a post-transaction basis.
 
Issue:  Is shareholder approval required for the Unit Offering?
 
Determination:  No.  By structuring the transaction as described, shareholder approval will not be required under NASDAQ rules.  While the Unit Offering will result in an issuance of 20% or more of the company’s pre-transaction outstanding shares, as contemplated by Listing Rule 4350(i)(1)(D)(ii), the price of the common stock to be issued will not be less than the greater of book and market value.  Further, the warrants to be issued were not priced at a discount, assigned an appropriate value and do not contain any price protection or anti-dilution provisions.  In addition, shareholder approval is not required, pursuant to Listing Rule 4350(i)(1)(B), because the Unit Offering will not result in a change of control, since no participating investor, alone or as a member of a group, will own or otherwise control 20% or more of the company’s common stock or voting power following the proposed transaction.
 
Publication Date*: 7/31/2012 Identification Number: 918 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-12
Identification Number
912
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval ... prior to the issuance of designated securities … in connection with a transaction other than a public offering involving: … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  In late 2003, a company proposed a private placement (the “Offering”).  Pursuant to the Offering, the company intends to sell common stock and warrants exercisable into common stock to a number of accredited investors.  The common stock and warrants will constitute approximately 50% and 25%, respectively, of the company’s pre-transaction outstanding shares.
 
The price of the units will equal the market value of the common stock immediately preceding the execution of the definitive agreement, plus an additional cost to allow for the attribution of $0.125 for each full share purchasable under a warrant.  The warrants will be exercisable at the same market value at any time after issuance.  The warrants will contain anti-dilution protection for stock splits and similar events, but will not contain price adjustments.  According to the terms of the transaction, no investor individually, or as part of a group, can beneficially own more than 19.9% of the company’s outstanding common shares or voting power as a result of the issuance.
 
The company subsequently closed only a portion of the unit offering (the “Initial Issuance”) and now plans to issue the remainder of the securities discussed above (the “Proposed Transaction”) on virtually identical terms to the securities issued in the Initial Issuance.  The market value will be determined immediately prior to the company entering into the binding agreement for the Proposed Transaction plus the attribution of the appropriate value for the warrants.  The Proposed Transaction, if consummated, together with the Initial Issuance, would result in the issuance of common shares and warrants convertible into common shares on a fully-diluted basis, totaling 45% of the company’s total shares outstanding prior to the Initial Issuance.  The company noted that only differences between the two issuances would be that the securities would be sold pursuant to separate agreements, and that the shares to be issued in the Proposed Transaction would have a different price than those issued in the Initial Issuance.
 
Issue:  Is shareholder approval required for the Proposed Transaction?
 
Determination:  No.  NASDAQ determined that the Proposed Transaction does not require shareholder approval pursuant to the Rules.  While the Proposed Transaction will be aggregated with the Initial Issuance for purposes of Listing Rule 4350(i)(1)(D), and the aggregate number of shares issuable pursuant to both transactions exceeds 20% of the company’s total shares outstanding, both transactions were priced at no less than the greater of book or market value.  Therefore, shareholder approval under Listing Rule 4350(i)(1)(D)(ii) was not required for either the Initial Issuance or the Proposed Transaction.  In addition, shareholder approval for the Proposed Transaction is not required pursuant to Listing Rule 4350(i)(1)(B) because the transaction will not result in a change of control since no participating investor will own alone, or as a group, hold 20% or more of the company’s common stock or voting power following the Proposed Transaction.
 
Publication Date*: 7/31/2012 Identification Number: 912 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-52
Identification Number
1019
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Rule 4310(c)(17)(D):  The issuer shall be required to notify NASDAQ on the appropriate form no later than 15 calendar days prior to … entering into a transaction that may result in the potential issuance of common stock (or securities convertible into common stock) greater than 10% of either the total shares outstanding or the voting power outstanding on a pre-transaction basis.
 
