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Frequently Asked Questions
  Staff Interpretation Letter 2010-14
Identification Number 713
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).  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”), with respect to the Investor’s proposed voting power (the “Voting Power”) and board representation.
 
In the Proposed Transaction, the company would sell shares of non-convertible preferred stock and warrants to the Investor for cash.  The warrant exercise price would equal the closing bid price of the common stock immediately prior to entering into the definitive agreement for the Proposed Transaction, and the number of shares of common stock that could be issued upon exercise of the warrants would exceed the number of currently outstanding shares.  Shareholder approval would otherwise be required pursuant to Listing Rule 5635(b) because the issuance would result in a change of control.
 
The Voting Power of the Investor would be based on the dollar value of the investment, as a percentage of the company’s overall market value immediately post-transaction, not to exceed 45% of the votes outstanding.  The Investor would also have the right to designate 25% of the company’s board of directors upon closing.  If the Investor’s ownership position were thereafter to decline to below 25%, the number of directors so appointed would decline such that the percentage of the board that it could appoint would remain approximately equal to its declining percentage ownership interest in the company.  Below 7.5% ownership, the Investor’s right to designate a director would be eliminated.
 
You have indicated that the company is in dire financial condition as a result of a variety of factors, including criminal activity by former executives, earnings restatements and the overall decline in commodity prices, and that as a result, the company is over-leveraged and facing imminent default under its subsidiaries’ credit facilities.  For more than a year, the company attempted unsuccessfully to restructure its credit facilities and raise needed capital.  Pursuant to the terms of those credit facilities, only cash on hand in a subsidiary can be used to repay that subsidiary’s debt.   In that regard, you have advised that the credit facility of one subsidiary matures in approximately one week, requiring a lump-sum payment of approximately $20 million.  The subsidiary, however, has less than $2 million in available cash.   The company expects that a default on that credit facility would lead to cross-defaults on other subsidiary credit agreements.
 
Without the Proposed Transaction, the company has no way to cure the impending defaults, or to restructure its debt, so that its only available option would be to file for bankruptcy protection.  However, the company’s lenders have agreed to a restructuring of the outstanding debt, contingent on the closing of the Proposed Transaction, which would reduce the interest rate, and provide the company one year until the next debt-reduction payment would be due.  The company thus expects that the Proposed Transaction would resolve its short-term financial issues and ensure its long-term financial viability.  In addition, the Investor has committed to make additional funds available to the company, as needed, for 18 months following the closing of the Proposed Transaction.  The company expects that, following the closing, it will remain in compliance with all of NASDAQ’s continued listing requirements.
 
You have also advised us that the company was unable to structure the Proposed Transaction such that it would not require shareholder approval.  The company also explored with the Investor the possibility of limiting the issuance of warrants to 19.9% of the pre-transaction outstanding shares and then obtaining shareholder approval for the remainder of the issuance, but the Investor rejected that approach.  In any event, the amount of any correspondingly smaller initial investment would not be adequate either to satisfy the lenders or to sustain the company for the time that it would take to seek shareholder approval.
 
Based on the foregoing, 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 Transaction to avoid declaring bankruptcy.  This exception is subject to the following conditions:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction 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 the exception; 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.
 
With respect to the Voting Rights Rule, we have determined that no exception is necessary because the Voting Power would be consistent with the Investor’s ownership position in the company, as would the board designation rights.
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 713
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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