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Frequently Asked Questions
  Staff Interpretation Letter 2014-3
Identification Number 1129
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635(d)(2) (the “Rule”) to a proposed transaction that would be agreed to immediately before the Company’s listing but completed following the listing.
 
According to the information you provided, the Company is currently a wholly-owned subsidiary of a public company (the “Parent”). The Parent intends to separate the Company by distributing the Company’s common stock to the holders of the Parent’s common stock (the “Spinoff”). In the Spinoff, each holder of the Parent’s common stock would be entitled to receive a set number of shares of the Company’s common stock for each share of the Parent’s common stock held by such holder on the record date. Shares of the Company’s common stock are expected to begin trading on Nasdaq on a “when issued” basis on or shortly before the record date and “regular way” on the day the Company’s shares are distributed to the Parent’s shareholders. Parent will remain a separately traded public company.
 
The Company may pursue a private placement of shares of the Company’s common stock or securities convertible into or exercisable for the Company’s common stock (the “Transaction”). The definitive agreement for the purchase and sale of such securities would be executed prior to the distribution date of the Spinoff. At the time such definitive agreement is executed, the Parent, as the sole shareholder of the Company, would approve the terms of the Transaction. However, the Transaction would not be consummated, and the securities would not be issued, until after the distribution date of the Spinoff. The Transaction may result in the issuance of more than 20% of the Company’s common stock or voting power outstanding before the issuance. The issuance may be for less than the greater of book or market value of the shares of the Company’s common stock.
 
Following our review of the information you provided, we have determined that if the Transaction results in the potential issuance, at a price less than the greater of book or market value, of shares equal to 20% or more of the common stock or voting power outstanding before the issuance, then the Rule would require shareholder approval of the Transaction because the Company will be listed on Nasdaq at the time of the issuance. However, approval of the Transaction by the Parent prior to the distribution date of the Spinoff, as the sole shareholder of the Company, would satisfy this requirement.
 
Publication Date*: 10/7/2014 Identification Number: 1129 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2012-9  
Identification Number 1071
This is in response to your correspondence regarding whether an issuance of the Partnership’s common units to the New Company would be treated as a public offering for purposes of IM-5635-3 and, therefore, not subject to the shareholder approval requirements of Rule 5635.

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

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

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

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

Publication Date*: 2/19/2013 Identification Number: 1071 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2012-7
Identification Number 1068

This is in response to your correspondence regarding whether certain proposed transactions (the “Proposed Transactions”), which would be undertaken in connection with an acquisition, would require the approval of the Partnership’s unitholders or the Corporation’s shareholders. The Partnership and Corporation are each listed on NASDAQ. The Corporation’s assets consist almost entirely of interests in the Partnership, including approximately 25% of its units and a 100% interest in its general partner.

The Proposed Transactions are designed to allow the Partnership to acquire a privately-held company (the “Target”) in exchange for a combination of Partnership units, cash (the “Cash Consideration”), and shares of the Corporation’s common or non-voting preferred stock (the “Shares”) (collectively, the “Acquisition Consideration”). Three members of the Corporation’s board, one of whom is also on the Partnership’s board (the “Partnership Director”), have an indirect economic interest in the Target, representing an aggregate indirect ownership of approximately 10% of the Target. The Acquisition Consideration would be paid to the owners of the Target. To the extent the Target’s owners are entities, rather than individuals, each such entity would individually determine whether, and to what extent, to distribute its share of the Acquisition Consideration to its owners.

To raise funds that would be used as a part of the Cash Consideration, the Partnership is considering a private placement of its common units (or units that would be convertible into its common units) to several institutional investors at a discount to market value (the “Partnership Private Placement”). A member of the Partnership’s board is a senior managing director (the “Board Member”) of one of the potential investors (the “Investor”). The Board Member has not participated, and would not participate, in the discussions and board meetings with respect to the Partnership Private Placement and would resign from the Partnership’s board prior to the execution of any definitive agreement with respect to the Partnership Private Placement. You asked whether the Partnership Private Placement would be considered equity compensation, requiring approval by the Partnership’s unitholders under Listing Rule 5615(a)(4)(H).

The Partnership may raise additional cash to be used as part of the Cash Consideration by selling common units to the Corporation at a price not less than their market value. The Corporation would raise the funds for this purchase through the issuance of non-voting preferred stock to one or more investors, including the Investor (the “Corporation Private Placement”). No shares of common stock would be issuable in the Corporation Private Placement until the Corporation’s shareholders approve the transaction, at which time the preferred shares would automatically convert into common shares at a discount to their market value at the time of the issuance of the preferred shares. The preferred stock would receive a quarterly cash dividend, which, if the preferred stock remains outstanding one year after issuance, could be adjusted up to 115% of the per share dividend paid on the Corporation’s common stock. You stated that these terms are based on, and are consistent with, similar transactions of other companies in the same industry. An investor in the Corporation Private Placement would be allowed to designate one member of the Corporation’s board of directors (the “New Director”). You asked: (i) whether the adjustment in the dividend rate would be an “alternative outcome” under IM-5635-2; and (ii) whether the Corporation Private Placement would be considered equity compensation with respect to the New Director, requiring shareholder approval under Rule 5635(c).

In order for the Partnership to obtain the Shares that would be used as part of the Acquisition Consideration, it would issue common units in exchange for shares of non-voting preferred stock of the Corporation (the “Preferred Exchange Shares”). The Preferred Exchange Shares would be convertible into shares of the Corporation’s common stock only after shareholder approval is obtained (the “Share Exchange”). The Share Exchange would be at prices not less than the respective market values of the common units and the common stock. The Preferred Exchange Shares would not be entitled to cash distributions for six quarters but would receive distributions in-kind, which also would be convertible into common stock only after shareholder approval is obtained. Dividends on the Preferred Exchange Shares would be subject to adjustment after six quarters. You stated that these terms are based on, and are consistent with, similar transactions of other companies in the same industry.

Although several directors and officers of the Corporation own common units of the Partnership, the ownership of each is less than 5% and in the aggregate is less than 10%. Currently, no substantial shareholder of the Corporation has a 5% or greater interest in the Partnership. The Investor, however, currently owns a 5% interest in the Partnership and is considering purchasing shares of common stock of the Corporation currently held by another party. Upon the completion of that purchase, which could occur prior to the closing of the Proposed Transactions, the Investor would be a substantial shareholder in the Corporation. You asked whether the proposed structure of the Share Exchange would satisfy the shareholder approval requirements.

Finally, in connection with the acquisition, the Corporation contemplates that it may amend its agreement with the Partnership, which sets forth the amount of quarterly cash distributions the Corporation is entitled to receive from the Partnership. Under the revised agreement, the amount of the distributions would be reduced for a specified period of time to allocate the accretion of the acquisition between the Corporation and the Partnership. You stated that this revision is unrelated to the financing transactions described above and would be contemplated with respect to the acquisition irrespective of such financing transactions.

Following our review of the information that you provided, we have reached the following conclusions. The Partnership Private Placement would not be considered equity compensation under Rule 5615(a)(4)(H) with respect to the Board Member because the Board Member would resign from the Partnership’s board prior to the execution of an agreement and would not participate in the discussions and board meetings with respect to the Proposed Transactions. In addition, the provisions of Rule 5635, which may require shareholder approval for certain below market issuances and in connection with certain acquisitions, do not apply to limited partnerships. As such, consummating the Partnership Private Placement as described would not require approval of the Partnership’s unitholders under NASDAQ’s rules.

The proposed Corporation Private Placement also satisfies the shareholder approval requirements. While we would aggregate the Corporation Private Placement with the shares to be issued in the Share Exchange, the Corporation would obtain shareholder approval prior to issuing any common stock in the Corporation Private Placement, and we would not consider the proposed adjustment in the dividend rate to be an “alternative outcome” under IM-5635-2. We have reached this determination because (i) the adjustment is not a function of the outcome of a shareholder vote; and (ii) you represented that the adjusted rate is consistent with similar transactions by other companies in the industry. The Corporation Private Placement also would not require shareholder approval as equity compensation because the New Director would not join the Corporation’s board until after the transaction is consummated.

We would consider the shares issued by the Corporation in the Share Exchange to be issued in connection with the acquisition of the Partnership’s units. Structured as you described, however, the Share Exchange satisfies the shareholder approval requirement of Rule 5635(a) because no shares of the Corporation’s common stock could be issued unless shareholder approval is first obtained. We would not consider the adjustment in the dividend of the Preferred Exchange Shares to be an “alternative outcome” under IM-5635-2 because (i) the adjustment is not a function of the outcome of a shareholder vote; and (ii) you represented that the adjusted rate is consistent with similar transactions by other companies in the industry. In addition, because the Share Exchange would be done at the respective market values of the Corporation’s common stock and the Partnership’s common units, shareholder approval would not be required by the Corporation or Partnership under Rules 5635(c) or 5615(a)(4)(H), respectively.

Rule 5635(a) is not applicable to a limited partnership. As such, the issuance of units by the Partnership in the Share Exchange does not require approval under that rule. Similarly, the issuance of units to the owners of the Target by the Partnership as Acquisition Consideration also would not require shareholder approval. The issuance of Partnership units as part of the consideration for the Target also would not require shareholder approval as equity compensation with respect to the Partnership Director. The Partnership would not be issuing units to the Partnership Director, and any units ultimately distributed to him would be solely in consideration of his ownership interest in the Target. As a result, shareholder approval would not be required under Rule 5615(a)(4)(H) by the Partnership for the issuance of Partnership units to the Target.

Finally, the contemplated amendment to the agreement between the Partnership and Corporation does not impact any aspect of the above analysis because it would not result in the issuance of any securities by either the Corporation or the Partnership and it would not affect the pricing analysis in determining whether any issuance is at or above market value.

Publication Date*: 1/17/2013 Identification Number: 1068 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2012-5
Identification Number 1063

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

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

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

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

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

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

Publication Date*: 11/30/2012 Identification Number: 1063 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2012-1
Identification Number 1040
This is in response to your interpretive request regarding an issuance of shares of common stock in the conversion of notes (the "Notes").  You asked whether the conversion would be considered to be at market value for purposes of determining the applicability of the shareholder approval requirements of Listing Rules 5635(c) and 5635(d) (the "Rules").
 
You advised us as follows.  The Notes were issued several years ago and are convertible, at the option of the holder, into a fixed number of shares of common stock for each $1,000 principal amount.  This conversion ratio would result in conversion at a premium to the common stock's closing market value at the time the company agreed to issue the Notes (the "Market Value").  The company's book value was less than the Market Value at that time.
 
In the proposed transaction, the company would offer all holders of the Notes the opportunity to receive for each $1,000 dollars in principal ("Par Value"): (i) the same number of shares into which the Notes are already convertible, plus (ii) a cash payment per Note equal to any accrued but unpaid interest (the "Accrued Interest"), plus (iii) an additional payment in cash designed to induce conversion (the "Additional Payment").   
 
Following our review of the information you provided, we have determined that, for the purposes of the Rules, the price at which the shares would be issued (the "New Conversion Price") would be calculated as (i) the Par Value minus the Additional Payment divided by (ii) the number of shares per Note issued to the tendering holder.  The Accrued Interest, also payable to the holder, would not be included in the calculation because, according to the information you provided, a holder is currently able to collect interest accrued on the Notes (normally payable semiannually) by effecting the conversion immediately after receiving the payment.  Under the Rules, shareholder approval would not be required for the proposed transaction if the New Conversion Price equals or is greater than the Market Value.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
Publication Date*: 7/31/2012 Identification Number: 1040 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2011-6  
Identification Number 696
This is in response to your correspondence regarding whether an issuance of securities in a potential private placement (the “Private Placement”) would be aggregated with an issuance of securities in a recently completed acquisition (the “Acquisition”) for determining whether shareholder approval would be required under Listing Rule 5635(a)(1) (the “Rule”).
 
You stated that approximately nine months ago, the company and the Target began preliminary discussions, which ultimately led to an agreement pursuant to which the company would acquire the Target for cash and shares of the company’s common stock.  The companies publicly announced the signing of a definitive merger agreement for the Acquisition approximately four months ago, and the Acquisition was completed approximately one month ago.
 
You stated that approximately six weeks ago, the company began to consider the possibility of the Private Placement to raise funds for general corporate purposes, including working capital and strategic transactions.  The company wishes to complete the Private Placement to strengthen its capital structure, in light of extended payment terms the company had granted to certain customers resulting in lower than expected cash levels, and to fund a major new product initiative. Additionally, the company received advice from its financial advisor that it likely could pursue the Private Placement on favorable terms.  The company’s board of directors (the “Board”) authorized the company to pursue the Private Placement approximately two weeks following the completion of the Acquisition.  The company has not yet entered into an agreement for the Private Placement.
 