Relevant Facts:  A company proposes a private placement (the “Unit Offering”).  Pursuant to the Unit Offering, the company intends to sell units consisting of one share of common stock and one warrant exercisable into an additional share of common stock to a number of accredited investors.  The stock issuance will constitute approximately 50% of the company’s pre-transaction outstanding shares with 50% warrant coverage, or warrants exercisable into approximately 25% of the company’s pre-transaction shares outstanding.  The price of the Units will be fixed using the market value of the common stock immediately preceding the execution of the binding agreement (the “Market Price”), plus $0.0625 to allow for the attribution of $0.125 for each full warrant (i.e., 50% multiplied by $0.125 equals $0.0625).  The warrants will be exercisable at the Market Price at any time after issuance.  The warrants will contain anti-dilution protection for stock splits and similar events, but will not contain price adjustments.  According to the terms of the transaction, no investor individually, or as part of a group, can beneficially own more than 19.9% of the company’s outstanding common shares or voting power as a result of the issuance.  The company also would like to close the Unit Offering prior to the conclusion of the 15 day notification period prescribed in Listing Rule 4310(c)(17)(D).
 
Issue:  Does NASDAQ require shareholder approval for this transaction?  
 
Determination:  No.  Pursuant to NASDAQ’s rules, shareholder approval is not required for the Unit Offering.  Although the share issuance will exceed 20% of the company’s pre-transaction outstanding shares, the fixed issuance price of the stock and the fixed exercise prices of the warrants will not be less than the greater of book and market value.  Accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D).  Further, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B), because no participant in the Unit Offering can alone, or together with others, acquire more than 19.9% of the company’s outstanding common stock or voting power.  Accordingly, there is no possibility of a change of control as a result of the Unit Offering.
 
Issue:  May the company complete the Unit Offering prior the end of the 15-day period contemplated by Listing Rule 4310(c)(17)(D)?
 
Determination:  Given that the company submitted its Notification: Listing of Additional Shares and that NASDAQ has completed its review of the Unit Offering, the company may close the transaction prior to the expiration of the 15-day period referenced in Listing Rule 4310(c)(17)(D).
 
Publication Date*: 7/31/2012 Identification Number: 1019 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-43
Identification Number
1010
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company proposes to conduct a tender offer to exchange previously issued convertible notes from a particular series for a combination of new convertible notes and common stock (the “Exchange Offer”).  The company represented that the conversion price of the new notes will be at a significant premium to the market price of the common stock on the last day prior to the commencement of the Exchange Offer.  The company also stated that the shares of common stock will be at issued a price (the “Reference Price”), which is set at market value prior to the expiration of the tender offer based on the closing bid price.  In no event will the conversion price of the notes be less than the Reference Price.  In the event of early redemption of the new notes, the company will be required to pay an early call fee in cash or in stock; however, in no event will any issuance of such stock be at a price less than the Reference Price.  The company also stated that no one holder will own more than 20% of the outstanding common stock or voting power on a post-transaction basis.
 
Issue:  Is shareholder approval required for the proposed transaction?
 
Determination:  No.  Since the issuance of common stock will not be at a price that is less than the greater of book or market value, and the conversion price for the new notes similarly will not be below the common stock offer price (Reference Price), the transaction does not require shareholder approval pursuant to Listing Rule 4350(i)(1)(D)(ii).  In addition, the transaction will not result in a change of control because no one holder would own more than 20% of the outstanding common stock or voting power on a post-transaction basis.  As a result, the Exchange Offer would not require shareholder approval pursuant to Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 1010 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-42
Identification Number
1009
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Rule 4310(c)(17)(D):  The issuer shall be required to notify NASDAQ on the appropriate form no later than 15 calendar days prior to: … entering into a transaction that may result in the potential issuance of common stock (or securities convertible into common stock) greater than 10% of either the total shares outstanding or the voting power outstanding on a pre-transaction basis.
 
Relevant Facts:  A company intends to raise approximately $13 million through the issuance of common stock and warrants to purchase common stock to approximately 10 accredited investors (the “Proposed Transaction”).  The company also plans to issue warrants to the placement agent representing approximately 5% of the number of common shares being offered.  The total issuance would be approximately 16% of the total shares outstanding on a pre-transaction basis.  The common stock will be issued at a discount to market price, and the warrants will be exercisable at a premium.  The warrants will contain anti-dilution provisions for stock splits and similar events, including transactions affecting all shareholders generally, but will not contain other adjustments affecting either the price or the number of shares.  The company stated that none of the participants in the transaction are officers or directors of the company or persons known to be current shareholders.  The company would like to close the Proposed Transaction prior to the conclusion of the 15 day notification period prescribed in Listing Rule 4310(c)(17)(D).
 
