This is in response to your correspondence regarding the potential applicability of the shareholder approval requirements of Marketplace Rules 4350(i)(1)(B) and 4350(i)(1)(D) (the “Rules”) to a proposed transaction (the “Proposed Transaction”) which you
described.
According to the information you submitted, approximately two years ago the company issued the Notes, which are convertible into shares of the company’s common stock at a price in excess of the market value of that common stock at the time of issuance.
The indenture agreement contains certain restrictive covenants (the “Covenants”), and the repayment of the Notes is secured by a security interest (the “Security Interest”) in the company’s assets, including all real and personal property and all subsidiary
equity interests. At the time of the issuance of the Notes, you stated that the company anticipated developing a property (the “Property”) with Group 1. As such, the indenture is structured such that the Security Interests and the Covenants terminate only
upon achieving specified milestones in that development specifically with Group 1. Due to a number of unanticipated events, however, Group 1 has been unable to proceed with the development of the Property.
More than a year after the issuance of the Notes, the company was approached by Group 2 and has since entered into an agreement with Group 2, which the company hopes will lead to the development of the Property. In the Proposed Transaction, the company
would amend the terms of the Notes to allow the Security Interests and the Covenants to terminate upon development of the Property with any Group. Thus, the Note holders would give up their right to enforce the Security Interest and the Covenants with respect
to the participation of Group 1, and the company could proceed with the development of the Property with Group 2. As consideration for these modifications, the company anticipates it will have to reduce the conversion price on the Notes and issue warrants
to the holders of the Notes. The revised conversion price would be no less than the closing bid price of the company’s common stock immediately preceding the execution of the binding agreement to modify the Notes (the “Closing Bid”), plus $0.125 for each
share of common stock issuable upon the exercise of the warrants. In addition, the warrants would be exercisable for no less than the Closing Bid and would not have any anti-dilution price adjustments other than for stock dividends, combinations, and similar
events. The company’s market value exceeds its book value. You stated that no Note holder could own as much as 20% of the company’s outstanding shares or voting power as a result of the Proposed Transaction, and there are no other arrangements between any
of the Note holders and the company.
Following our review of the information you submitted, we have concluded that shareholder approval of the Proposed Transaction is not required pursuant to the Rules. For purposes of determining whether the issuance price is at least as much as market
value, it is appropriate to use the closing bid price immediately prior to the binding agreement for the Proposed Transaction, rather than that immediately prior to the initial issuance, because of the changes in circumstances since the company entered into
the original agreement that led to the desire to consummate the Proposed Transaction and because of the changes in terms that would be reflected in the Proposed Transaction, as described above. As such, although the issuance could exceed 20% of the pre-transaction
outstanding shares, shareholder approval is not required pursuant to Listing Rule 4350(i)(1)(D) because the issuance price will not be less than the greater of book or market value. The Proposed Transaction will not result in a change of control because no
Note holder could own as much as 20% of the company’s outstanding stock or voting power and there will be no other arrangements between any of the Note holders and the company. Accordingly, shareholder approval of the Proposed Transaction is not required
under Listing Rule 4350(i)(1)(B).