You stated that the Acquisition did not cause the company to need the funds that would be raised in the Private Placement and that the purpose of the Private Placement would not be to fund either the acquisition of, or the ongoing operations of, the Target.  The Private Placement was not a condition of, and there was no financing condition to, the closing of the Acquisition.  Neither the Acquisition nor the Private Placement is contingent on the other.  The company did not even consider the possibility of the Private Placement until more than two months after the Board approved the Acquisition agreement.
 
Following our review of the information you provided, we have determined that securities issued in the Private Placement would not be deemed to be in connection with the Acquisition for purposes of the Rule.  We have reached the conclusion because the proceeds from the Private Placement would be used for purposes unrelated to the Acquisition and because neither the Private Placement nor the Acquisition would be contingent on the other. Accordingly, the issuances in the Private Placement and the Acquisition would not be aggregated for determining whether shareholder approval would be required under the Rule.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
 
Publication Date*: 7/31/2012 Identification Number: 696 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2011-2    
Identification Number 692
This is in response to your correspondence asking whether securities to be issued in a proposed private placement (the “Proposed Transaction”) would be aggregated with certain prior security issuances (the “Prior Transactions”) in determining whether shareholder approval would be required of the Proposed Transaction under Listing Rule 5635.
 
The Prior Transactions related to the company’s acquisition of Target, which closed approximately two weeks ago.  In the Prior Transactions, the company issued securities directly to Target’s shareholders as consideration for the acquisition and, additionally, to other investors in a private placement, the closing of which was contingent on the closing of the acquisition. The proceeds from the private placement were used primarily to pay down Target’s debt, which was assumed by the company in the acquisition. In the aggregate, the number of shares of common stock issuable in the Prior Transactions is less than 20% of the company’s pre-transaction outstanding shares of common stock. The agreements relating to the acquisition and the private placement were entered into approximately one month ago and three weeks ago, respectively.
 
While the company did not contemplate another transaction when it completed the Prior Transactions, approximately one week later the company received unsolicited correspondence from the Investor expressing interest in investing in the company. The ensuing discussions resulted in the Proposed Transaction pursuant to which the company would issue to the Investor less than 20% of its pre-transaction outstanding shares of common stock at a price less than market value. The proceeds from the Proposed Transaction would be used for working capital and to fund the company’s growth strategy.  The Investor did not participate in the Prior Transactions. The company expects that the Proposed Transaction would close approximately four to six weeks after the closing of the Prior Transactions.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not be aggregated with the Prior Transactions for purposes of determining whether shareholder approval would be required under Listing Rule 5635. We have reached this conclusion because: (i) there is no commonality of investors between the transactions; (ii) the transactions are not contingent on each other; (iii) the funds from the transactions will be used for different purposes; (iv) the Proposed Transaction was not contemplated at the time of the closing of the Prior Transactions; and (v) the opportunity for the Proposed Transaction arose unexpectedly after the closing of the Prior Transaction and was at the initiation of the Investor, not the company. Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
 
Publication Date*: 7/31/2012 Identification Number: 692 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2010-16  
Identification Number 715
This is in response to your correspondence regarding whether a proposed private placement (the “Proposed Transaction”) would be aggregated with certain prior transactions (the “Prior Transactions”) for purposes of the shareholder approval requirements of Listing Rule 5635(d) (the “Rule”). The Prior Transactions consisted of three private placements that were completed approximately eight months ago (the “First Transaction”), five months ago (the “Second Transaction”), and two months ago (the “Third Transaction”).
 
You stated that there are no contingencies between the Proposed Transaction and any of the Prior Transactions. Although the investors (the “Investors”) in the Proposed Transaction would be the same as those in each of the Prior Transactions, you stated that there has never been an agreement or understanding between the company and the Investors which would have required the company to issue additional securities to the Investors following any of the Prior Transactions. Moreover, at the time of each of the Prior Transactions, the company had no plan to engage in any of the subsequent Prior Transactions or the Proposed Transaction. In each case, the company was approached by a placement agent indicating that the Investors were interested in making an investment in the company. Each of the Prior Transactions was approved separately by the company’s board of directors at the time of the transaction, and the company expects that the Proposed Transaction will be approved by the board at an upcoming meeting.
 
You stated that the purpose of both the First Transaction and Second Transaction was to raise capital for general corporate purposes. Following the Second Transaction and prior to the Third Transaction, the Food and Drug Administration granted the company approval to market a medical device, giving rise to the company’s need for additional capital. Accordingly, the purpose of the Third Transaction was, and the purpose of the Proposed Transaction will be, to provide funding for sales and marketing of the device and continuing product development as well as for general corporate purposes.
 
Each of the Prior Transactions involved the issuance of common stock at a discount to the market value, and the company expects that the Proposed Transaction would likewise result in the issuance of common stock at less than market value. No investor in the Proposed Transaction, either individually or as part of a group, could beneficially own or have the right to acquire more than 19.99% of the company’s outstanding common stock or voting power.
 
Following our review of the information you provided, we agree with the company’s belief that the Proposed Transaction should not be aggregated with the First Transaction for purposes of the Rule.  We have reached this conclusion in view of the amount of time between the transactions, the absence of contingencies, the different uses of proceeds, and the lack of any agreement between the company and the Investors that would have required the company to issue additional securities to the Investors following any of the Prior Transactions.  We are expressing no opinion as to whether either or both of the Second and Third Transactions would be aggregated with the Proposed Transaction.  Further, we are expressing no opinion as to whether any transaction that may be undertaken subsequent to the Proposed Transaction, particularly transactions involving the Investors, would raise potential aggregation issues.
 
Publication Date*: 7/31/2012 Identification Number: 715 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2010-7  
Identification Number 706
This is in response to your correspondence asking whether the shareholder approval that the company previously obtained with respect to the Proposed Transactions is sufficient for purposes of Listing Rules 5635(b) and 5635(d) (the “Rules”).
 
According to the information you provided, the Proposed Transactions would consist of: (i) an exchange transaction with the United States Department of Treasury (the “Treasury”) (the “Treasury Exchange”); and (ii) an exchange offer, which would be made to the holders of the company’s outstanding trust preferred securities (the “Trust Preferred”) (the “Trust Preferred Exchange”). Currently, as a result of its investment in the company under the Troubled Asset Relief Program, the Treasury owns shares of the company’s non-convertible preferred stock (the “Preferred Stock”) and a warrant (the “Warrant”) exercisable for shares of common stock. The Warrant cannot be exercised for 20% or more of the company’s pre-transaction outstanding shares of common stock at a discount, or if such exercise would result in a change of control, unless shareholder approval is first obtained. The Trust Preferred is held by investors other than the Treasury.
 
At a shareholders’ meeting held approximately three months ago, the company received shareholder approval for the Trust Preferred Exchange under Listing Rule 5635(d) and for the issuance of its common stock to the Treasury in exchange for the Preferred Stock under Rules 5635(b) and (d). In the proposal in its proxy statement, the company said that it would complete the Trust Preferred Exchange within three months of the date of shareholder approval.
 
Following the shareholders’ meeting and before consummating the Treasury Exchange, the company and the Treasury continued to negotiate terms. As a result, the final terms of the Treasury Exchange differ in some respects from what was presented to shareholders. Under the final terms, the company would issue shares of convertible preferred stock (the “New Preferred”) to the Treasury, rather than shares of common stock. The conversion price, and the maximum number of shares of common stock that could be issued upon conversion, would be consistent with the terms of the common stock issuance that shareholders approved. In addition, the company would issue a new warrant (the “New Warrant”) to the Treasury in exchange for the Warrant. The New Warrant would contain a provision that would allow its exercise only to the extent such exercise is consistent with NASDAQ’s Rules (the “Exercise Limitation”).
 
The company had been waiting to finalize the Treasury Exchange before commencing the Trust Preferred Exchange. As such, the company will not complete the Trust Preferred Exchange within three months of the receipt of shareholder approval; instead, it now expects to complete the Trust Preferred Exchange within approximately six months of such approval. Otherwise, the Trust Preferred Exchange would be on the same terms as approved by shareholders.
 
Following our review of the information you provided, we have determined that NASDAQ will not require further shareholder approval of the Proposed Transactions under the Rules. We have reached this conclusion because in the Treasury Exchange the issuance of the common stock upon the conversion of the New Preferred would be on the same terms as the common stock issuance approved by the shareholders, including the pricing and the maximum number of shares that could be issued. Because of the Exercise Limitation, the New Warrant could not be exercised if such exercise could result in either a change of control or an issuance of 20% or more of the pre-transaction outstanding shares at a discount without shareholder approval. As such, the requirements of the Rules would be satisfied with respect to the New Warrant.  The Trust Preferred Exchange would not require further shareholder approval because it would be on the terms which were approved by the company’s shareholders. We do not believe that the additional time required in this case to complete the Trust Preferred Exchange requires the company to seek additional shareholder approval under NASDAQ rules.
 
Publication Date*: 7/31/2012 Identification Number: 706 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2010-4    
Identification Number 703
This is in response to your correspondence regarding whether a proposed equity financing facility (the “Proposed Facility”) would be aggregated with a prior equity financing facility (the “Prior Facility”) for purposes of the shareholder approval requirements of Listing Rule 5635(d) (the “Rule”). The company develops pharmaceutical products.
 
According to the information you provided, the company entered into the agreement with Investor One for the Prior Facility (the “Agreement”) approximately five months ago. Under the Prior Facility, the company, at its discretion, was entitled to sell to Investor One, and Investor One was obligated to buy, shares of the company’s common stock from time to time over an eighteen-month period. The number of shares that could be sold under the Prior Facility was limited to 19.9% of the shares outstanding prior to the execution of the Agreement (the “Share Maximum”), and the aggregate dollar value of the shares issued was limited to a specified amount (the “Dollar Maximum”).
 
You stated that at the time the company entered into the Agreement, it was nearing completion of its Phase 3 trial for a specific product then under development (the “Product”). You stated that the purpose of the Prior Facility was to assure the availability of funding in the event the completion of the Phase 3 trial was delayed. You further stated that the Prior Facility was never intended to be the company’s primary source of funds and that the company planned to undertake an underwritten public common stock offering (the “Public Offering”) to fund further development and potential marketing of the Product following its expected favorable completion of the Phase 3 trial.
 
Approximately three months after entering into the Agreement, the Phase 3 trial was completed, and the results did not meet the company’s expectations. On the day the results were announced, the company’s stock price declined approximately 75%. You stated that as a consequence of the unexpected results, the company’s capital raising needs and planned use of capital changed drastically. Following the announcement of the results, the company was required to provide comfort to its lenders that a “material adverse change,” which would have constituted an event of default under its secured credit facility, had not occurred. To satisfy the lenders, the company completed two draw-downs under the Prior Facility, the more recent of which was approximately six weeks ago. The proceeds from the draw-downs were used to provide working capital to fund the company’s operations while it worked to redefine its strategy following the negative Phase 3 results. Following the draw-downs, the Agreement automatically terminated because the Share Maximum had been reached. As such, no additional funding was available under the Prior Facility even though the aggregate dollar amount of the draw-downs was only approximately 23% of the Dollar Maximum.  The company believes that the Public Offering is no longer a viable alternative given the negative Phase 3 results.
 
The company plans to enter into the Proposed Facility in approximately three weeks with Investor Two, who is not affiliated with Investor One. Similar to the Prior Facility, the Proposed Facility would be available over a specified time period and would be limited to 19.9% of the pre-transaction outstanding shares and to an aggregate dollar amount.  The proceeds of the Proposed Facility would be used to effect the company’s redefined strategy. Specifically, the company will use the proceeds to conduct regulatory and clinical activities designed to target the Product towards a specific group of patients for which the Phase 3 data showed potential benefits and to secure a strategic partner or other transaction to allow it to continue to develop the Product. You stated that the need for funds for these purposes only arose following the negative Phase 3 trials.
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Following our review of the information you provided, we have determined that the Prior Facility and the Proposed Facility will not be aggregated for purposes of the applicability of the Rule.  We have reached this conclusion because: (i) circumstances have changed significantly since the company entered into the Prior Facility resulting in its having to significantly alter its capital raising plans; (ii) the use of proceeds from the Proposed Facility would be different from that of the Prior Facility; (iii) approximately six months will have passed following the execution of the Agreement before the execution of the agreement for the Proposed Facility; (iv) there are no contingencies between the Prior Facility and the Proposed Facility; and (v) there is no commonality of investors between the facilities. NASDAQ is expressing no opinion on whether shareholder approval is required under any other provision of Listing Rule 5635.
 