Issue:  Is shareholder approval required for the Proposed Transaction?
 
Determination:  No.  Pursuant to Listing Rule 4350(i)(1)(B), shareholder approval is not required because the consummation of the Proposed Transaction will not result in a change of control of the company.  No investor will own alone, or as a member of a group, 20% or more of the company’s common stock or voting power following the Proposed Transaction.  Further, shareholder approval is not required, pursuant to Listing Rule 435(i)(1)(D)(ii), because the total issuance in the Proposed Transaction will equal less than 20% of the total shares outstanding on a pre-transaction basis.
 
Issue:  May the company complete the Proposed Transaction prior the end of the 15-day period contemplated by Listing Rule 4310(c)(17)(D)?
 
Determination:  Given that the company submitted its Notification: Listing of Additional Shares and that NASDAQ has completed its review of the Proposed Transaction, the company may close the Proposed Transaction prior to the expiration of the 15-day period referenced in Listing Rule 4310(c)(17)(D).
 
Publication Date*: 7/31/2012 Identification Number: 1009 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-31    
Identification Number
1000
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company has previously issued Convertible Subordinated Notes (the “Notes”), which are convertible into shares of the company above the market price on the date of the original issuance.  The company proposes to initiate an exchange offer (the “Exchange Offer”) to all holders of the Notes, wherein all of the outstanding Notes would be exchanged for shares at a price greater than the book or market value of the stock.
 
In the event that all of the Notes are exchanged, the three largest shareholder positions would increase, but none of their ownership interests would increase beyond 20% of the total shares outstanding.  However, if only the three largest holders of the Notes participated in the Exchange Offer, it would bring the share ownership of the largest shareholder above 20% of the total shares outstanding.  The company stated that it would consider limiting the exchange, so that following the Exchange Offer, no one person or entity would own 20% or more of its ordinary shares.
 
Issue:  Does NASDAQ require shareholder approval for this transaction?
 
Determination:  The Exchange Offer would not require shareholder approval under Listing Rule 4350(i)(1)(D)(ii), because the shares were being issued above book and market value.  However, based on the potential for one of the company’s largest shareholders to increase its ownership interest beyond 20% through participation in the Exchange Offer, the transaction will create the potential for a change of control and will, therefore, require shareholder approval pursuant to Listing Rule 4350(i)(1)(B).
 
In the event that the company arranges to limit the Exchange Offer, so that no one person or entity could increase its ownership position above 20% or more of the total shares outstanding as a result of the Exchange Offer, then NASDAQ would concur that shareholder approval would not be required under the Rules.
 
Publication Date*: 7/31/2012 Identification Number: 1000 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-22
Identification Number
993
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company proposes a private placement (the “Private Placement”) and a recapitalization (the “Recapitalization”).
 
Pursuant to the Private Placement, the company intends to sell common stock and warrants (the “New Warrants”) to 30 accredited investors.  The stock issuance will exceed 20% of its company’s pre-transaction outstanding shares and the company will also issue warrants in an amount equal to 35% of the newly issued common shares.  The price of the units of common stock and warrants will be fixed using the market value immediately preceding the execution of the binding agreement, plus $0.04375 to allow for the attribution of $0.125 for each full warrant (i.e., 35% multiplied by $0.125 equals $0.04375).  The warrants will be exercisable at a fixed price at any time after their issuance and will expire in five years.  The warrants will contain anti-dilution protection for stock splits and similar events, but will not contain price adjustments.  According to the terms of the transaction, no investor individually, or as part of a group, can beneficially own more than 15% of the company’s outstanding common shares or voting power as a result of this transaction.
 
A portion of the proceeds from the Private Placement will be used to fund the cash portion of an exchange agreement with the holders of the company’s existing preferred stock and existing warrants (the “Recapitalization”).  In addition, the company will issue non-convertible term loans and new warrants (the “Loan Warrants”) to the preferred stock holders.  The Loan Warrants will enable the holder to purchase a certain number of common shares at a fixed exercise price, which will be the average closing bid price for the four or five days immediately preceding the issuance of the warrants.  The terms of the Loan Warrants will contain a provision limiting their exercisability, so that no holder can beneficially own more than 15% of the company’s outstanding common shares.
 
