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Frequently Asked Questions
  Staff Interpretation Letter 2009-4  
Identification Number 722
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to a proposed issuance of common stock (the “Proposed Transaction”).  You asked about the potential applicability of Marketplace Rules 4350(i)(1)(B), 4350(i)(1)(C), and 4350(i)(1)(D) (the “Rules”).
 
According to the information you provided, in a prior transaction approximately eight months ago (the “Prior Transaction”), the company issued the Securities which are convertible into shares of the company’s common stock at any time at the discretion of the holders (the “Holders”).  Because the Prior Transaction was a public offering, shareholder approval was not required under the Rules.
 
In the Proposed Transaction, the company would offer the Holders the opportunity to exchange the Securities for: (i) that number of common shares that would be issuable upon conversion at the existing terms (the “Conversion Shares”); and (ii) cash and/or an additional number of common shares (the “Additional Shares”) as an inducement to accept the offer given that the conversion price for the Securities is well in excess of the current market value of the company’s common stock.  The number of Additional Shares would equal less than 20% of the company’s currently outstanding shares of common stock.  None of the Holders would own as much as 10% of the company’s outstanding shares of common stock as a result of the Proposed Transaction (the “Ownership Maximum”).
 
You stated that at no time during the structuring of the Prior Transaction did the company, a financial institution, contemplate the Proposed Transaction.  At that time, the company did not intend to seek conversion of the Securities prior to the fifth anniversary of their issuance.  Economic and market conditions have worsened considerably more than could have been reasonably anticipated at the time of the Prior Transaction, and financial institutions have been particularly adversely impacted.  As a result, financial institutions, including the company, need to raise capital to maintain financial strength and meet regulatory requirements.  In that regard, you stated that there has been increased focus on the amount of tangible common equity that financial institutions have in relation to their assets (“Tangible Common Equity Ratio”).  The Proposed Transaction would improve the company’s Tangible Common Equity Ratio by replacing securities which are not treated as common equity, the Securities, with shares of common stock. The company believes that the Proposed Transaction would strengthen its capital position such that it would then have greater flexibility in taking other actions that would further improve its overall capital structure.
 
Following our review of the information you provided, we have determined that the Proposed Transaction would not require shareholder approval under the Rules.  Given the Ownership Maximum, the Proposed Transaction would not result in a change of control and, therefore, would not require shareholder approval under Listing Rule 4350(i)(1)(B).  Because the issuance would not be in connection with the acquisition of the stock or assets of another company, shareholder approval would not be required under Listing Rule 4350(i)(1)(C).  With respect to Listing Rule 4350(i)(1)(D), the Conversion Shares would not be aggregated with the Additional Shares for purposes of calculating whether the 20% threshold of Listing Rule 4350(i)(1)(D) could be reached because: (i) the Conversion Shares would be issued in connection with an exchange offer for the Securities, which were issued in a public offering; (ii) several months will have passed between the Prior Transaction and the Proposed Transaction; and (iii) there have been unforeseen changes in both the company’s circumstances and economic conditions generally since the Prior Transaction, which gave rise to the need for the company to enter into the Proposed Transaction at this time.  The Additional Shares would not require shareholder approval under Listing Rule 4350(i)(1)(D) because the potential issuance is less than 20% of the company’s pre-transaction outstanding shares.  NASDAQ is expressing no opinion on whether shareholder approval is required under any other provision of Listing Rule 4350(i).
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 722
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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