Publication Date*: 7/31/2012 Identification Number: 703 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2010-1  
Identification Number 700
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635(a) (the “Rule”) to the company’s proposed issuances of securities in a proposed acquisition (the “Acquisition”) and in a proposed private placement (the “Private Placement”).  Specifically, you asked: (i) whether the Private Placement would be considered to be in connection with the Acquisition under the Rule; (ii) whether certain shares issuable under warrants and options assumed in the Acquisition would be included in determining whether shareholder approval is required under the Rule; and (iii) whether the Shareholder would be considered to have a 5% or greater interest in the company to be acquired or the consideration to be paid under Listing Rule 5635(a)(2).
 
According to the information you provided, in the Acquisition the company, a financial institution, would acquire the outstanding common shares of another financial institution (the “Target”) in exchange for shares of its common stock (the “Exchange Shares”).  The company would replace the Target’s outstanding non-convertible preferred stock, which was issued to the United States Treasury under the Troubled Asset Relief Program, with new shares of the company’s own non-convertible preferred stock, and would replace a related warrant of the Target with a company warrant (the “Warrant”).  Following the Acquisition, the Warrant would be exercisable into the company’s common stock at approximately 1700% of the current stock price.  The company would also replace outstanding options issued by the Target with the company’s own newly issued options, which would have an effective exercise price in excess of 10 to 20 times the company’s current stock price (the “Options”).  The company expects that in the aggregate, the number of Exchange Shares and the shares underlying the Warrant and the Options (the “Acquisition Shares”) would equal less than 5% of its pre-transaction outstanding shares of common stock.
 
The company expects that a condition to the approval of the Acquisition by its banking regulator would be that the company be “well capitalized” following the Acquisition. In order to satisfy this condition, the company would close the Private Placement shortly before closing the Acquisition. Due, in part, to the expected increase in the company’s total assets in connection with the Acquisition, a substantial portion of the proceeds of the Private Placement would be needed to maintain the company’s well-capitalized status following the Acquisition. As such, the Private Placement (or a similar transaction that would result in the company being considered well capitalized following the Acquisition) would be a condition to the completion of the Acquisition. The number of shares that would be issued in the Private Placement, together with the Acquisition Shares, could exceed 20% of the pre-transaction outstanding shares.
 
The Shareholder owns approximately 6% of the outstanding common shares of each of the company and the Target. These shares are predominately held for pension funds, exchange traded funds, and the Shareholder does not have any direct economic interest in these shares. As noted above, the Target has issued preferred stock to the U.S. Treasury (the “Preferred Stock”). Under the terms of the Acquisition, the consideration to be paid by the company would include the Acquisition Shares and the assumption of the Preferred Stock and certain other securities. As such, the Shareholder would receive less than 5% of the consideration that would be paid in the Acquisition and, after giving effect to this preferred stock, the Shareholder has less than a 5% interest in the Target’s equity capital.  The Shareholder would not participate in the Private Placement and would receive the same merger consideration as all other common equity stockholders of the Target.
 
Following our review of the information you provided, we have determined that for purposes of the Rule, the portion of the Private Placement that the company believes will be necessary for it to be considered “well capitalized” following the Acquisition would be considered to be in connection with the Acquisition under the Rule. As such, these shares would be included in determining whether shareholder approval would be required for the Acquisition.  We have reached this conclusion because the completion of the Acquisition would be contingent on that portion of the Private Placement and because that portion of the Private Placement would be issued for the purpose of raising an amount of capital sufficient for the company to maintain its well-capitalized status after merging with the Target.  Shares issued in the Private Placement that the company does not believe would be necessary for the company to be considered well capitalized after giving effect to the Acquisition would not be counted in determining whether shareholder approval is required under the Rule. In addition, we note that the shares of common stock underlying the Warrant and the Options would be included in calculating the number of shares issuable in the Acquisition, even though both the Warrant and the Options are significantly out of the money. Finally, we have determined that Listing Rule 5635(a)(2) does not apply because when giving effect to the Preferred Stock, the Shareholder would have an interest of less than 5% in the Target and in the consideration that would be paid in the Acquisition.
 
Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the Rules in any way other than as addressed herein.This interpretation provides guidance based on the rules in effect at the time of issuance.  
Publication Date*: 7/31/2012 Identification Number: 700 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-25
Identification Number 743
This is in response to your correspondence regarding whether an issuance of securities in a potential private placement (the “Private Placement”) would be aggregated with an issuance in a pending acquisition (the “Acquisition”) for purposes of determining whether shareholder approval would be required under Listing Rule 5635(a)(1).
 
According to the information you provided, approximately six weeks ago the company entered into the agreement for the Acquisition, pursuant to which it will acquire certain property and equipment from the Target in exchange for approximately $200,000 in cash and shares of the company’s common stock equal to approximately 10% of its pre-transaction outstanding shares and voting power. The company first considered the Acquisition over one year ago and held initial discussions with the Target more than ten months ago. On multiple occasions, the company’s board of directors considered the Acquisition and directed management to continue its efforts to reach an agreement with the Target. The Acquisition is expected to close within approximately two months.
 
The company has not yet determined whether it will proceed with the Private Placement nor has it settled on a precise structure. The Private Placement would be part of the company’s overall corporate financing strategy and the use of the proceeds from the Private Placement would be for general corporate purposes, working capital, and possible future acquisitions. The company anticipates that if it chooses to proceed, the Private Placement would occur within approximately three months. You stated that the company is considering the Private Placement at this time because it believes that the equity markets have strengthened, making this an opportune time to undertake such a financing. If, however, the equity markets were to weaken materially in the near future, or the company's stock price were to decline, you indicated that the company might not proceed with the Private Placement and would not be forced to sell equity on unfavorable terms in order to raise cash to fund its operations.
 
You stated that the Acquisition is not linked to, or conditioned upon, the Private Placement and that, likewise, the Private Placement would not be linked to or conditioned upon the Acquisition. The company is obligated to close the Acquisition without regard to whether it chooses to pursue the Private Placement. The Target will be the sole recipient of the company’s shares in the Acquisition and will not be a purchaser in the Private Placement. The proceeds from the Private Placement would not be used to replenish any cash expended on the Acquisition. The company’s management concluded that the company could complete the Acquisition and still have sufficient cash to meet the anticipated needs of the combined businesses without raising additional capital.
 
Following our review of the information you provided, we have determined that the issuance in the Private Placement would not be deemed to be in connection with the Acquisition. We have reached the conclusion because: (i) the Private Placement would not be conducted to raise funds to be used as consideration for the Acquisition or to fund the company’s cash needs arising from the Acquisition; and (ii) neither the Private Placement nor the Acquisition would be contingent on the other. As such, the issuances in the Private Placement and the Acquisition would not be aggregated for purposes of determining the applicability of Listing Rule 5635(a)(1). Accordingly, the issuance of shares to the Target in the Acquisition will not require shareholder approval under Listing Rule 5635(a)(1) because the issuance will be less than 20% of the pre-transaction outstanding shares and voting power.  Please note that we are not providing any guidance as to whether shareholder approval will be required under Listing Rule 5635 for the Private Placement because the terms of that transaction have not yet been determined.
 
Publication Date*: 7/31/2012 Identification Number: 743 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-21
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 2009-20
Identification Number 738
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to the issuance of shares of common stock in exchange for shares of currently outstanding preferred stock (the “Exchange”). Specifically, you asked about the applicability of Listing Rule 5635(c) if officers and directors (the “Officers and Directors”) of the company participate in the Exchange.
 
According to the information you provided, the company issued preferred stock in private placements approximately fifteen months ago to multiple investors including the Officers and Directors in a shareholder-approved transaction.  The preferred stock is currently convertible into common stock at the option of the holders. The company is planning the Exchange in response to the adverse economic and market conditions over the past several months that have resulted in the need for financial institutions, such as the company, to raise equity capital to maintain financial strength and meet regulatory requirements. In the Exchange, the company would replace the preferred stock with common stock.
 
Under the terms of the Exchange, the number of shares of common stock that would be issued for each share of preferred stock is the sum of: (i) the number of shares into which it is currently convertible (the “Conversion Shares”), and (ii) the number of shares equal in value to 75% of the value of future dividends that that would be payable if the preferred stock were to remain outstanding (the “Dividend Shares”). The aggregate number of shares that could be issued in the Exchange, including both the Conversion Shares and the Dividend Shares, would be less than 20% of the pre-transaction outstanding shares of common stock.
 
Pursuant to Listing Rule 5635(c), shareholder approval would be required if the Exchange could result in common stock being issued to the Officers and Directors at a price less than market value at the time of the Exchange (the “Market Value”). For this purpose, the Market Value would be the last closing consolidated bid price of the common stock prior to the closing of the Exchange. The price at which the common stock would be issued in the Exchange would be determined by dividing: (i) the amount which the company received for each share of preferred stock and at which the company reflects each preferred share on its balance sheet, by (ii) the aggregate number of Conversion Shares and Dividend Shares issued in the Exchange for each preferred share (such quotient being the “Offer Price”). Based on the information you submitted, the issuance to the officers and directors in the Exchange would not require shareholder approval under the Rule if the Offer Price, calculated as described above, is not less than the Market Value. Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the shareholder approval requirements in any way other than as addressed herein.
 
Publication Date*: 7/31/2012 Identification Number: 738 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-18
Identification Number 736
This is in response to your correspondence regarding the applicability of the shareholder approval requirement of Listing Rule 5635(d) (the “Shareholder Approval Rule”) and the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) to a proposed issuance of securities (the “Proposed Offering”).
 
According to the information you provided, in the Proposed Offering the company would offer shares of a newly designated senior common stock (the “Senior Common”) at a fixed price (the “Offering Price’) in a continuous private placement on a best-effort basis over a twenty-four month period (the “Offering Period”). The company expects that during the Offering Period, it will accept subscription agreements which would become effective twice monthly. In addition, each holder of the Senior Common would be entitled to reinvest distributions that would be paid on the Senior Common for additional shares of Senior  Common at the Offering Price. Except where required by law, the Senior Common would be non-voting.
 
The Senior Common would be convertible into shares of the company’s class of common stock which is listed on NASDAQ (the “Common Stock”). The number of shares of Common Stock that could be issued exceeds 20% of the pre-offering outstanding shares. The conversion price would be equal to the greater of the highest book or market value per share during the Offering Period. The book value would be that value attributable to the company’s common stockholders’ equity and would not give effect to the company’s outstanding preferred stock.
 
Following our review of the information you provided, we have determined that the Proposed Offering, structured as you described, would satisfy the Shareholder Approval Rule and the Voting Rights Rule. Although the potential issuance exceeds 20% of the pre-offering outstanding shares, shareholder approval would not be required under the Shareholder Approval Rule because the conversion price could not be less than the greater of book or market value per share. The Proposed Offering would comply with the Voting Rights Rule because the issuance of the Senior Common would not disparately reduce or restrict the voting rights of existing shareholders in that it is non-voting, except as required by law. Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the Listing Rules in any way other than as addressed herein.
 
Publication Date*: 7/31/2012 Identification Number: 736 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-13
Identification Number 731
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Listing Rules 5635(b) and 5635(d) (the “Rules”) to a proposed issuance of common stock (the “Proposed Offering”).  In addition, you asked whether the Proposed Offering would be aggregated with a prior private placement (the “Prior Offering”) so as to cause the Prior Offering to violate Listing Rule 5635(d).  Relevant to the applicability of the Rules is whether the Proposed Offering would be a public offering pursuant to IM-5635-3.
 
According to the information you provided, prior to the public announcement of the Proposed Offering, the company would spend approximately four days contacting and meeting with approximately 30 to 40 institutional investors to identify potential core institutional investors. These institutions would be asked to sign confidentiality agreements or otherwise commit to maintain the confidentially of any material non-public information. If the company determines to proceed with the Proposed Offering, then shortly after the close of the market the company would file a preliminary prospectus with the Securities and Exchange Commission specifying the number of shares to be offered and publicly announce the Proposed Offering by means of a press release that would contain information about the offering including how to obtain a copy of the preliminary prospectus. The Proposed Offering would be conducted by underwriters on a firm commitment basis. The shares which would be issued would be registered under the company’s effective shelf registration statement.
 
You stated that promptly after the public announcement, the underwriters would undertake a broad and active marketing effort in the United States and Europe from approximately 4:30 p.m. EDT until shortly before the opening of the market the morning after the public announcement. During that period, the underwriters would expect to: (i) conduct a road show with the company involving telephonic or in-person meetings with approximately 30 to 40 institutional investors; (ii) make available an internet road show to prospective investors; (iii) undertake retail marketing through a network of more than 1,500 brokers to several thousand retail accounts; and (iv) distribute electronic copies of the preliminary prospectus to more than 100 prospective institutional investors and more than 1,500 retail brokers.
 
You stated that the Proposed Offering would be priced shortly before the opening of the market the morning after the public announcement at a discount to the prior day’s closing price in a range, approximately 5 % to 10%, expected to be customary for underwritten offerings of comparable companies. In addition, you stated that you expect purchasers in the Proposed Offering will include 15 to 30 or more institutional investors and 300 to 500 retail investors. The number of shares that would be issued in the Proposed Offering exceeds 20% of the company’s pre-transaction shares of outstanding common stock.
 
