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Frequently Asked Questions
  Staff Interpretation Letter 2007-20  
Identification Number 796
This is in response to your correspondence regarding the applicability of NASDAQ’s shareholder approval requirements to a proposed issuance of securities by the company in a private placement (the “Transaction”).  Specifically, you asked about the potential applicability of Marketplace Rules 4350(i)(1)(A), 4350(i)(1)(B), and 4350(i)(1)(D) (the “Rules”).
 
According to the information you submitted, in the Transaction the company will issue convertible debentures (“Debentures”) to several investors.  Initially, the conversion price will be greater than market and book value, and the number of shares of common stock issuable upon conversion would equal approximately 10% of the pre-transaction total shares outstanding.  The Debentures contain anti-dilution provisions, however, which could reduce the conversion price to below market value and increase the number of shares that would be issued.  The effect of any anti-dilution adjustments will be limited by a provision of the Debentures which will prohibit conversion into more than 19.9% (the “Conversion Limitation”) of the pre-transaction outstanding shares at an average conversion price which is less than the closing bid price immediately prior to entering into the binding agreement (“Market Value”) unless shareholder approval is obtained.  The company’s market value exceeds its book value.
 
The investors will include two members (the “Directors”) of the board of directors (the “Board”) and two advisory directors (the “Advisory Directors”) who, although not members of the Board, provide consulting services to the company.  The conversion price for the Directors and the Advisory Directors will be limited so that it will not be less than Market Value (the “Conversion Price Limitation”).  The investors will not include any employees or officers of the company, or any other directors or consultants.
 
You stated that, as a result of the Transaction, no investor individually, or as part of a group, could beneficially own, or obtain the right to acquire, more than 19.99% of the company’s outstanding common shares or the voting power of the company on a post-transaction basis, and there would be no other related arrangements between the company and any of the investors (the “Ownership Limitation”, and together with the Conversion Limitation and the Conversion Price Limitation, the “Limitations”).
 
You stated that the Limitations may be removed only if shareholder approval is obtained.  The terms of the Transaction would not otherwise change as a result of a shareholder vote.
 
Following our review of the information you provided, we have determined that the Transaction complies with the Rules.  The Transaction would not require shareholder approval under Listing Rule 4350(i)(1)(A) because, due to the Conversion Price Limitation, no shares could be acquired by any officer, director, employee, or consultant of the company at a discount to market value.  Given the Ownership Limitation and the lack of any other related arrangements between the company and any of the investors, the Proposed Transaction would not result in a change of control and therefore will not require shareholder approval under Listing Rule 4350(i)(1)(B).  Due to the Conversion Limitation, the Transaction could not result in the issuance of 20% or more of the pre-transaction outstanding shares or voting power at a discount to the greater of book or market value, and, therefore, shareholder approval would not be required under Listing Rule 4350(i)(1)(D).  The Limitations could be removed only after shareholder approval is obtained.  Please note that pursuant to IM-4350-2: (i) shares issued under a cap cannot be counted in the vote to approve the removal of the cap; (ii) a cap must apply for the life of the transaction unless shareholder approval is obtained; and (iii) if the terms of a transaction can change based on the outcome of the shareholder vote, then no shares of common stock may be issued prior to the vote.
 
 
Publication Date*: 7/31/2012 Mailto Link Identification Number: 796
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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