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Staff Interpretation Letters
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All Years; Voting Rights; All
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Identification Number
1841
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This is in response to your correspondence asking whether the issuance of the Preferred Stock in a proposed transaction (the “Transaction”) would comply with the voting rights requirements in
Listing Rule 5640 and
IM-5640 with respect to the voting power of the Preferred Stock. The Company did not ask, and Nasdaq did not review for purposes of this letter, whether the Transaction will comply with the shareholder approval requirements of
Listing Rule 5635 with regard to the Transaction.
The Company is a clinical-stage biopharmaceutical company. Since inception, the Company has incurred negative cash flows from operations and has expended, and expects to continue to expend, substantial funds for the next several years as it continues to fund
product research and development, pre-clinical studies, clinical trials, and regulatory compliance. The Company has historically funded its operations primarily through sales of its common stock. You stated that if the Company is unable to raise needed capital,
it will be unable to pursue planned pre-clinical and clinical trials and would be forced to delay, discontinue, or curtail product development. The Company currently has a limited number of authorized but unissued shares of common stock that remain available
for issuance.
The Company proposes to issue, concurrently, two different series of redeemable, convertible preferred stock (the “Series X Preferred Stock” and the “Series Y Preferred Stock,” collectively, the “Preferred Stock”). The Preferred Stock will be issued in a private
placement, for cash, and will be convertible into the shares of the Company’s common stock at no less than the Minimum Price, as defined in Listing Rule 5635(d)(1)(A). The Preferred Stock will vote together with the common stock as a single class on all matters
submitted to a vote of the holders of the common stock (except as otherwise required by law or by the Company’s Certificate of Incorporation), including election of the members of the Company’s Board of Directors (the “Board”) and will be entitled to a number
of votes on an as-converted basis based on the Minimum Price. The holders of Preferred Stock will not receive any Board nomination or designation rights.
In addition to these voting rights, Series Y Preferred Stock will have super voting rights solely on matters related to a reverse stock split as governed by the requirements of the Delaware General Corporation Law (“DGCL”). In this regard, the Company explained
that it believes that effecting a reverse stock split would be the most effective way to reduce the number of shares of common stock outstanding such that the Company will have the ability to issue a greater number of shares out of its authorized but unissued
shares of common stock. Having the ability to issue such shares would in turn allow the Company to pursue possible financing activities.
You stated that pursuant to the requirements of the DGCL, effecting a reverse stock split requires amendment of the Company’s Certificate of Incorporation, and thus requires an affirmative vote of a majority in voting power of the outstanding shares of capital
stock of the Company entitled to vote thereon (the “DGCL Charter Amendment Requirement”). You further stated that based on the Company’s experience at its most recent annual general meeting of stockholders, where it attempted to adopt a non-controversial amendment
of its Certificate of Incorporation to de-classify its Board and was unable to meet the DGCL Charter Amendment Requirement (notwithstanding over 95% approval by those shareholders who did vote), the Company believes that it is highly unlikely that the holders
of a sufficient number of shares of its common stock would vote on the proposal to effect the reverse stock split.
In that regard, you stated that the super voting rights structure of the Series Y Preferred Stock is designed and narrowly tailored to address this issue. Specifically, each share of Series Y Preferred Stock will have the right to over 10,000 votes only on
matters related to the reverse stock split at the next meeting of shareholders (the “Reverse Stock Split Proposal”). The holders of the Series Y Preferred Stock will be required to vote the shares of Series Y Preferred Stock on the Reverse Stock Split Proposal
in the same proportion as the votes cast by holders of the Company’s common stock on the Reverse Stock Split Proposal. The holders of the Series Y Preferred Stock would vote together with the common stock on this matter, and not as a separate class.
You stated that prior to the meeting of stockholders, the Company will file a definitive proxy statement that will contain a statement explaining the effect of the Transaction on the DGCL Charter Amendment Requirement, namely that the reverse stock split will
no longer require a vote of a majority of outstanding shares, and will instead be decided by a majority of votes cast so long as the quorum requirement is met. You stated that the Company will comply with the Nasdaq quorum requirement in Listing Rule 5620(c)
and that the super voting structure of the Series Y Preferred Stock will have no effect on this requirement. You further stated that the Company has fully considered the super voting structure of the Series Y Preferred Stock and the Board has determined, with
the advice of counsel, that the Transaction is consistent with the Delaware General Corporation Law.
Following our review of the information you provided, we have determined that the Transaction, structured as you described, would satisfy the voting rights requirements in Listing Rules 5640 and IM-5640 because: (i) on all matters except for the Reverse Stock
Split Proposal, the Preferred Stock would not have higher voting power than as if converted at the Minimum Price immediately preceding the company entering into the binding agreement to issue the Preferred Stock, and (ii) on the Reverse Stock Split Proposal,
the Series Y Preferred Stock would not affect the percentage of votes cast for or against the proposal but instead would only have the effect of increasing the aggregate voting power of the Company’s outstanding capital stock that is voted on the matter.
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Publication Date*:
6/21/2022
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Identification Number:
1841
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