Following our review of the information you provided, we have determined that the Proposed Offering would be a public offering under IM-5635-3 because: (i) the offering would be a firm commitment offering of registered securities; (ii) the offering would be broadly marketed to both retail and institutional potential investors; (iii) the company expects that there would be many purchasers in the offering including both retail and institutions; (iv) the discount to the market is expected to be in a range consistent with underwritten offerings of comparable companies; and (v) the company would have little control over the Proposed Offering. Accordingly, because the Proposed Offering would be a public offering, shareholder approval would not be required under the Rules, and the Proposed Offering would not affect the compliance of the Prior Offering with the Rules. NASDAQ is expressing no opinion on whether shareholder approval is required under any other provision of Listing Rule 5635.
 
Publication Date*: 7/31/2012 Identification Number: 731 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-10
Identification Number 728
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to proposed issuances of common stock in exchange for one or more series of the Securities (the “Exchange”). Specifically, you asked whether the Exchange would be a public offering pursuant to IM-5635-3.
 
According to the information you provided, the Securities consist of two series of perpetual preferred stock and four series of trust preferred securities, which were initially issued at various times in underwritten public offerings.  The first offering was conducted approximately twelve years ago, and the most recent, approximately five years ago.  Four of the series are listed on NASDAQ, and the other two are traded over-the-counter. Each series has at least 600 beneficial owners.
 
The Exchange would be conducted as a tender offer. All of the holders of each series for which an offer is made would be offered common stock with a value expected to be more than the trading price, but less than the liquidation value, of the Securities that would be exchanged. The exact pricing would be determined by the company’s board of directors after considering analysis from a nationally recognized investment bank. The number of shares of common stock that could be issued in the Exchange would exceed 20% of the pre-transaction outstanding shares. You stated that the Exchange would not vest control with any shareholder due, in part, to requirements applicable to the company as a financial institution.
 
The company is planning the Exchange in response to the adverse economic and market conditions over the past several months that have resulted in the need for financial institutions to raise equity capital to maintain financial strength and meet regulatory requirements. In the Exchange, the company would replace the Securities, which are not treated as common equity, with common stock.
 
Following our review of the information you submitted, we have determined that the Exchange would be a public offering pursuant to IM-5635-3. We have reached this conclusion because the Securities were initially publicly offered and are currently publicly traded, the Securities are widely held, and the Exchange would be by means of a registered exchange offer available at the same price to all holders of any series of the Securities that is the subject of an exchange offer.
 
Publication Date*: 7/31/2012 Identification Number: 728 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2009-4  
Identification Number 722
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to a proposed issuance of common stock (the “Proposed Transaction”).  You asked about the potential applicability of Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(C), and 4350(i)(1)(D) (the “Rules”).
 
According to the information you provided, in a prior transaction approximately eight months ago (the “Prior Transaction”), the company issued the Securities which are convertible into shares of the company’s common stock at any time at the discretion of the holders (the “Holders”).  Because the Prior Transaction was a public offering, shareholder approval was not required under the Rules.
 
In the Proposed Transaction, the company would offer the Holders the opportunity to exchange the Securities for: (i) that number of common shares that would be issuable upon conversion at the existing terms (the “Conversion Shares”); and (ii) cash and/or an additional number of common shares (the “Additional Shares”) as an inducement to accept the offer given that the conversion price for the Securities is well in excess of the current market value of the company’s common stock.  The number of Additional Shares would equal less than 20% of the company’s currently outstanding shares of common stock.  None of the Holders would own as much as 10% of the company’s outstanding shares of common stock as a result of the Proposed Transaction (the “Ownership Maximum”).
 
You stated that at no time during the structuring of the Prior Transaction did the company, a financial institution, contemplate the Proposed Transaction.  At that time, the company did not intend to seek conversion of the Securities prior to the fifth anniversary of their issuance.  Economic and market conditions have worsened considerably more than could have been reasonably anticipated at the time of the Prior Transaction, and financial institutions have been particularly adversely impacted.  As a result, financial institutions, including the company, need to raise capital to maintain financial strength and meet regulatory requirements.  In that regard, you stated that there has been increased focus on the amount of tangible common equity that financial institutions have in relation to their assets (“Tangible Common Equity Ratio”).  The Proposed Transaction would improve the company’s Tangible Common Equity Ratio by replacing securities which are not treated as common equity, the Securities, with shares of common stock. The company believes that the Proposed Transaction would strengthen its capital position such that it would then have greater flexibility in taking other actions that would further improve its overall capital structure.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not require shareholder approval under the Rules.  Given the Ownership Maximum, the Proposed Transaction would not result in a change of control and, therefore, would not require shareholder approval under Listing Rule 4350(i)(1)(B).  Because the issuance would not be in connection with the acquisition of the stock or assets of another company, shareholder approval would not be required under Listing Rule 4350(i)(1)(C).  With respect to Listing Rule 4350(i)(1)(D), the Conversion Shares would not be aggregated with the Additional Shares for purposes of calculating whether the 20% threshold of Listing Rule 4350(i)(1)(D) could be reached because: (i) the Conversion Shares would be issued in connection with an exchange offer for the Securities, which were issued in a public offering; (ii) several months will have passed between the Prior Transaction and the Proposed Transaction; and (iii) there have been unforeseen changes in both the company’s circumstances and economic conditions generally since the Prior Transaction, which gave rise to the need for the company to enter into the Proposed Transaction at this time.  The Additional Shares would not require shareholder approval under Listing Rule 4350(i)(1)(D) because the potential issuance is less than 20% of the company’s pre-transaction outstanding shares.  NASDAQ is expressing no opinion on whether shareholder approval is required under any other provision of Listing Rule 4350(i).
 
Publication Date*: 7/31/2012 Identification Number: 722 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-29  
Identification Number 773
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to two proposed issuances of securities by the company (the “Proposed Transactions”).  Specifically, you asked whether for purposes of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”), either or both of the Proposed Transactions would be aggregated with a prior transaction (the “Prior Transaction”).
 
According to the information you provided, approximately one year ago the company and the Investors entered into the agreements relating to the Prior Transaction, pursuant to which the company issued to the Investors shares of its common stock, at a discount to market value, and the Prior Transaction Notes.  The Prior Transaction Notes are not convertible into common stock.  The number of shares of common stock issued in the Prior Transaction was less than 20% of the company’s pre-transaction total shares outstanding.  The proceeds from the Prior Transaction were used to strengthen the company’s balance sheet and to provide liquidity.
 
You stated that approximately two years before entering into the Prior Transaction, the company issued the Senior Notes, which are also non-convertible.  Subsequent to the Prior Transaction, Investor One purchased a portion of the Senior Notes from certain of their holders (the “Senior Note Holders”), and simultaneously, the Senior Note Holders purchased a portion of the Prior Transaction Notes from Investor One.
 
Beginning approximately eight months ago, the company entered into individually negotiated transactions (the “Completed Note Exchanges”), whereby it issued shares of common stock, at a discount to market value, in exchange for the Senior Notes.  The Investors were not a party to the Completed Note Exchanges.  The number of shares issued in the Completed Note Exchanges was less than 10% of the company’s total shares outstanding prior to the first exchange.
 
In the Proposed Transactions, the company would issue, in a series of individually negotiated transactions, shares of its common stock at a discount to market value: (i) in exchange for the Prior Transaction Notes held by holders other than the Investors; and (ii) in exchange for the Senior Notes held by one or more of the Investors.
 
In the Proposed Transactions, the company would not receive any cash proceeds but would reduce its indebtedness.  You stated that there are no contingencies between or among the Prior Transaction and the Proposed Transactions and that the Proposed Transactions were not contemplated at the time of the Prior Transaction.  You further stated that changes in circumstances subsequent to the Prior Transaction gave rise to the need for the Proposed Transactions.  Specifically, you referenced changes in the financial markets, particularly with respect to the ability of financial institutions to access the capital markets.  As a result of these changes, and based on the company’s discussions with its banking regulator, the company’s new senior management has focused on de-leveraging the company.  You stated that the Proposed Transactions would not involve any officer, director, employee or consultant, or their affiliated entities.
 
Following our review of the information you provided, we have determined that shares issued in the Proposed Transactions would not be aggregated with shares issued in the Prior Transaction under the Rule because: (i) approximately one year passed between the Prior Transaction and the Proposed Transactions, (ii) circumstances changed since the Prior Transaction, (iii) the Proposed Transactions were not contemplated at the time of the Prior Transaction, and (iv) the need for the Proposed Transactions arose only after the closing of the Prior Transaction.  We do note, however, that shares issued in the Proposed Transactions would be aggregated with shares issued in the Completed Note Exchanges in determining whether shareholder approval is required.  We also note that you have not asked us to reach, and we have not reached, a conclusion as to whether any provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transactions.
 
Publication Date*: 7/31/2012 Identification Number: 773 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-24  
Identification Number 768
This is in response to your correspondence wherein you asked whether shareholder approval would be required of an issuance of securities in a proposed transaction (the “Proposed Transaction”) pursuant to Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”).
 
According to the information you provided, in a prior transaction (the “Prior Transaction”), which closed approximately five months ago, the company sold shares of convertible preferred stock (the “Preferred Stock”) in a private placement to several investors (the “Investors”).  In compliance with the Rule, the company received shareholder approval of the Prior Transaction to allow the Investors to convert the Preferred Stock into 20% or more of the company’s total shares of common stock at a discount to the greater of the company’s book value or market value.  Accordingly, the Preferred Stock is currently fully convertible into common stock at any time at the option of the holder and will be mandatorily converted in approximately three years.  You stated that subsequent to the Prior Transaction, the company’s circumstances changed significantly due to the generally worsening credit and business environment affecting all companies in its sector.
 
Approximately three weeks ago, one of the Investors (the “Holder”) initiated discussions with the company regarding the Proposed Transaction.  In the Proposed Transaction, the Holder would convert all of its Preferred Stock into common stock, pursuant to the terms approved by shareholders, provided that it would receive, in addition, the number of shares of common stock having a value that would be approximately equal to the present value of the dividends that would be payable to the Holder if the Preferred Stock were held to the mandatory conversion date.  The number of shares of common stock that could be issued in the payment of the dividends (the “Dividend Shares”) would be less than 20% of the company’s shares of common stock outstanding prior to the execution of the agreement for the Proposed Transaction.  You stated that the Holder is not an officer, director, or employee of the company and that the Proposed Transaction will not result in a change of control.  You indicated that the Proposed Transaction, which was not contemplated at the time of the Prior Transaction, would be valuable in helping the company enhance its equity capital position, preserve cash and improve liquidity.
 
Following our review of the information you provided, we have determined that the Rule will not require shareholder approval of the Proposed Transaction.  The shares that would be issued to the Holder in the conversion of its Preferred Stock would be issued pursuant to terms that the company’s shareholders have approved, and, therefore, would not be aggregated with the Dividend Shares for purposes of calculating whether the 20% threshold of the Rule could be reached.  The Dividend Shares would not require shareholder approval under the Rule because the potential issuance is less than 20% of the company’s pre-transaction outstanding shares.  Please be advised that any similar future transactions may be aggregated with each other and with the Dividend Shares for purposes of the applicability of the Rule.  Please note also that you have not asked us to reach, and we have not reached, a conclusion as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transaction.
 
Publication Date*: 7/31/2012 Identification Number: 768 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-23
Identification Number 767
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to an issuance of securities in a private placement (the “Proposed Transaction”).  You asked about the potential applicability of Marketplace Rules 4350(i)(1)(A),  4350(i)(1)(B),  4350(i)(1)(C), and 4350(i)(1)(D) (the “Rules”).
 
According to the information you provided, in the Proposed Transaction, the company would sell shares of convertible preferred stock, which would be convertible into common stock.  The potential issuance of common stock would exceed 20% of the company’s pre-transaction outstanding shares.  The conversion price would exceed the greater of book or market value and would not be subject to any adjustment provision other than in connection with stock splits and similar changes to the company’s capitalization.  The company expects that between 5 and 25 investors will participate in the Proposed Transaction.  No investor individually, or as part of a group, would beneficially own, or have the right to acquire, more than 19.9% of the company’s outstanding shares or voting power on a post-transaction basis (the “Ownership Limitation”).  The proceeds would be used to provide additional capital and for other general corporate purposes.  The lead investor in the Proposed Transaction would be entitled to designate one member of the company’s board of directors until it ceases to own at least 3% of the company’s voting equity securities.  You stated that the Proposed Transaction is not connected with any acquisition or merger.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not require shareholder approval under the Rules.  Rule 4350(i)(1)(A) would not require shareholder approval because no shares of common stock could be acquired by any officer, director, employee or consultant of the company at a discount to market value.  Given the Ownership Limitation, the Proposed Transaction would not result in a change of control, and, therefore, would not require shareholder approval under Listing Rule 4350(i)(1)(B).  Because the issuance would not be in connection with the acquisition of the stock or assets of another company, shareholder approval would not be required under Listing Rule 4350(i)(1)(C).  Finally, shareholder approval would not be required under Listing Rule 4350(i)(1)(D) because the conversion price would not be less than the greater of book or market value.
 