Issue:  Does NASDAQ require shareholder approval for either or both of these transactions?
 
Determination:  Pursuant to NASDAQ’s rules, shareholder approval is not required for either the Private Placement or the Reorganization.  Although the share issuance will exceed 20% of the company’s pre-transaction shares outstanding, the fixed issuance price of the units and the fixed exercise prices of the warrants will not be less than the greater of book and market value.  Accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D).  Further, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B), because no purchaser in either the Private Placement or in the Reorganization can acquire alone, or together with others, more than 20% of the company’s outstanding common stock or voting power. Accordingly, there is no change of control.
 
Publication Date*: 7/31/2012 Identification Number: 993 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-13
Identification Number
984
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company is proposing a repurchase of certain debt (the “Debt Repurchase”) and a sale of common stock and warrants (the “Equity Issuance”).
 
In the Debt Repurchase, the company will repurchase certain of its outstanding convertible subordinated debentures for a combination of cash, common stock, and warrants (the “Debt Warrants”).  The repurchase is expected to involve five holders of the company’s debt (the “Debt Holders”) and would involve separate negotiations with each.  The issuance of common stock, which will be at a discount to market value, will be limited to less than 20% of the company’s pre-transaction outstanding shares.  In the event of a change in control of the company, the Debt Warrants will be exercisable for $0.01 per common share, but only after the company’s shareholders approve such an issuance.  Otherwise, the warrants will be exercisable, beginning six months after issuance, at the market value of the company’s common stock immediately preceding the execution of the binding agreement.  Although the Debt Warrants have certain anti-dilution provisions, the company has represented that it will not take any action that would trigger shareholder approval under NASDAQ rules, unless the company obtains advance shareholder approval of such issuance.  In any event, there will be no alternative outcome if shareholders do not approve the exercise of the warrants.
 
In the Equity Issuance, the company proposes the issuance of common stock at a discount to market value and warrants, which would be immediately exercisable.  While a definitive agreement had not been reached, the company represented that it would limit the potential issuance (including shares issuable upon the exercise of the warrants) to less than 20% of the company’s pre-transaction outstanding common shares.
 
None of the Debt Holders will participate in the Equity Issuance, and there are no contingencies between the two transactions.  The proceeds from the Equity Issuance will be used for general corporate purposes and will not be used to fund the Debt Repurchase.  No officer or director of the company will participate in either transaction.  Further, no participant in either transaction will own or have the right to acquire more than 19.9% of the outstanding common stock or voting power of the company as a result of the transactions.
 
Issue:  Does NASDAQ require shareholder approval for these transactions?
 
Determination:  No.  The shares to be issued to the Debt Holders will be aggregated for purposes of determining whether the Debt Repurchase reaches the 20% threshold set forth in Listing Rule 4350(i)(1)(D)(ii).  Shares issuable upon the exercise of the Debt Warrants at $0.01 per share will not contribute to the 20% calculation, because such issuance can only take place after shareholder approval is obtained.  Likewise, shares issuable at an exercise price equal to or greater than the market and book value on the date of the definitive agreement will not contribute to the 20% calculation.  Further, the warrants are not exercisable until six months after closing and are exercisable at a price equal to or greater than the market and book value on the date of the binding agreement.
 
The Equity Issuance will not require shareholder approval, pursuant to Listing Rule 4350(i)(1)(D)(ii), because the issuance is limited such that it cannot exceed 20% of the company’s pre-transaction outstanding shares (including shares issuable upon the exercise of the warrants).
 
In addition, the Debt Repurchase and the Equity Issuance will not be aggregated for purposes of Listing Rule 4350(i)(1)(D)(ii), because the investors and the use of proceeds in each transaction are different, and there are no contingencies between the two transactions.
 
Finally, neither of the proposed transactions can result in a change of control because no individual or entity will own, or have the right to acquire, 20% or more of the outstanding common stock or voting power of the company as a result of the transactions.  Therefore, shareholder approval pursuant to Listing Rule 4350(i)(1)( B) is not required.
 
