referencelibrarybanner
Listing Center Coronavirus FAQs for Nasdaq-listed Companies
Reference Library - Advanced Search
Find
 


Library 



 
Timeframe
Category
 
Sub-Category
** To make multiple selections, select the first criterion and then press and hold the Ctrl Key **
 
1- 1 of 1 Search Results for:
Libraries:   Staff Interpretation Letters
Filters:   All Years; Shareholder Approval;
 
Search   Clear


Expand All
Printer Friendly View
Mailto Link 
Page: 1 of 1
Frequently Asked Questions
  Staff Interpretation Letter 2012-8
Identification Number 1069
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to proposed issuances of securities (the “Proposed Transactions”). In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”).

The Company, a savings and loan holding company, conducts banking operations through its operating subsidiary (the “Bank”) and does not have any significant business or assets apart from its ownership of the Bank. You stated that for the past several years, the Bank has experienced very substantial increases in loan delinquencies and defaults due primarily to unfavorable economic conditions including the downturn in the real estate market in its service area. As a result, the Company has reported substantial losses for each of the past two years and does not have sufficient cash to meet its operating expenses. In its report in the most recent Form 10-K, the Company’s independent auditor included the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern.

The banking regulators determined that the Company and the Bank are in “troubled condition” which is a regulatory designation resulting in substantial restrictions on the operations of both the Company and the Bank enforced through Cease and Desist Orders (the “Orders”). Pursuant to the Orders, the Company is required to maintain capital ratios higher than otherwise required and is not permitted to incur, make payments on, or increase any debt without the approval of its regulators. As a result, the Company is in default on a substantial amount of its outstanding debt, including a credit facility which is secured by the assets of the Company (the “Debt”). To preserve capital, the Company has closed two of the five branch offices of the Bank and has sold its headquarters building. In addition, the Company has sold other assets, including non-performing loans.

In the Proposed Transactions, the company would issue common stock, or securities which would be convertible into common stock (the “Convertible Securities”), in exchange for currently outstanding preferred stock and a portion of the Debt. The Convertible Securities would vote on an as-converted basis. The exchange for the preferred stock would be at a 50% discount to the liquidation preference and would also be in satisfaction of accrued but unpaid dividends. The U.S. Treasury Department would also exchange preferred stock it was issued under the Troubled Asset Relief Program and, as a result, would become the largest holder of the Company’s common stock. Concurrently with the completion of these exchanges, the Company would sell shares of common stock in a private placement to unrelated investors at a discount to the market value. You stated that the completion of each part of the Proposed Transactions is conditioned on the completion of each of the other parts. The Company plans to seek the necessary approval of the banking regulators to allow it to retain at the holding company level a substantial portion of the proceeds from the private placement and to invest the remainder in the Bank.

You stated the Company exhaustively explored possibilities to structure a transaction which would comply with the shareholder approval requirements but was unable to do so. Each participant in the Proposed Transactions demanded the contingency that all portions close concurrently. The investors in the private placement agreed to invest only if the improvements in the Company’s capital structure, which would result from the preferred stock exchanges, were certain to occur. The participants in the Proposed Transactions also insisted on full voting power and were unwilling to accept a non-voting security which would be convertible into common stock only after shareholder approval.

The Company’s financial advisory firm approached approximately 175 potential investors over the past 2 years but could not reach an agreement for another source of capital on different terms. Efforts to sell the Company in its entirety were not successful. You stated that based on these efforts, the Company believes that the Proposed Transactions are the only available alternative. In addition, you stated that if it is not able to complete the Proposed Transactions in the very near term, the Company will be forced to file for bankruptcy protection or bank regulatory authorities may appoint a receiver or conservator for the Bank.

The Company expects that as a result of the Proposed Transactions, it would avoid having to seek bankruptcy protection, and the Bank would no longer face the risk of the appointment of a receiver or conservator. In addition, the Company believes that following the closing of the Proposed Transactions it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the Company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) as the issuance could result in a change of control and pursuant to Listing Rule 5635(d) as the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the Convertible Securities would effectively have greater voting rights than the common stock since they would vote on an as-converted basis and would convert at a discount to the market value. You stated that the time that would be required to prepare for and conduct a meeting of stockholders would seriously jeopardize the Company’s continuing existence as an operating entity and that even more urgently, the Company does not have the cash that would be required to hold such a meeting.

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and the appointment of a conservator or a receiver for the Bank. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the Proposed Transactions because both that rule and former Securities and Exchange Commission Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.

This exception applies only to the Proposed Transactions and not to any other issuances of securities which you stated may occur following the completion of the Proposed Transactions.

Publication Date*: 1/17/2013 Mailto Link Identification Number: 1069
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.
Page: 1 of 1
home_footer_links
Copyright_statement
App Store       Google Play       Listing Center Content RSS Feed
The Nasdaq Stock Market, Nasdaq, The Nasdaq Global Select Market, The Nasdaq Global Market, The Nasdaq Capital Market, ExACT and Exchange Analysis and Compliance Tracking system are trademarks of Nasdaq, Inc.
FINRA® and Financial Industry Regulatory Authority, Inc.® are registered trademarks of Financial Industry Regulatory Authority, Inc. OTCBBTM and OTC Bulletin BoardTM are trademarks of FINRA