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Frequently Asked Questions
  Staff Interpretation Letter 2008-24  
Identification Number 768
This is in response to your correspondence wherein you asked whether shareholder approval would be required of an issuance of securities in a proposed transaction (the “Proposed Transaction”) pursuant to Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”).
 
According to the information you provided, in a prior transaction (the “Prior Transaction”), which closed approximately five months ago, the company sold shares of convertible preferred stock (the “Preferred Stock”) in a private placement to several investors (the “Investors”).  In compliance with the Rule, the company received shareholder approval of the Prior Transaction to allow the Investors to convert the Preferred Stock into 20% or more of the company’s total shares of common stock at a discount to the greater of the company’s book value or market value.  Accordingly, the Preferred Stock is currently fully convertible into common stock at any time at the option of the holder and will be mandatorily converted in approximately three years.  You stated that subsequent to the Prior Transaction, the company’s circumstances changed significantly due to the generally worsening credit and business environment affecting all companies in its sector.
 
Approximately three weeks ago, one of the Investors (the “Holder”) initiated discussions with the company regarding the Proposed Transaction.  In the Proposed Transaction, the Holder would convert all of its Preferred Stock into common stock, pursuant to the terms approved by shareholders, provided that it would receive, in addition, the number of shares of common stock having a value that would be approximately equal to the present value of the dividends that would be payable to the Holder if the Preferred Stock were held to the mandatory conversion date.  The number of shares of common stock that could be issued in the payment of the dividends (the “Dividend Shares”) would be less than 20% of the company’s shares of common stock outstanding prior to the execution of the agreement for the Proposed Transaction.  You stated that the Holder is not an officer, director, or employee of the company and that the Proposed Transaction will not result in a change of control.  You indicated that the Proposed Transaction, which was not contemplated at the time of the Prior Transaction, would be valuable in helping the company enhance its equity capital position, preserve cash and improve liquidity.
 
Following our review of the information you provided, we have determined that the Rule will not require shareholder approval of the Proposed Transaction.  The shares that would be issued to the Holder in the conversion of its Preferred Stock would be issued pursuant to terms that the company’s shareholders have approved, and, therefore, would not be aggregated with the Dividend Shares for purposes of calculating whether the 20% threshold of the Rule could be reached.  The Dividend Shares would not require shareholder approval under the Rule because the potential issuance is less than 20% of the company’s pre-transaction outstanding shares.  Please be advised that any similar future transactions may be aggregated with each other and with the Dividend Shares for purposes of the applicability of the Rule.  Please note also that you have not asked us to reach, and we have not reached, a conclusion as to whether any other provision of Listing Rule 4350(i) would require shareholder approval of the Proposed Transaction.
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 768
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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