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Frequently Asked Questions
  Staff Interpretation Letter 2006-40  
Identification Number 849
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(B) to a proposed transaction (the “Proposed Transaction”), which you described.  You asked whether the Transaction would result in a change of control and, if so, whether the proposed alternative structure would comply with the requirements of the Rule.
 
According to the information you submitted, in the Proposed Transaction the company would sell shares of its common stock (the “Shares”) and warrants (the “Warrants”) to several investors. The number of Shares would equal more than 20% of the pre-transaction outstanding shares, and the Warrants would be exercisable into that number of shares of common stock equal to 25% of the number of Shares.  The Shares would be issued at a price per share equal to the closing bid price immediately preceding the entering into of the binding agreement (the “Purchase Price”), and the Warrants would be sold for $0.125 each.  The Warrants would be exercisable for not less than the Purchase Price and would not have any anti-dilution price adjustments other than for stock dividends, stock splits, and similar events.  The company’s market value exceeds its book value.
 
Currently, the company’s officers and directors own in the aggregate approximately 21% of the company’s outstanding shares of common stock (the “D&O Shares”).  No single shareholder, nor any holders reporting as a group, own as much as 20% of the outstanding shares.  Following the Proposed Transaction, the D&O Shares would represent approximately 18% of the then outstanding shares, and each of the two largest investors in the Proposed Transaction (the “Principal Investors) would own approximately 22%.  The company has agreed to appoint to its board of directors, on a one-time basis, an individual who is an affiliate of one of the Principal Investors (the “Limited Board Right”).
 
You stated that according to the terms of the Proposed Transaction, if shareholder approval is required under the Rule, the Principal Investors would be prohibited from owning in excess of 19.99% of the outstanding shares unless shareholder approval has been obtained (the “Limitation”) of a change in control.  Due to the allocation of the securities that would be sold, no other investor could acquire as much as 19.99% of the company’s outstanding shares.  If shareholder approval is obtained, there would be a second closing in which the Principal Investors would be the only purchasers.  There would be no change in the terms of the Proposed Transaction if the shareholders do not approve the removal of the Limitation.
 
Following our review of the information you submitted, we have concluded that without the Limitation the Proposed Transaction would require shareholder under Listing Rule 4350(i)(1)(B) because it would result in a change of control.  Although each Principal Investor would have the same ownership position as the other, Listing Rule 4350(i)(1)(B) would nonetheless apply because of the significant change in the ownership structure resulting from the Proposed Transaction, including two new ownership positions which would be over 20% of the shares then outstanding and each of which would be larger than the current largest ownership position, the D&O Shares.  By including the Limitation, however, the company has structured the Proposed Transaction in a manner that complies with Listing Rule 4350(i)(1)(B).  Specifically, due to the Limitation, no investor in the Transaction could own more than 19.99% of the company’s common stock without shareholder approval.  Further, other than the Limited Board Right, there are no relationships between any of the Principal Investors and the company.  Please be advised that pursuant to IM-4350-2: (i) shares issued under a cap (in this case, the cap is the Limitation that is applicable to the Principal Investors) 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: 849
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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