Publication Date*: 7/31/2012 Identification Number: 984 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2003-6
Identification Number
977
Rule 4350(i)(1)(A):  Each issuer shall require shareholder approval of a plan or arrangement  … when a stock option or purchase plan is to be established or other arrangement made pursuant to which stock may be acquired by officers or directors, except for warrants or rights issued generally to security holders of the company or broadly based plans or arrangements including other employees (e.g. ESOPs).  The establishment of a plan or arrangement under which the amount of securities which may be issued does not exceed the lesser of 1% of the number of shares of common stock, 1% of the voting power outstanding, or 25,000 shares will not generally require shareholder approval.
 
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Relevant Facts:  A company proposes to sell shares of its common stock and a warrant exercisable for common stock to the chairman of its board.  The purchase price per common share will be the market value immediately preceding the execution of the definitive agreement, plus $0.125 for each share of common stock subject to the warrant.  The warrant will be exercisable at a 25% premium to the market value.  The warrant does not contain any anti-dilution provisions other than provisions to pro-ratably adjust the number of shares issuable upon exercise in the event of stock dividends, stock splits or similar events effecting holders of the common stock generally.
 
Giving effect to the exercise of the warrant, the proposed transaction will result in the potential issuance of approximately 10% of the company’s pre-transaction outstanding common shares.  While the chairman already owns shares of the company’s common stock, his ownership would not exceed 20% of the company’s common stock as a result of the transaction.
 
Issue:  Is shareholder approval required for the issuance of common stock to a director of a listed company?
 
Determination:  Because the maximum potential issuance will be less than 20% of the pre-transaction total shares or voting power outstanding, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D)(ii).  Further, although the shares will be issued to a member of the company’s board of directors, shareholder approval is not required, pursuant to Listing Rule 4350(i)(1)(A), because the sale is not at a discount to market value.  Lastly, because the chairman’s ownership upon consummation of the transaction will not exceed 20% of the company’s outstanding shares or voting power, a change of control will not occur as a result of the proposed transaction.  Accordingly, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 977 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2014-4
Identification Number
1130
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from Nasdaq’s shareholder approval requirements with respect to the proposed issuance of securities (the “Proposed Transaction”).
 
You have stated that since its inception, the Company has recorded net losses in every fiscal year but one. Additionally, in the most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You have stated that, without the Proposed Transaction, the Company has only enough cash to fund operations for the next four weeks.
 
In the Proposed Transaction, the Company will issue units consisting of common stock and convertible preferred stock (the “Preferred Stock”). The purchase price would be at a discount to the current market value of the units (when such value is determined by adding the current market values of the common stock shares issued as part of the units and common stock shares to be issued upon a future conversion of the Preferred Stock shares issued as part of the units).
 
You stated that investors in the Proposed Transaction would include officers and directors, as well as current and new shareholders of the Company (the “Proposed Investors”). Following completion of the Proposed Transaction and subject to conversion of the Preferred Stock, the Proposed Investors would own greater than 50% of the outstanding common stock shares, with the largest shareholder owning more than 20% of the outstanding common stock shares. The common stock shares issued or issuable as a result of the Proposed Transaction will represent more than 20% of the pre-transaction total number of outstanding common stock shares.
 
You stated that the Company has pursued multiple alternative financing strategies for over one year, including the potential sale of the Company, and that there are no realistic alternatives to the Proposed Transaction. You stated that if the Proposed Transaction is not completed in the very near term, the Company would be forced to cease operations and terminate most employees, and that the Company’s assets would be liquidated through an assignment for the benefit of creditors or through a bankruptcy process. You stated that there can be no assurance that any liquidation proceeds would remain for distribution to the Company’s shareholders. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
 
Without the requested exception, shareholder approval may be required pursuant to each of the following rules: Listing Rule 5635(b), because one of the Proposed Investors would own more than 20% of the shares of common stock outstanding upon completion of the Proposed Transaction; Listing Rule 5635(c), because the issuance at a discount of common stock shares to the officers and directors constitutes equity compensation; and Listing Rule 5635(d), because common stock shares issued or issuable as a result of the Proposed Transaction at a price less than the greater of book or market value would represent more than 20% of the pre-transaction number of outstanding common stock shares.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid the ceasing of operations. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration to be received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
 
Publication Date*: 10/7/2014 Identification Number: 1130 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-15
Identification Number
733
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Listing Rules 5635(b), 5635(d), and IM-5635-2 (the “Rules”) to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked about the applicability of the voting rights requirements of Listing Rule 5640 and IM-5640 (the “Voting Rights Requirements”) to rights that the Investor in the Proposed Transaction would receive allowing it to designate members to serve on the company’s board of directors and to have non-member board observers (the “Designation Rights”).
 
