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Staff Interpretation Letters
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All Years; Shareholder Approval; All
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Identification Number
1857
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This is in response to your correspondence requesting an exception under Listing Rule 5635(f) to Nasdaq’s otherwise applicable shareholder approval requirements with respect to a proposed issuance of securities (the “Proposed Transaction”). In addition, you
asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) if Nasdaq determines that the Board Designation Rights, as defined below, would violate the Voting Rights Rule.
The Company is a retailer that currently operates over 450 stores. You stated that the Company’s results of operations have been negatively impacted by a variety of factors, including COVID-19 pandemic-related disruptions to supply chains and higher supply
chain costs resulting from higher freight costs and other supply chain conditions, and reduced store traffic and sales as a result of increased fuel prices. You further stated that the Company has experienced a rapid, further deterioration of its financial
condition in the last few months. As a result, the Company began withholding payments to vendors and is beginning to experience difficulty in obtaining goods necessary to continue its operations. While the Company’s lenders have agreed not to exercise certain
remedies available to them that would result in a bankruptcy filing for approximately two weeks, you stated that without an infusion of capital, the Company expects to seek bankruptcy protection within a matter of days.
You stated that despite extensive efforts to seek additional capital, the Company has been unable to execute a financing transaction or secure additional capital and that based on the efforts to raise capital, the Company believes that the Proposed Transaction
is the only available alternative. You further stated that the transaction could not be structured in a manner that would not require shareholder approval. As a result, the Company believes it would not be able to consummate the Proposed Transaction if it
were delayed to obtain shareholder approval prior to the issuance of securities in the Proposed Transaction given the time required to file a proxy statement, clear any SEC review of the proxy statement, solicit votes and hold a stockholder meeting. You stated
that the proceeds from the Proposed Transaction would be sufficient to fund the Company’s operations and meet Nasdaq’s continued listing requirements for at least the next 12 months.
In the Proposed Transaction, the Company will issue to an investor (the “Investor”) a note convertible into shares of common stock (the “Convertible Notes”). The conversion price of the note is at a discount to the Minimum Price, as defined in Nasdaq Rule 5635(d)(1)(A),
and the market value of the common stock at the time the binding agreement to purchase the Convertible Notes is executed. You stated that as a condition to the investment the Investor desired that members of management make a significant financial commitment
to the rescue effort on the same terms. As a result, certain members of the Company’s management will purchase approximately 8% of the Convertible Notes. Following the closing of the Proposed Transaction, the Investor would beneficially own more than 50% of
the Company based on the number of shares the Convertible Notes will be immediately convertible into. In connection with the Proposed Transaction the Investor will receive a right to appoint five on nine members (the “Board Designation Rights”) of the Company’s
board of directors.
Without the requested exception, shareholder approval would be required pursuant to each of the following rules: Listing Rule 5635(b), because the Investor would beneficially own more than 20% of the shares of common stock outstanding upon completion of the
Proposed Transaction; Listing Rule 5635(c), because the issuance at a discount of common stock shares to the officers and directors constitutes equity compensation; and Listing Rule 5635(d), because shares of common stock issuable as a result of the Proposed
Transaction at a price less than the Minimum Price would represent more than 20% of the pre-transaction total shares of common stock outstanding.
However, based on our review of the circumstances described in your correspondence and on your representations and the information provided regarding: (i) the Company’s financial condition, (ii) the dire consequences to the Company should it not obtain the
financing provided by the Proposed Transaction, and (iii) the Company’s expectation that it will remain in compliance with all applicable continued listing requirements upon completion of the Proposed Transaction, we have determined to grant the requested
exception to the shareholder approval rules. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the terms of the Proposed Transaction (including
the number of shares of common stock that could be issued and the consideration received) and alerting shareholders to the omission to seek the otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception
to the shareholder approval rules and that the audit committee has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing
the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
Based on our review of the circumstances described in your correspondence we determined that the Board Designation Rights are consistent with the Voting Rights Rule because the Investor’s beneficial ownership upon the issuance of the Convertible Notes of over
50% is proportionate with the right to appoint five of nine members of the board of directors and, therefore, does not disparately reduce or restrict voting rights of existing shareholders. As such, an exception from the Voting Rights Rule is not required.
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Publication Date*:
1/17/2022
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Identification Number:
1857
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