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Frequently Asked Questions
  Staff Interpretation Letter 2010-11  
Identification Number 710
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from the shareholder approval requirements and from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) with respect to the proposed transactions described below (the “Proposed Transactions”).
 
According to the information you provided, in the Proposed Transactions the company would: (i) issue shares of common stock and convertible preferred stock to the Investor in a private placement (the “Investment”); and (ii) issue shares of common stock and/or convertible preferred stock to the United States Department of Treasury (the “Treasury”) in exchange for shares of the company’s non-convertible preferred stock currently held by the Treasury (the “Treasury Exchange”).  The issuance price of the common stock and the conversion price of the preferred stock both would be less than the market value of the common stock, and the convertible preferred stock would vote on an as-converted basis. You stated that the Treasury Exchange is a condition precedent to the Investment.
 
You indicated that the company is a bank holding company, and its subsidiary is a nationally chartered bank (the “Bank”). The Bank has been drastically impacted by economic deterioration in the markets its serves and by declining asset quality, and the company, therefore, has experienced significant losses and projects substantial additional losses going forward. As a result, the Bank is not in compliance with mandated regulatory capital ratios, and the applicable federal banking regulators have implemented enforcement actions, which resulted in the company and the Bank entering into agreements with those regulators requiring them to increase their leverage and capital ratios. In order to satisfy these agreements, the company must raise a significant amount of capital within a limited amount of time. The agreements also provide that if the company fails to meet the prescribed capital ratios within the prescribed timeframes, it must submit a plan to sell, merge or liquidate the Bank, which you stated would likely result in a complete loss to the company’s shareholders, or face additional regulatory action having the same effect. Recently, several rating agencies have downgraded the company’s credit ratings and the Bank’s deposit ratings.
 
You stated that over the past several months, the company unsuccessfully attempted to develop other capital raising opportunities or identify a merger partner. Despite these efforts, which resulted in several dozen prospective counterparties entering into confidentiality agreements and conducting due diligence, the company has been unable to generate any firm proposal other than the Proposed Transactions. The company believes that the Proposed Transactions are its only available means of addressing its capital needs within the timeframe available and that the delay in seeking shareholder approval could result in it having to seek bankruptcy protection. In that regard, you stated that there is a very high risk of depositor attrition, and the attendant risk of near-term regulatory action against the company, resulting from the delay and uncertainty associated with obtaining shareholder approval. With respect to voting rights of the preferred stock, the company believes that such rights are consistent with an investor’s reasonable expectations for protection of its investment in the context of this type of transaction.
 
The company expects that as a result of the Proposed Transactions it would satisfy the banking regulatory requirements and would no longer face the prospect of having to liquidate or file for bankruptcy. In addition, the company believes that following the consummation 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 exceptions, the Proposed Transactions would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance would result in a change of control and Listing Rule 5635(d) because 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 preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in its effectively having greater voting rights than the common stock.
 
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 on your representations that the company needs to quickly proceed with the Proposed Transactions to avoid additional regulatory actions and the loss of additional deposits, either of which could lead to the company’s declaring bankruptcy or facing regulatory action having the same effect. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following:  (i) 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 of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) 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 to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 710
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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