 
Publication Date*: 7/31/2012 Identification Number: 767 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-13
Identification Number 758
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 transaction (the “Proposed Transaction”) involving a reduction in the exercise prices of two series of previously issued warrants (the “Old Warrants”) and the issuance of new warrants (the “New Warrants”).
 
According to the information you provided, the Old Warrants were issued approximately fifteen months ago in a transaction (the “Prior Transaction”), which was approved by the company’s shareholders.  The Old Warrants contain anti-dilution provisions (the “Anti-dilution Provisions”), which could reduce the exercise prices of the Old Warrants and increase the number of shares of common stock for which they are exercisable.  None of the holders of the Old Warrants is a director or officer of the company.
 
In the Proposed Transaction, the company would offer to reduce the exercise price of the Old Warrants to less than the current market value of the shares for which they are exercisable.  Warrant holders who accept the offer (the “Participating Holders”) would agree to immediately exercise their Old Warrants at the reduced exercise price, and the company would issue New Warrants to the Participating Holders.  The number of shares that would be issued as a result of the exercise of the Old Warrants by the Participating Holders would be less than 19.9% of the company’s pre-transaction outstanding shares.  The number of common shares underlying the New Warrants would not be greater than the number underlying the Old Warrants that would be exercised in the Proposed Transaction.  The New Warrants would have an exercise price not less than the greater of book or market value, would not be exercisable for six months after issuance, and would not contain anti-dilution provisions other than with respect to stock splits and similar events.  The exercise price of the Old Warrants held by warrant holders who do not accept the offer would be reduced as a result of the Anti-dilution Provisions, which would be triggered by the Proposed Transaction.
 
You stated that the Proposed Transaction was not contemplated at the time of the Prior Transaction.  At that time, the company believed that any additional capital needs would be funded through research and development grants or investments from new sources.  The proceeds from the Prior Transaction were used primarily to finance the company’s efforts to secure a grant from the federal government.  The grant would have been used to fund the development of one of the company’s products.  Subsequent to the closing of the Prior Transaction, the company learned that it would not receive the grant.  As a result, the company revised its strategy and reassessed its capital needs.  You stated the financing contemplated by the Proposed Transaction came about solely as a result of discussions that the company had regarding its financing needs approximately 10 months after the closing of the Prior Transaction.
 
Following our review of the information you submitted, we have determined that the Proposed Transaction will not require shareholder approval under the Rule.  Although it involves a modification to the warrants issued in the Prior Transaction, the Proposed Transaction is considered to be a new transaction because of the amount of time that has elapsed, and the significant change in circumstances since the Prior Transaction giving rise to the company’s need to seek additional financing.  As such, because the number of shares of common stock that could be issued as a result of the exercise price reduction would be less than 20% of the shares outstanding prior to the Proposed Transaction, shareholder approval is not required under the Rule.  In addition, the shares underlying the New Warrants would not be aggregated with the shares that would be issued as a result of the exercise price reduction, because the New Warrants would not be exercisable for less than the greater of book or market value and could not be exercised until at least six months after the closing of the Proposed Transaction.  The additional shares that could be issued under the Anti-dilution Provisions of the Prior Transaction would not be aggregated with the Proposed Transaction because the issuance of those shares was approved by shareholders.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transaction.
 
Publication Date*: 7/31/2012 Identification Number: 758 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-9
Identification Number 754
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), 4350(i)(1)(C), and 4350(i)(1)(D) (the “Rules”) to an issuance of securities.
 
According to the information you provided, approximately two months ago the company entered into agreements (the “Agreements”) with the Shareholder relating to the formation of a limited liability company (the “LLC”).  The Shareholder currently owns approximately 8% of the company’s outstanding shares.  Pursuant to the Agreements, the company and the Shareholder would each contribute certain assets to the LLC and, through the LLC, would jointly develop certain properties for the operation of a business (the “Project”).  The closing of the Agreements is conditioned on, among other things, financing being received by the LLC.  The financing would not be provided by the company and would not involve an issuance of securities by the company.
 
After the Agreements were reached, an affiliate of the Shareholder (the “Shareholder’s Affiliate”) proposed making an investment in the company, and the company and the Shareholder’s Affiliate entered into a agreement for a private placement (the “Private Placement”) pursuant to which the Shareholder’s Affiliate would purchase shares of common stock equal to approximately 14% of the company’s pre-transaction outstanding shares at a discount to market value.  The Private Placement has not yet closed.  The closings of the Private Placement and the Agreements are not contingent on each other, and each would close without regard to the other.  Further, the Private Placement is not conditioned on the consummation of any of the transactions contemplated by the Agreements, and the proceeds of the Private Placement will not be used to finance the Project.
 
Following the closing of the Private Placement, the Shareholder and the Shareholder’s Affiliate would own, in the aggregate, less than 20% of the company’s then outstanding common shares and voting power (the “Aggregate Ownership”).  The Shareholder’s Affiliate is not an officer, director, employee, or consultant of the company.
 
Following our review of the information you provided, we have determined that the issuance of the common stock in the Private Placement does not require shareholder approval under the Rules.  Although the shares would be sold at a discount, shareholder approval would not be required under: (i) Listing Rule 4350(i)(1)(A) because the purchaser is not an officer, director, employee, or consultant of the company; or (ii) Listing Rule 4350(i)(1)(D) because the number of shares issued would equal less than 20% of the pre-transaction outstanding shares.  In addition, shareholder approval would not be required under Listing Rule 4350(i)(1)(B) because the issuance would not result in a change of control given the Aggregate Ownership.  Finally, Listing Rule 4350(i)(1)(C) is not applicable because the issuance would not be in connection with the acquisition of the stock or assets of another company.
 
Publication Date*: 7/31/2012 Identification Number: 754 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-7
Identification Number 752
This is in response to your correspondence regarding a proposed issuance of securities by the company (the “Proposed Issuance”) and the sale (the “Proposed Sale”) of common stock by the chairman of the company’s board of directors (the “Chairman”).  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)(i) (the “Rules”).
 
According to the information you provided, in the Proposed Issuance the company would issue convertible debt to the Investor.  Initially, the conversion price would be greater than both the market and book value of the common stock such that the number of shares that could be issued upon conversion would equal approximately 13% of the pre-transaction outstanding shares.  The conversion price is subject to adjustment, however, which could result in its being at a discount to market or book value.  As such, pursuant to the terms of the Proposed Issuance, the number of shares issuable upon conversion cannot reach or exceed 20% of the pre-transaction outstanding shares without shareholder approval.
 
The Investor is the company’s largest shareholder and currently owns approximately 40% of the outstanding shares.  The Investor acquired its current ownership position approximately seven months ago in connection with a prior transaction approved by shareholders (the “Prior Transaction”).  The company’s board of directors includes two members (the “Directors’) who are executive officers of a subsidiary of the Investor, but not of the Investor itself.  You stated that neither of the Directors would be the beneficial owner of, nor have a pecuniary interest in, the securities that would be issued in the Proposed Issuance.
 
In the Proposed Sale, pursuant to an agreement entered into in connection with the Prior Transaction, the Investor will purchase shares of the company’s common stock equal to approximately 10% of the company’s outstanding shares from the Chairman (the “Chairman’s Shares”).  You stated that the terms of the agreement have been amended to reduce the price at which the Investor would purchase the Chairman’s Shares; however, no additional shares of common stock would be issued by the company or sold by the Chairman in the Proposed Sale.
 
Following our review of the information you provided, we have determined that the Proposed Issuance complies with the Rules.  Shareholder approval is not required under Listing Rule 4350(i)(1)(A) because the Proposed Issuance will not result in equity compensation to any officer, director, employee, or consultant of the company, or to any affiliated entity of any such person.  The Directors would not be the beneficial owner of, or have any pecuniary interest in, the securities that would be issued in the Proposed Issuance.  Shareholder approval is not required under Listing Rule 4350(i)(1)(B) because the Proposed Issuance will not result in a change of control given that the Investor will have a control position both before and after the Proposed Issuance.  The Proposed Issuance satisfies the requirements of Listing Rule 4350(i)(1)(D)(i) because the issuance cannot reach 20% of the pre-transaction outstanding shares without shareholder approval.  The Chairman’s Shares do not contribute to the 20% calculation because the sale of those shares would be pursuant to the Prior Transaction, which was approved by shareholders, and the reduction of the price that the Chairman will receive in that transaction does not require additional shareholder approval.  Please note that pursuant to IM-4350-2: (i) shares to be 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 a transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can changed 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: 752 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-6
Identification Number 751
This is in response to your correspondence wherein you asked whether the company’s proposed issuance of securities (the “Proposed Transaction”) would be aggregated with a prior transaction (the “Prior Transaction”) for purposes of the shareholder approval requirements of Marketplace Listing Rule 4350(i).  Specifically, your question relates to the applicability of Listing Rule 4350(i)(1)(D)(ii) (the “Rule”).
 
According to the information you provided, in the Prior Transaction, which closed approximately seven months ago, the company sold shares of common stock and warrants to purchase shares of common stock in a private placement.  The common stock was issued at a discount to the greater of book or market value and was less than 10% of the pre-transaction outstanding shares.  The total number of shares issuable in the Prior Transaction, giving effect to the exercise of the warrants, was equal to approximately 13% of the pre-transaction outstanding shares prior to giving effect to anti-dilution adjustments.  The warrants are exercisable for common stock at a price that initially exceeded the greater of book or market value with weighted average anti-dilution protection (the “Anti-dilution Protection”) that could increase the number of shares issuable.  The warrants contain a limitation such that the company cannot issue shares in the Prior Transaction that would require shareholder approval under the Rule unless such approval is obtained (the “Prior Transaction Cap”).
 
In the Proposed Transaction, the company would issue shares of common stock in a private placement to several investors at a discount to the market value.  The company may also issue warrants to purchase shares of common stock.  It is anticipated that the warrants will have an exercise price in excess of the greater of book value or market value and will not be exercisable until six months after the closing of the Proposed Transaction.  The number of shares that would be issued, including shares that could be issued upon the exercise of the warrants, would equal less than 20% of the pre-transaction outstanding shares.  Because of the Anti-Dilution Protection applicable to the warrants issued in the Prior Transaction, the company will be required to issue additional warrants to the investors in the Prior Transaction (the  Additional Warrants”).
 
You stated that there are no contingencies between the transactions, the Proposed Transaction was not contemplated at the time of the Prior Transaction, and the proceeds are for different purposes.  Specifically, you indicated that the funds raised in the Prior Transaction had been used to pay contract research organization costs associated with, and to enroll patients for, the company’s Phase II clinical trials and to make regulatory filings with the FDA.  You stated that the Proposed Transaction is necessary to fund Phase III trials and the eventual commercialization of its drug product.  In addition, you stated that there may be up to a 25% overlap in the two transactions because the investors in the Prior Transaction have a contractual right to purchase up to 25% of any subsequent transactions.  Although the company has solicited elections from the investors in the Prior Transaction, it does not yet know whether there will be any commonality of investors.  Finally, you stated that no officers, directors, employees, or consultants participated in the Prior Transaction, and none will participate in 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.  Additionally, the Additional Warrants will not be added to the shares issued in the Proposed Transactions because they are being issued in accordance with the terms of the Prior Transaction and are subject to the Prior Transaction Cap.  As such, given that the issuance in the Proposed Transaction would equal less than 20% of the pre-transaction outstanding shares, the Proposed Transaction would not require shareholder approval under the Rule.
 
Please note that if there is significant commonality of investors in the Prior Transaction and the Proposed Transaction, our determination may change.  Note also that you have not asked us, and we have not reached a conclusion, as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transaction.  For example, if the issuance could result in a change of control, shareholder approval would be required under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 751 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2008-2
Identification Number 747
This is in response to your correspondence regarding the applicability of the shareholder approval requirements to a proposed change in the exercise prices (the “Exercise Price Change”) of two sets of previously issued warrants, the first issued in 2001 (the “2001 Warrants”) and the second in 2005 (the “2005 Warrants”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B) and 4350(i)(1)(D)(ii) (the “Rules”).
 
According to the information you provided, the company issued the 2001 Warrants in connection with a private placement (the “2001 Issuance”) which occurred approximately three years prior to its initial public offering in 2004.  In 2005, the company conducted a private placement of shares of its common stock and the 2005 Warrants (the “2005 Issuance”).  The 2001 Issuance was not subject to NASDAQ’s shareholder approval requirements because the issuance occurred prior to the company’s listing on NASDAQ.  The 2005 Issuance did not require shareholder approval under the Rules because the issuance price was not less than the greater of book or market value and did not result in a change of control.
 
