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Frequently Asked Questions
  Staff Interpretation Letter 2011-8  
Identification Number 698
This is in response to your correspondence regarding whether certain issuances of the company’s common stock to employees of the Target (the “Employee Issuances”) would require shareholder approval as equity compensation under Listing Rule 5635(c) or IM-5635-1 (collectively, the “Rule”).
 
The company plans to acquire the Target for a combination of cash and shares of common stock.  Specific provisions of the Target’s charter and its loan agreements set forth how consideration must be allocated between the Target’s shareholders and employees in the event the Target is acquired.  Specifically, these provisions require that upon the closing of an acquisition, the Target must distribute a portion of the proceeds: (i) to the Target’s Chief Executive Officer in exchange for shares issued to him upon the establishment of the Target; (ii) to the holders of the Target’s outstanding vested employee stock options; and (iii) to officers, directors, employees, and consultants of the Target in connection with the repayment of certain of Target’s bridge loans.  As a result of the acquisition, all of the Target’s employee stock options would be cancelled, and any shares previously issued upon exercise of options would be transferred to the company for no additional consideration.
 
You stated that these provisions were adopted approximately two years ago and were not adopted in contemplation of the Acquisition.  You also stated that the number of shares of common stock that would be issued in the acquisition, including the Employee Issuances, would be less than 20% of the Company’s pre-transaction outstanding shares.
 
Following our review of the information you provided, we have determined that the Employee Issuances would not require the approval of the company’s shareholders as equity compensation under the Rule because the issuances would be in satisfaction of arrangements which were entered into between the Target and its employees and which did not involve the company.  Our determination is based on the provision of IM-5635-1 which states that shareholder approval is not required under Listing Rule 5635(c) to convert, replace, or adjust outstanding options or other equity compensation awards to reflect an acquisition.  In addition, we note that the charter provisions requiring the Employee Issuances were not adopted in contemplation of 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 shareholder approval requirements in any way other than as addressed herein.
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 698
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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