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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 Mailto Link Identification Number: 1063
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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