You stated that as a result of recent unfavorable events involving its clinical stage product candidates, the company has re-evaluated and substantially revised the strategic plan that had been in place at the time of the 2001 and the 2005 Issuances.  These events included unfavorable results on two product candidates, resulting in the termination of collaboration agreements with one third-party partner and the expected termination with another.  Because of these events, the company is seeking alternative forms of financing as it refocuses its product development strategy and attempts to enter into new collaboration agreements.  As such, the company is considering the Exercise Price Change as a means of raising capital.
 
In the Exercise Price Change, the company would offer to reduce the exercise prices of the 2001 Warrants and the 2005 Warrants to a price equal to the consolidated closing bid price immediately preceding the time the company and the holders of the warrants enter into a binding agreement with the respect to the change (the “New Exercise Price”).  The company’s market value exceeds its book value.  Under the agreement, warrant holders who accept the offer would be required to exercise their warrants within a specified time period.  The company is also considering issuing new warrants (the “New Warrants”), to participating warrant holders, with an exercise price equal to the New Exercise Price.  Current warrant holders include entities with which certain of the members of the company’s board of directors are affiliated.  You stated that as result of the Exercise Price Change and the issuance of any New Warrants, no investor would own or have the right to acquire as much as 20% of the company’s outstanding shares of common stock or voting power (the “Ownership Positions”).  In addition, you stated that the number of shares of common stock subject to the Exercise Price Change plus the number of shares of common stock issuable pursuant to the New Warrants is expected to be less than 20% of the company’s pre-transaction total shares outstanding.  If such aggregate number were to exceed 20%, then the New Warrants would not be exercisable until at least six months after the transaction.
 
Following our review of the information you submitted, we have determined that the Exercise Price Change will not require shareholder approval under the Rules.  For determining whether the exercise price is at a discount to the market value, the Exercise Price Change is considered to be a new transaction because of the amount of time that has elapsed since the original transactions and the significant changes in circumstances since the original transactions giving rise to the company’s need to seek additional sources of financing.  As such, because the New Exercise Price will not be less than the market value, shareholder approval is not required of the Exercise Price Change or the New Warrants by: (i) Listing Rule 4350(i)(1)(A) because an issuance at market value is not considered to be equity compensation, or (ii) Listing Rule 4350(i)(1)(D).  Shareholder approval is not required by Listing Rule 4350(i)(1)(B) because, due to the Ownership Positions, the New Exercise Price and the potential New Warrants will not result in a change of control.
 
Publication Date*: 7/31/2012 Identification Number: 747 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2007-34
Identification Number 810
This is in response to your correspondence regarding whether the company’s proposed equity financing facility (the “New Facility”) would be aggregated with its prior equity financing facility (the “Prior Facility”) for purposes of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”).
 
According to the information you provided, the agreement (the “Agreement”) for the Prior Facility was entered into with the Purchaser approximately nineteen months ago.  Under the Prior Facility, the company, at its discretion, is entitled to sell to the Purchaser, and the Purchaser is obligated to buy, shares of the company’s common stock from time to time over a three-year period.  The number of shares that can be sold under the Prior Facility cannot exceed 19.9% of the shares outstanding prior to the execution of the Agreement (the “Share Maximum”).  In addition, the aggregate dollar value of the shares issued cannot exceed a specified amount (the “Dollar Maximum”).
 
The company’s stock price has declined approximately 45% since the date of the Agreement, substantially reducing the amount of funding available under the Prior Facility because of the Share Maximum.  The company believes that the amount remaining available under the Prior Facility is insufficient to fund its ongoing activities and that as a result, it needs to enter into the New Facility.  Under the New Facility, the company would have the right to sell, and the Purchaser would be obligated to buy, shares of the company’s common stock from time to time over a three-year period.  The total number of shares that could be issued, including shares that could be issued upon the exercise of warrants issued in connection with entering into the New Facility, would be less than 20% of the shares outstanding prior to entering the agreement for the New Facility.  In addition, the New Facility would be subject to a maximum dollar amount of shares that could be issued.
 
You stated that the Prior Facility contains, and the New Facility would contain, provisions that would prevent the company from issuing shares under either facility that would result in the Purchaser’s owning 20% or more of the company’s outstanding shares or voting power.
 
Following our review of the information you provided, we have determined that the Prior Facility and the New Facility will not be aggregated for purposes of the applicability of the Rule.  We have reached this conclusion because: (i) at least nineteen months will have passed following the execution of the Agreement and before the execution of the agreement for the New Facility; (ii) there were no contingencies between the facilities; and (iii) there has been a change in circumstances since the company entered into the Prior Facility, specifically, the steep reduction in the stock price resulting in a limitation on the amount of funding available.  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 other than as described herein.
 
Publication Date*: 7/31/2012 Identification Number: 810 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2007-33  
Identification Number 809
This is in response to your correspondence regarding whether the company’s issuance of common stock in a private placement (the “Private Placement”) would be deemed to be in connection with the acquisition of Target One for purposes of the applicability of Marketplace Listing Rule 4350(i)(1)(C)(ii) (the “Rule”).
 
Approximately one year ago, the company entered into an agreement to acquire Target One in exchange for cash (the “Cash Portion”) and shares of its common stock (the “Stock Portion”).  The company obtained required governmental consents and completed the Acquisition approximately seven months ago.  The Stock Portion was limited to 19.9% of the company’s pre-transaction total shares outstanding, and the Cash Portion was funded by cash on hand and a term loan (the “Loan”).  The Loan is not convertible into shares of the company’s common stock.  Prior to entering into the acquisition agreement, the company received a commitment letter from the Bank under which the Bank committed to provide the Loan.  Pursuant to the commitment, the company and the Bank entered into an agreement for the Loan on the date of the completion of the Acquisition.
 
Approximately eleven months ago, the company submitted a non-binding bid for Target Two, another potential acquisition target.  To fund the acquisition price, the company completed the Private Placement approximately eight months ago, immediately prior to submitting its final bid for Target Two.  Approximately ten days after the closing of the Private Placement, the company learned that its bid was not successful.
 
Currently, the company is considering using some or all of the proceeds of the Private Placement, which was conducted to partially fund the acquisition of Target Two, to repay all of or a portion of the Loan, the proceeds from which were used to partially fund the acquisition of Target One.
 
In your submission, you stated that: (i) the Private Placement was not conducted to raise funds to finance the acquisition of Target One; and (ii) the Bank provided a commitment for the Loan for the acquisition of Target One before the company’s board of directors considered the Private Placement for the acquisition of Target Two.  The company publicly represented that: (i) the source of the cash portion of the acquisition price for Target One was cash on hand and the Loan; and (ii) the Loan would be repaid through cash flows from operations.  The stated use of proceeds for the Private Placement included a reference to the acquisition of Target Two.  The company’s board approved the acquisition of Target One approximately four months before the Private Placement, which was to be used for the acquisition of Target Two.  You further stated that there were no contingencies between the Private Placement and the acquisition of Target One and that each would have taken place without regard to the other.  None of the owners of Target One invested in the Private Placement.
 
Following our review of the information you provided, we have determined that for purposes of the Rule, the Private Placement will not be deemed to be in connection with the acquisition of Target One.  Accordingly, the company may use the proceeds from the Private Placement to repay the Loan without causing the shares that were issued in the Private Placement to be considered under the Rule to be in connection with the acquisition of Target One.  We have reached this conclusion because: (i) the Private Placement was not conducted to raise funds for the acquisition of Target One; (ii) the Private Placement was not contemplated at the time the company’s Board approved the acquisition of Target One; (iii) the company had alternative long-term financing in place to fund the acquisition of Target One; and (iv) there were no contingencies between the Private Placement and the acquisition of Target One.
 
Publication Date*: 7/31/2012 Identification Number: 809 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2007-32  
Identification Number 808
This is in response to your correspondence regarding the applicability of the shareholder approval requirements to two proposed transactions. In one transaction, the company would issue shares of its common stock in a private placement (the “Proposed Common Stock Issuance”). In the other transaction, the company would issue warrants (the “Warrants”), exercisable for shares of its common stock, in order to obtain a debt facility. Specifically, you asked whether, for purposes of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”), the Proposed Common Stock Issuance would be aggregated with a prior issuance of common stock (the “Prior Issuance”). In addition, you asked whether the shares underlying the Warrants would be aggregated with the Proposed Common Stock Issuance in considering whether either requires shareholder approval under the Rule.
 
In the Prior Issuance, which occurred approximately seven months ago, the company sold shares of its Common Stock at a price less than the market value of the stock in a private placement to several investors. The number of shares that were issued was less than 20% of the pre-transaction outstanding shares.
 
In the Proposed Common Stock Issuance, the terms of which have not been established, the company would sell up to 20% of its pre-transaction shares of common stock. The investors in the Prior Issuance would not purchase more than 30% of the shares in the Proposed Common Stock Issuance and would not comprise more than 25% of the investors in the Proposed Common Stock Issuance. None of the investors in the Prior Issuance would be the lead investor in the Proposed Common Stock Issuance. As a result of the Proposed Common Stock Issuance, no investor could acquire as much as 20% of the company’s outstanding shares of common stock when aggregated with all shares of held by such investor.  No officer, director, employee, or consultant of the company would be an investor in the Proposed Common Stock Issuance. There are no contingencies between the Prior Issuance and the Proposed Common Stock Issuance.
 
You stated that at the time of the Prior Issuance, the company did not know that it would have to consummate another financing at this time. The need for the Proposed Common Stock Issuance is primarily due to the acceleration of Phase 3 trials of a pharmaceutical product the company is developing. This acceleration, which was unforeseen at the time of the Prior Issuance, will result in the costs of research and development being due sooner than anticipated. The proceeds from the Prior Issuance were not used in connection with this product, but instead were used for the development of other products.
 
The Warrants would be issued to a lender (the “Lender”) in connection with a non-convertible debt facility the Lender would provide. The Lender would not be an investor, or an affiliate of any investor, in the Proposed Common Stock Issuance. The exercise price of the Warrants would be not less than the greater of book or market value immediately preceding the entering into of the binding agreement, and the Warrants would not contain any anti-dilution adjustments other than for stock splits and similar events.  The Warrants would not be exercisable until at least six months after the later of (i) their issuance, or (ii) the closing of the Proposed Common Stock Issuance.
 
Following our review of the information you provided, we have determined that the Proposed Common Stock Issuance would not be aggregated with the Prior Issuance for purposes of the Rule because: (i) approximately seven months would have passed between the transactions; (ii) the need for the Proposed Issuance arose from a change in circumstances following the Prior Issuance; (iii) there are no contingencies between the transactions; and (iv) the Proposed Common Stock Issuance was not contemplated at the time of the Prior Issuance. In addition, the Warrants would not be aggregated with the Proposed Common Stock Issuance because the Warrants would not be exercisable for less than the greater of book or market value and could not be exercised until the at least six months after the later of (i) their issuance. or (ii) the closing of the Proposed Common Stock Issuance.  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 other than as described herein.
 
Publication Date*: 7/31/2012 Identification Number: 808 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 2007-27  
Identification Number 803
This is in response to your correspondence wherein you asked whether the company’s proposed issuances of securities in two transactions (the “Transactions”) would be aggregated for purposes of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”).
 
According to the information you provided, the Transactions would consist of: (i) the sale of common stock to the Institutional Investor (the “Institutional Investment”) in a private placement and (ii) the issuance of common stock and warrants, as described below, in connection with the buy-out of the company’s obligation to make certain cash payments (the “Buy-Out Transaction”).  In the Buy-Out Transaction, the company would issue shares of its common stock and pay cash to the Payee in satisfaction of its obligation to make cash payments in connection with a royalty agreement originally entered into approximately six years ago.  In addition, in connection with the Buy-Out Transaction, the company would issue warrants to the providers of a debt facility, which the company would utilize to pay the cash portion of the Buy-Out Transaction.
 
You stated that the primary purpose for completing the Institutional Investment would be to fund the needs of the company’s operations as well as for other general corporate purposes including preparations for the anticipated launch of a new product in approximately one year.  None of the funds raised in the Institutional Investment would be used to fund the Buy-Out Transaction.  The Payee would not purchase shares in the Institutional Investment, and the Institutional Investor would not receive shares in the Buy-Out Transaction.  The Institutional Investor and the Payee are not affiliated with each other.  Neither of the Transactions is contingent on the other, although they may close concurrently.
 
Following our review of the information you provided, we have determined that the Transactions would not be aggregated for purposes of the Rule because they are for different purposes, there are no contingencies between the Transactions, and there is no commonality of investors.  As such, each would be evaluated separately to determine whether shareholder approval is required under Listing Rule 4350(i).
 
