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  Listing Council Decision 2008-2  
Identification Number 623
Rule 4350(i)(2):  An exception applicable to a specified issuance of securities may be made upon prior written application to NASDAQ's Listing Qualifications when:
(A) the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise; and
 
(B) reliance by the company on this exception is expressly approved by the audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors.  Listing Qualifications shall respond to each application for such an exception in writing.
 
A company that receives such an exception must mail to all shareholders not later than ten days before issuance of the securities a letter alerting them to its omission to seek the shareholder approval that would otherwise be required. Such notification shall disclose the terms of the transaction (including the number of shares of common stock that could be issued and the consideration received), the fact that the issuer is relying on a financial viability exception to the stockholder approval rules, and that the audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors has expressly approved reliance on the exception.  The issuer shall also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days before the issuance of the securities.
 
Issue:  The Panel determined that Staff erred in denying the financial viability exception to the shareholder approval rules.  The Panel found the Staff had applied a bright-line test that denies the financial viability exception based on any issuance that includes a discounted offering of stock to corporate officers.
 
Determination:  After a review of the record in this matter, the Listing Council affirms the Panel’s decision to continue the listing of the company’s securities.
 
NASDAQ shareholder approval requirements are designed to provide shareholders with a meaningful voice in significant transactions and in transactions where they may face significant dilution.  The Listing Council believes that this voice, mandated by NASDAQ rules, is a basic tenet of the NASDAQ corporate governance rules.  In adopting these rules, however, NASDAQ also understood that there are special situations wherein companies are unable to seek prior shareholder approval to issue securities because any delay would jeopardize a company’s ability to continue as a going concern.
 
After reviewing the record before it, the Listing Council agrees with the Panel’s determination that the company’s viability was threatened.  The Listing Council also agrees with the Panel’s determination that it can be fairly and reasonably implied that a discounted issuance of stock to management in a private placement, as contemplated in the present case, is considered “equity compensation” for purposes of Listing Rule 4350(i)(1)(A), and as such, requires prior shareholder approval absent an exception.  The Listing Council finds that the Panel reasonably concluded that, based upon the record before it, the Staff had applied a “bright-line” test that would deny the availability of the financial viability exception for any issuance that includes an equity compensation component.  The Listing Council agrees with the Panel that applying a “bright-line” test, which summarily excludes companies from access to the financial viability exception based upon the existence of equity compensation, is improper.  Staff must consider the facts and circumstances surrounding each request for a financial viability exception.
 
In the case at hand, the Panel found convincing the company’s belief that any effort to amend the terms of the financing in any way would have required the approval by multiple parties and raised a very high risk that the deal would fall through.  The Panel was not convinced that the terms of the financing were intended to allow management to enrich itself or that any enrichment would occur without the approval of shareholders. Instead, the Panel believed that the management participation in the financing, which was negotiated at the end of the process at the direction of the independent committee of the Board, was to some extent offset by other significant concessions.
 
Based on the foregoing, the Listing Council affirms the Panel decision to grant the company additional time to regain compliance with the Capital Market continued listing standards.
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 623
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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