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  Staff Interpretation Letter 2003-31    
Identification Number 1000
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval prior to the issuance of designated securities … in connection with a transaction other than a public offering involving the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
Relevant Facts:  A company has previously issued Convertible Subordinated Notes (the “Notes”), which are convertible into shares of the company above the market price on the date of the original issuance.  The company proposes to initiate an exchange offer (the “Exchange Offer”) to all holders of the Notes, wherein all of the outstanding Notes would be exchanged for shares at a price greater than the book or market value of the stock.
In the event that all of the Notes are exchanged, the three largest shareholder positions would increase, but none of their ownership interests would increase beyond 20% of the total shares outstanding.  However, if only the three largest holders of the Notes participated in the Exchange Offer, it would bring the share ownership of the largest shareholder above 20% of the total shares outstanding.  The company stated that it would consider limiting the exchange, so that following the Exchange Offer, no one person or entity would own 20% or more of its ordinary shares.
Issue:  Does NASDAQ require shareholder approval for this transaction?
Determination:  The Exchange Offer would not require shareholder approval under Listing Rule 4350(i)(1)(D)(ii), because the shares were being issued above book and market value.  However, based on the potential for one of the company’s largest shareholders to increase its ownership interest beyond 20% through participation in the Exchange Offer, the transaction will create the potential for a change of control and will, therefore, require shareholder approval pursuant to Listing Rule 4350(i)(1)(B).
In the event that the company arranges to limit the Exchange Offer, so that no one person or entity could increase its ownership position above 20% or more of the total shares outstanding as a result of the Exchange Offer, then NASDAQ would concur that shareholder approval would not be required under the Rules.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 1000
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