 
Publication Date*: 7/31/2012 Identification Number: 803 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 2007-24
Identification Number 800
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D) (the “Rule”) to a proposed issuance (the “Proposed Issuance”) of common stock which could exceed 20% of the pre-transaction outstanding shares.  You asked whether the Proposed Issuance would be considered to be a public offering and, therefore, not require shareholder approval under the Rule.
 
According to the information you submitted, the company has entered into an agreement with the Investment Banker whereby the company could, at its choice, sell shares of its common stock (the “Shares”) from time to time to the Investment Banker, which would purchase the shares on a firm commitment basis for approximately 94% of market value.  The Investment Banker would then sell the Shares through several brokerage firms (the “Brokers”) via ordinary market transactions on the Foreign Stock Exchange at prevailing market prices.  The company is also listed on the Foreign Stock Exchange, and over 80% of its volume has traded on that market over the last three months.  The sales would be open to all market participants, and the company would have no control over the sale of the Shares after selling the Shares to the Investment Banker.  You stated that it is the intent of the Investment Banker to distribute the Shares to the Brokers for resale immediately after acquiring them from the company.
 
Following our review of the information you submitted, we have determined that the Proposed Issuance would be a “public offering” under the Rule and therefore would not require shareholder approval under the Rule.  We have reached this conclusion because the Shares would be sold into the market at the prevailing market prices in ordinary brokerage transactions open to all market participants.  This conclusion is based on the representation that the Investment Banker intends to distribute the Shares to the Brokers for resale into the market immediately after acquiring them from the company.
 
Publication Date*: 7/31/2012 Identification Number: 800 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
Frequently Asked Questions
  Staff Interpretation Letter 2007-22
Identification Number 798
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D) (the “Rule”) to a proposed issuance (the “Proposed Issuance”) of common stock. You asked whether the Proposed Issuance, which would be less than 20% of the pre-transaction total shares outstanding, would be aggregated with subsequent issuances when determining whether shareholder approval is required under the Rule for those subsequent issuances.
 
According to the information you submitted, the company has entered into an agreement (the “Agreement”) with the Investment Banker whereby the company would sell shares of its common stock from time to time through the Investment Banker. Each time the company wishes to sell shares under the Agreement, it will send a notice to the Investment Banker setting forth the number of shares to be issued, the time period during which the sales are to be made, the minimum price at which sales may be made, and any limitation on the number of shares to be sold in any one day.  If the Investment Banker accepts the placement notice, it will sell the shares into the existing trading market at the prevailing market price at the time of sale in ordinary brokerage transactions. The sales will be open to all market participants, and the Investment Banker will make the shares available in the same way it makes available any other securities that it is requested to sell by any shareholder of any issuer. The company will have no control over the sale of the shares after submitting a placement notice. No officers or directors of the company would purchase shares in the Proposed Issuance.
 
You stated that in the vast majority (over 98%) of cases, the Investment Banker will make the sales on an agency basis, not taking ownership of the shares that are sold. However, the Investment Banker will have the flexibility to act as principal to facilitate sales that otherwise might not close. For example, when dealing with sales orders that it may be unable to fill prior to an expiration date without causing downward pressure on the stock price, the Investment Banker may purchase those shares to resell them into the market at the prevailing market price when it could do so without causing a disruption in the market (no more than a few days later).
 
Following our review of the information you submitted, we have determined that the Proposed Issuance would be a “public offering” under the Rule and therefore does not require shareholder approval under the Rule. As such, the Proposed Issuance would not be aggregated with subsequent issuances that are subject to the Rule. We have reached this conclusion because the sales in the Proposed Issuance would be made directly into the market at the prevailing market prices in ordinary brokerage transactions open to all market participants.
 
 
Publication Date*: 7/31/2012 Identification Number: 798 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 2007-17
Identification Number 793
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 Listing Rule 4350(i)(1)(D).
 
According to the information you submitted, in the Prior Transaction, which was completed approximately three months ago, the company issued convertible notes to several investors in a private placement.  The notes are convertible into common stock at a discount to the market value of the common stock, but the number of shares issuable upon conversion is limited to 19.9% of the company’s pre-transaction outstanding shares.  The primary purpose of the Prior Transaction was to raise funds to resolve debt covenant issues which arose due to the company’s recent financial performance.  The proceeds were used to pay down debt under the company’s term loan agreement and for general corporate purposes.
 
In the Proposed Transaction, the company would issue to an institutional investor shares of its common stock up to a fixed aggregate dollar value, at a discount to market value.  The number of shares to be issued will be further capped so as to make sure that it remains below 20% of the total shares outstanding prior to the Proposed Transaction.  The investor in the Proposed Transaction was not an investor in the Prior Transaction and is not an officer, director, employee, or consultant of the company.  You stated that the Transactions are distinct and unrelated and each came to the attention of the company separately.  Neither is contingent on the other.
 
You stated that at the time of the closing of the Prior Transaction, the company anticipated that it would have sufficient liquidity for the foreseeable future and had not planned any additional capital raising efforts in the short term.  Subsequent changes in circumstances, however, gave rise to the need for the Proposed Transaction.  Specifically, (i) there was a significant increase in the cost of raw materials that the company purchases for use in its manufacturing process; (ii) the company entered into a contract settlement that resulted in its having to make a higher than anticipated payment; and (iii) the company experienced operational difficulties that resulted in lower than expected revenue after the Prior Transaction was completed.  These events caused the company’s working capital requirements to increase significantly beyond the amount that had been anticipated at the time of the Prior Transaction, and the proceeds from the Proposed Transaction would be used to fund those requirements.
 
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 Listing Rule 4350(i)(1)(D).  Of course, if the investor in the Proposed Transaction acts with the intent to sell or resell company shares to any of the investors in the Prior Transaction, then our conclusion could be different.  Please note that you have not asked us to reach, and we have not reached, a conclusion as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transaction.  For example, if the issuance could result in a change of control, shareholder approval would be required under Listing Rule 4350(i)(1)(B).
 
 
Publication Date*: 7/31/2012 Identification Number: 793 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 2007-13  
Identification Number 789
This is in response to your correspondence regarding the applicability of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) to the company’s issuance of securities to settle litigation (the “Settlement Transaction”) associated with a prior stock issuance (the “Prior Transaction”).
 
According to the information you provided, the Prior Transaction was a private placement of common stock (the “Common Shares”) to several investors, at a discount to the market value, along with warrants (the “Warrants”) exercisable for additional shares of common stock.  Shareholder approval of the Prior Transaction was not required under the Rule because: (i) the number of Common Shares was limited to less than 20% of the pre-transaction outstanding shares and (ii) and the Warrants were exercisable for not less than the greater of book or market value and were not exercisable until six months following closing.  The investors in the Prior Transaction did not include any officer, director, employee or consultant of the company.
 
The Prior Transaction closed approximately five months ago.  Approximately two months after that closing,  one of the investors in the Prior Transaction commenced litigation alleging that the company and eight of its officers and directors violated federal and state law by misrepresenting, and failing to disclose, certain material information regarding the company’s business and forecasted revenues in connection with the purchase of the securities in the Prior Transaction.  The complaint sought rescission of the Prior Transaction and both compensatory and punitive damages.  Subsequent to the filing of the complaint, the company was approached by other investors in the Prior Transaction, all of whom also sought damages or rescission.
 
To settle these claims, the company has reached agreements with the investors resulting in the Settlement Transaction, which will consist of: (i) a cash payment by the company to the investors; (ii) the issuance of notes (the “Notes”) convertible into common stock; and (iii) the cancellation of the Warrants.  Initially, the conversion price is such that the aggregate number of shares that could be issued in the conversion of the Notes would equal less than 20% of the pre-transaction outstanding shares.  In the event the company is in default of its obligations under the Notes, however, the conversion price would be reset to a specified discount to the then market price, and the aggregate issuance of common stock could exceed 20% of the pre-transaction outstanding shares (the “Reset Provision”).  The Notes specifically stipulate that any conversion is subject to the applicability of NASDAQ’s shareholder approval requirements.
 
Following our review of the information you provided, we have determined that the Settlement Transaction will not be aggregated with the Prior Transaction for purposes of the Rule because the Settlement Transaction was not expected at the time of the Prior Transaction, but instead arose as a result of subsequent legal action.  In addition, over five months have passed between the Prior Transaction and the settlement.  Nonetheless, please note that before the Notes could be converted into common stock, the company must obtain shareholder approval because the Reset Provision could result in the company being required to issue more than 20% of the pre-transaction outstanding shares at a discount.  However, because the Notes contain a provision requiring such approval before conversion, the company is not foreclosed from issuing the Notes before such approval is obtained.  Please note also that you have not asked us to, and we have not, reached a conclusion as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Settlement Transaction.  For example, if the issuance could result in a change of control, shareholder approval would be required under Listing Rule 4350(i)(1)(B).
 
Publication Date*: 7/31/2012 Identification Number: 789 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2007-9
Identification Number 785
This is in response to your correspondence regarding whether the company’s proposed issuance of securities (the “Proposed Transaction”) would be aggregated with a prior transaction (the “Prior Transaction”) for purposes of the shareholder approval requirements of Marketplace Listing Rule 4350(i).  Specifically, your question relates to the applicability of Listing Rule 4350(i)(1)(D)(ii) (the “Rule”).
 
According to the information you provided, in the Prior Transaction, which closed approximately five months ago, the company sold shares of common stock in a private placement to several investors at a price that exceeded the greater of book or market value.  The number of shares that were issued was equal to approximately 15% of the pre-transaction outstanding shares.
 
In the Proposed Transaction, which is expected to close within approximately one month, the company would issue shares of common stock in a private placement to several investors at a discount to the market value.  The number of shares that would be issued would equal less than 20% of the pre-transaction outstanding shares.
 
You stated that there are no contingencies between the transactions, the proceeds are for different purposes, and a change in circumstances subsequent to the Prior Transaction gave rise to the need for the Proposed Transaction.  Specifically, you indicated that the funds raised in the Prior Transaction had been used for sales and marketing of a product that did not receive an expected regulatory approval.  You stated that the Proposed Transaction is necessary to fund initiatives that the company previously expected to fund through sales of that product.  In addition, you stated that although the placement agent for the Proposed Transaction will attempt to seek investors different from those who participated in the Prior Transaction, the company does not yet know whether there will be any commonality of investors.
 
Following our review of the information you provided, and on the assumption that there is no significant overlap between the investors in the Prior Transaction and the investors in the Proposed Transaction, we have determined that the Proposed Transaction would not be aggregated with the Prior Transaction for purposes of the Rule.  As such, given that the issuance in the Proposed Transaction would equal less than 20% of the pre-transaction outstanding shares, the Proposed Transaction would not require shareholder approval under the Rule.
 
Please note that if there is significant overlap between the investors in the Prior Transaction and investors in the Proposed Transaction our determination may change.  Note also that you have not asked us to, and we have not, reached a conclusion as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transaction.  For example, if any shares were to be sold at a discount to any officer, director, employee, or consultant of the company, shareholder approval would be required under 4350(i)(1)(A), and if the issuance could result in a change of control, shareholder approval would be required under Listing Rule 4350(i)(1)(B).
 
 
 
Publication Date*: 7/31/2012 Identification Number: 785 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2007-7
Identification Number 783
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(C) and 4350(i)(1)(D) (the “Shareholder Approval Rules”) and the voting rights requirements of Listing Rule 4351 (the “Voting Rights Requirements”) to a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, the company has one class of common stock (the “Common Stock”), which carries one vote per share.  At its next annual meeting, the company will seek shareholder approval for the creation of a new Class B Common Stock (“Class B Common”) and the elimination of a current charter provision which prohibits the issuance of non-voting stock (the “Non-Voting Prohibition”).  If both proposals are approved, the Class B Common would be non-voting; if the latter proposal is not approved, the Class B Common would have a fraction of a vote per share (“Nominal Voting Rights”).
 
In the Proposed Transaction, the company would sell Series A Preferred Stock and Series B Preferred Stock (the “Preferred Stock”) to the Investor.  The Series A Preferred would be convertible, at the option of the Investor, into shares of Common Stock at a price per share that exceeds both the closing bid price of the Common Stock and the book value per share immediately preceding the entering into of the binding agreement (the “Conversion Price”).  Initially, the Series B Preferred would convert into Class B Common, although if certain conditions were met, it could subsequently convert into Common Stock.  Due to the Non-Voting Prohibition, each class of Preferred Stock would have Nominal Voting Rights.
 