The company has two classes of common stock, Class A, which is listed on NASDAQ, and Class B, which is not publicly traded (collectively, the “Common Stock”). The Class A has one vote per share, and the Class B has ten votes per share. The number of shares of Class A outstanding equals approximately 97% of the shares of Common Stock outstanding, and the number of shares of Class B outstanding equals approximately 3% of the shares of Common Stock outstanding. The aggregate voting power of the Class A is approximately 79% of the company’s total outstanding voting power, and the Class B, approximately 21%. The company’s chief executive officer owns all of the Class B shares.  No other shareholder owns as much as 10% of the company’s outstanding voting power or outstanding shares of Common Stock.
 
According to the information you provided, in the Proposed Transaction the company would issue to the Investor: (i) non-convertible senior secured notes with an aggregate principal amount equal to approximately three times the current aggregate market value of the company’s outstanding shares of Common Stock; and (ii) warrants to purchase shares of Class A equal in number to approximately 55% of the pre-transaction outstanding shares of Common Stock, subject to the restrictions described below (the “Warrants”). On a post-transaction basis, the potential issuance would equal approximately 36% of the then outstanding shares of Common Stock and approximately 31% of the company’s then outstanding voting power.
 
Pursuant to the Designation Rights, upon the closing of the Proposed Transaction one designee of the Investor would be added to the company’s board of directors (the “Board”), representing not more than 11% of the total number of members of the Board.  Following shareholder approval of the Proposed Transaction, the Investor would be entitled to a second designee on the Board, with the two designees representing not more than 20% of the total number of members of the Board. In addition, the Investor would be entitled to have one or two non-voting observers attend meetings of the Board. At any given time, the number of designees together with the number of observers would not exceed two. The audit, nomination, and compensation committees could exclude the observers from the proceedings at the discretion of the respective committee. The Designation Rights would include step-downs for reduced Board representation if the size of the Investor’s stake in the company were to decrease.
 
Absent shareholder approval, the exercise price of the Warrants would not be less than the greater of book or market value prior to entering into the binding agreement (the “Exercise Price Restriction”). In addition, absent shareholder approval, a holder of the Warrants would not be entitled to exercise Warrants if immediately following such exercise: (i) the aggregate voting power of such holder (or any group including such holder) would exceed 19.9% of the aggregate voting power of the company; or (ii) the aggregate shares of the class of common stock underlying the Warrants owned by such holder (or any group including such holder) would exceed 19.9% of the company’s aggregate outstanding common shares (the “Ownership Limitation”).
 
The Exercise Price Restriction and the Ownership Limitation would apply until such time as shareholder approval is obtained.  The Warrants would not be exercisable to any extent until the earlier of: (i) shareholder approval; (ii) the holding of a specified maximum number of meetings of the company’s shareholders at which shareholder approval would be sought; and (iii) a specified maximum period of time after the closing of the Proposed Transaction during which the company would be permitted to seek shareholder approval pursuant to the agreement relating to the Proposed Transaction. The interest rate on the notes would increase over time unless shareholder approval has been obtained.
 
Following our review of the information you provided, we have determined that the Proposed Transaction, structured as you described and as summarized above, would satisfy the requirements of the Rules. Given the Ownership Limitation, the Proposed Transaction could result in a change of control only after shareholder approval is obtained, thereby satisfying Rule 5635(b). Given the Exercise Price Restriction, the exercise price could be less than the greater of book or market value only after shareholder approval is obtained, thereby satisfying Rule 5635(d). With respect to IM-5635-2, no shares of common stock could be issued in the Proposed Transaction (i.e., the Warrants would not be exercisable to any extent), unless either: (i) shareholder approval has been obtained, or (ii) shareholder approval could no longer be sought pursuant to the terms of the agreement. As such, absent shareholder approval, the Warrant would be exercisable only if there would not be a subsequent shareholder vote to approve the Proposed Transaction, and then only to the extent permissible under the Exercise Price Restriction and the Ownership Limitation. Accordingly, the Proposed Transaction complies with IM-5635-2. In addition, the Designation Rights satisfy the Voting Rights Requirements given the economics of the Proposed Transaction relative to the company’s aggregate market value and because such rights would decline if the size of the Investor’s stake in the company were to decrease.
 
Publication Date*: 7/31/2012 Identification Number: 733 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-21
Identification Number
739
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed issuance of securities (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue warrants (the “Warrants”) to a current shareholder (the “Shareholder”) in connection with the Shareholder’s providing a credit facility (the “Credit Facility”). The Warrants would be exercisable for less than the book value per share. The aggregate number of shares of common stock that could be issued upon the exercise of the Warrants would be limited to 19.99% of the pre-transaction outstanding shares of common stock subject to proportional adjustment for stock splits and similar events (the “Aggregate Limit”). In addition, a holder of the Warrants, whether the Shareholder or a subsequent transferee, could not exercise the Warrants if the result would be the holder’s owning more than 19.99% of the company’s outstanding shares of common stock or voting power after giving effect to the shares issued as a result of such exercise (the “Ownership Limit”). The Credit Facility is not convertible into common stock.
 
Following our review of the information you provided, we have determined that the Proposed Transaction, structured as you described, would not require shareholder approval under the Rules. Given the Ownership Limit, shareholder approval is not required under Listing Rule 5635(b) because the issuance could not result in a change control.  Given the Aggregate Limit, shareholder approval is not required under Listing Rule 5635(d) because the number of shares that could be issued is less than 20% of the pre-transaction outstanding shares.
 
 
Publication Date*: 7/31/2012 Identification Number: 739 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-6
Identification Number
1093

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

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

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

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

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

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

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

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

Publication Date*: 10/23/2013 Identification Number: 1093 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-23
Identification Number
799
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval and voting rights requirements to the company’s proposed issuance of securities (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(D), 4351 and IM-4350-2 (the “Rules”).
 
According to the information you provided, in the Transaction the company would issue shares of non-voting exchangeable preferred stock (the “Preferred Stock”) to the Investor in a private placement.  Although the final terms have not been reached, the number of common shares that could be issued in the event of an exchange could exceed 20% of the pre-transaction total shares outstanding at a price that is less than market value.  The Preferred Stock would be exchangeable for common stock only if shareholder approval is first obtained.  The holder of the Preferred Stock would have no voting rights other than the right to consent to any amendment of the terms or to the creation or issuance of any capital stock or debt securities that rank senior to or equal with the Preferred Stock, or as otherwise required by applicable state law.
 
The Investor would have the right to designate one member of the company’s seven-member board of directors for so long as it owns at least 50% of the Preferred Stock, or in the event of an exchange for common, for so long as it owns at least: (i) 10% of the company’s total stock outstanding or (ii) 50% of the common stock acquired pursuant to the Exchange.  If shareholder approval is not received within one year of closing, the Preferred Stock would be entitled to receive cumulative cash dividends at an annual rate of 10%.  If still outstanding after four years, the Preferred Stock would become redeemable for cash at the option of either the company or the holder.  The holder may require the company to redeem the Preferred Stock for cash upon the occurrence of certain events, such as liquidation or a change of control.
 
Following our review of the information you provided, we have concluded that the Transaction, structured as you described, would comply with the Rules because no common shares or voting power (except limited voting power as describe above) could be issued until after shareholder approval is obtained.  Specifically, the Transaction would comply with: (i) Listing Rule 4350(i)(1)(B) because a change in control could not occur without shareholder approval, and (ii) Listing Rule 4350(i)(1)(D) because the issuance could not reach 20% of the pre-transaction outstanding shares or voting power without shareholder approval.  Further, IM-4350-2 is not implicated because no shares of common stock could be issued prior to the shareholder vote.  In addition, the right to designate one director would be consistent with the voting rights provisions of Listing Rule 4351 because the percentage of the board of directors that may be appointed by the Investor would not exceed its percentage economic contribution to the company.  Please be advised that you have not asked us to reach, and we have not reached, a conclusion as to whether any director designated by the Investor would be eligible to be an independent director or to
Publication Date*: 7/31/2012 Identification Number: 799 Mailto Link
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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