Currently, the Investor has the largest ownership position in the company, approximately 36%.  The issuance in the Proposed Transaction would equal approximately 50% of the pre-transaction outstanding shares, such that the Investor’s post-transaction ownership would be approximately 57%, subject to certain limitations.  Three of the Investor’s employees or affiliates (“Investor Employee Directors”) are presently members of the company’s eight-member board of directors, although the Investor has no rights to cause their future election.  You stated that these directors were among those designated for Board membership by the creditors’ committee, in connection with the company’s plan of reorganization.
 
Following the closing of the Proposed Transaction, the Investor would have the right to nominate one new Board member, and the Board size would be increased to nine.  In addition, if the company fails to make three dividend payments, the Preferred Stock would have the right, as a class, to elect two additional directors (the “Dividend Default Directors”) to what would then be an eleven-member Board, until the dividend arrearages were paid.  Although this right is vested in the holders of the Preferred Stock, rather than specifically with the Investor, you stated that it would be exercisable by the Investor, immediately upon closing, in the event of a default.  If that right is triggered, the Investor would then have the right to designate three of eleven Board members, in addition to the three Investor Employee Directors.  Pursuant to the terms of the Preferred Stock, the Dividend Default Directors cannot be employees or affiliates of the Investor, if their appointment would result in the Investor’s employees or affiliates holding a majority of the company’s Board seats.  The Dividend Default Directors are also subject to the “reasonable approval” by the company if such directors would cause a majority of the Board to be appointed by holders of the Preferred Stock.
 
In the event of a change of control, as defined in the transaction documents, the Preferred Stock may, at the option of the holder, be redeemed for cash or converted at its terms into Common Stock or Class B Common.  If the holder chooses such redemption or conversion, the holder would be entitled to receive cash or stock, in the amount of dividends that would have been paid over a specified time period (the “Dividend Payment”).  If the Dividend Payment is made in stock, it would be paid in shares of a new series of non-voting preferred stock (the “New Preferred”), which could not convert into any class of common stock without shareholder approval, or if shareholder approval has been obtained, it would be paid in shares of Class B Common.
 
The company will pay the Investor a placement fee and will reimburse the Investor in cash for certain legal fees and expenses incurred by the Investor in connection with the Proposed Transaction (collectively, the “Fees and Expenses”).
 
Approximately two months after entering into the definitive agreement relating to the Proposed Transaction, the company entered into a definitive agreement for the acquisition of all of the outstanding stock of another company (the “Acquisition”).  The consideration in the Acquisition consists of cash and the assumption of debt.  You stated that the Proposed Transaction was not entered into in contemplation of the Acquisition or for any other specific use of proceeds; neither the Proposed Transaction nor the Acquisition was contingent on the other; the company has sufficient cash for the Acquisition without regard to the Proposed Transaction; and, the Proposed Transaction would have been entered into without regard to whether the Acquisition would take place.  You also stated that at the time the company committed to the Proposed Transaction, it had no reason to believe that it would be successful in its attempt to complete the Acquisition.
 
Following our review of the information you provided, we have concluded that the Proposed Transaction complies with the Shareholder Approval Rules and the Voting Rights Requirements.  Specifically, Listing Rule 4350(i)(1)(C) does not apply because, as summarized above, you represented that the Proposed Transaction is not in connection with the Acquisition.  There were no contingencies between the two, and each would take place without regard to the occurrence of the other.  Rule 4350(i)(1)(D) does not require shareholder approval because any common stock, or securities convertible into common stock, issuable in the transaction will be issued at a price not less than the greater of book or market value of the common stock.  The payment of the Fees and Expenses and the Dividend Payment in cash would not be considered in determining whether the issuance price is at a discount.  Further, the Dividend Payment would not require shareholder approval if it is paid in stock because the only stock that could be issued without shareholder approval is the New Preferred, which cannot convert into common stock without shareholder approval.  Finally, the proposed director representation complies with the Voting Rights Requirements because the Investor’s right to nominate or designate Board members will not be at a higher percentage than its equity ownership interest in the company.
 
Publication Date*: 7/31/2012 Identification Number: 783 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2007-3
Identification Number 779
This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements to a proposed transaction (the “Proposed Transaction”) which you described.  Specifically, your question relates to Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”).
 
According to the information you provided, the company issued the Notes in a private placement (the “Note Offering”) approximately nine months ago, and the conversion price exceeded the book and market value of the company’s stock.  As such, shareholder approval was not required under the Rule for the Note Offering.  The Holder purchased approximately 9% of the Notes.  In the Proposed Transaction the company would enter into an agreement with the Holder pursuant to which the company would make a cash payment (the “Inducement Payment”) to the Holder to induce the Holder to convert all or a portion of the Notes that it holds.  The conversion would take place at the Notes’ original terms, which would not be changed.  Because a definitive agreement relating to the Proposed Transaction has not been reached, it is unknown whether the Holder’s effective conversion price, after giving effect to the Inducement Payment, would exceed the greater of book or market value.  The number of shares that would be issued, however, would be less than 20% of the company’s pre-transaction outstanding shares.  The Holder is not an officer, director, employee, or consultant of the company.  The company has no plans to enter into similar agreements with other holders of the Notes.
 
In a transaction (the “Equity Offering”) completed approximately four months ago, the company sold shares of its common stock and warrants.  Shareholder approval was not required by the Rule because the aggregate issuance was limited to 19.9% of the pre-transaction outstanding shares.  The Holder was a participant in, and purchased approximately 10% of, the Equity Offering.
 
You stated that the Equity Offering was completed to fund the company’s development efforts.  The Proposed Transaction would not raise any new funds, but is being undertaken to restructure the company’s securities and to eliminate debt outstanding on the company’s balance sheet.  You also said that the Proposed Transaction would be completed on terms that represent a discount to the interest that otherwise would be payable on the Notes, if they were held to maturity.
 
Following our review of the information you submitted, we have concluded that the Proposed Transaction will not require shareholder approval under the Rule.  Specifically, the Proposed Transaction would not be aggregated with the Equity Offering because: (i) the number of shares that would be issued in the Proposed Transaction is determined by the terms of indenture covering the Note Offering and, accordingly, there would be no increase in the number of common shares that are issuable; (ii) there are no contingencies between the Proposed Transaction and the Equity Offering; and (iii) the transactions are not part of the same financing plan, in that the Equity Offering was to raise funds for specific corporate purposes, and the Proposed Transaction would be designed to restructure the company’s balance sheet.  Further, while the Inducement Payment could result in the conversion price of the Holder’s Notes being at a discount to the market price, the number of common shares that would be issued is less than 20% of the pre-transaction outstanding shares.  Be advised, however, that any similar transactions with the Holder and with other holders of the Notes would be aggregated for purposes of determining whether the resultant net conversion price is at a discount to the greater of book or market value, and, therefore, whether shareholder approval is required.
 
Publication Date*: 7/31/2012 Identification Number: 779 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2006-43
Identification Number 852
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(C), and 4350(i)(1)(D) (the “Rules”) to two proposed transactions (the “Proposed Transactions”) which you described.  The Proposed Transactions are:  (i) a private placement (the “Private Placement”); and (ii) the acquisition of a portion of the outstanding stock of the Target (the “Acquisition”).
 
According to the information you provided, the Private Placement would consist of the sale of common stock (the “Shares”) and warrants (the “Warrants”) to several investors.  The number of Shares that would be issued (the “Share Issuance”) could exceed 20% of the pre-transaction outstanding shares, and, in addition, the Warrants would be exercisable into that number of shares equal to 50% of the Share Issuance.  The Warrants would be exercisable, however, only after shareholder approval of such exercise, and the Shares would not be entitled to vote in the shareholder vote to approve the exercise.  Should shareholders not approve the exercise of the Warrants, the remaining terms of the Private Placement would not change.  The Shares would be sold at a price not less than the closing bid price of the company’s common stock immediately preceding the execution of the binding agreement, and there would be no additional consideration that would be attributable to the Warrants.  The company’s market value exceeds its book value.  After giving effect to the Private Placement: (i) no investor in the Private Placement would beneficially own or control, alone or as a part of a group, 20% or more of the outstanding shares or voting power of the company; and (ii) the company’s current largest shareholder would remain the largest.
 
In the Acquisition, the company would issue shares of its common stock (the “Acquisition Shares”) and cash in exchange for shares of the Target.  The issuance of the Acquisition Shares would take place only after shareholder approval of such issuance.
 
You stated that: (i) the Proposed Transactions are separate from each other; (ii) the failure of one to occur would not cause the other not to proceed; (iii) they are not contingent on each other; (iv) they will be discussed and approved, if approved, at separate board meetings; (v) no portion of the proceeds of the Private Placement would be used to finance the Acquisition; (vi) the proceeds of the Private Placement will be used for working capital of the company and not for working capital of the Target; and (vii) the cash portion of the Acquisition will be funded from cash on hand.
 
Following our review of the information you submitted, we have determined that the Proposed Transactions comply with the Rules.  The Shares that would be issued in exchange for shares of the Target would be issued only after shareholder approval in compliance with 4350(i)(1)(C).  Based on your representations as summarized above, the Shares that would be issued in the Private Placement would not be considered to be in connection with the acquisition of the Target’s shares and, accordingly, the Private Placement would not be subject to shareholder approval under Listing Rule 4350(i)(1)(C). The Shares to be issued in the Private Placement will be issued at market value, and therefore shareholder approval is not required for the Private Placement under Listing Rule 4350(i)(1)(D).  In that regard, we note that it is not necessary to attribute a value to the Warrants for purposes of determining whether the Shares are being issued at a discount because the Warrants could be exercised only if the company’s shareholders vote to approve such exercise, and the Shares cannot be voted in the vote to approve such exercise.  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.  Further, given that following the Private Placement no investor in the Private Placement, either alone or as a part of a group, would own 20% or more of the outstanding shares or voting power of the company, that the company’s current largest shareholder would retain that position, and that there are no other arrangements between the company and any of the investors, the Private Placement would not result in a change of control and therefore would 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: 852 Mailto Link
Frequently Asked Questions
  Staff Interpretation Letter 2006-41
Identification Number 850
This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1) (the “Rule”) to a proposed restructuring (the “Restructuring”) which you described.
 
According to the information you provided, in the Restructuring, the company would issue shares of its common stock (the “Shares”) solely to certain of its directly or indirectly wholly-owned subsidiaries (the “Subsidiaries”).  One or more of the Subsidiaries would use certain of the Shares to acquire the equity interest of other wholly-owned subsidiaries of the company.  Because all of the Shares would be held by directly or indirectly wholly-owned subsidiaries of the company, the company would directly or indirectly hold all of the Shares both prior to and following the Restructuring.
 
You stated that the company does not intend to register the Shares with the Securities and Exchange Commission.  You also stated that, under the laws of the company’s state of incorporation, the Shares would not be permitted to be voted and would not be considered as outstanding for purposes of calculating the shares required to be present to form a quorum.  In addition, you stated that the Shares would be treated as treasury shares for purposes of generally accepted accounting principles, and, because they will be held by subsidiaries, the Shares would not be considered in calculating the company’s earnings per share.
 
Following our review of the information you submitted, we have determined that the Restructuring will not be subject to Listing Rule 4350(i)(1) because, for purposes of the Rule, we would not consider the Shares to be issued and outstanding.  This is based on your representations about the treatment of the shares for state law purposes and under generally accepted accounting principles.  Please be advised that any subsequent issuance of the Shares, whether by the company or the Subsidiaries, and any change in circumstances that could result in the Shares becoming outstanding, would need to be assessed under the Rule.
 
 
 
 
Publication Date*: 7/31/2012 Identification Number: 850 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 2006-38    
Identification Number 847
This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D) (the “Rule”) to a proposed transaction (the “Proposed Transaction”) which you described.
 
According to the information you provided, in the Proposed Transaction, the company would issue convertible notes (the “Notes”) to several investors in a private placement through a Rule 144A offering. Although the Notes provide for adjustments in the conversion price based on certain future issuances of common stock, the maximum number of shares that could be issued in the Proposed Transaction is limited to 19.9% of the pre-transaction outstanding shares unless shareholder approval is obtained.  The terms of the Proposed Transaction would not change as a result of the shareholder vote.  Investors in the Proposed Transaction will not include any of the company’s officers, directors, employees, or consultants.   The company intends to use the proceeds from the Notes to expand its business and for general corporate purposes.
 
Following our review of the information you submitted, we have determined that by structuring the Proposed Transaction as you described, the company would comply with the requirements of the Rule because the issuance of common stock would be less than 20% of the pre-transaction outstanding shares unless shareholder approval is obtained, and the terms of the transaction would not change as a result of the shareholder vote.  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.  In your letter, you stated that that you were not asking us to determine (and we have not determined) whether the Proposed Transaction would result in a change of control.  Please be advised, however, that if the Proposed Transaction would result in a change of control, shareholder approval would be required under Listing Rule 4350(i)(1)(B), which requires such approval when an issuance will result in a change of control.
 
 
Publication Date*: 7/31/2012 Identification Number: 847 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
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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