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  Listing Council Decision 2006-11
Identification Number 640
Rule 4350(i)(1)(D)(ii): Each issuer shall require shareholder approval or prior to the issuance of securities…in connection with a transaction other than a public offering involving…(ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable 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.
Issue: The company failed to obtain shareholder approval before issuing Series E preferred stock that was convertible into the common stock. The company had previously completed two series of similar financings. After analysis, Staff determined to aggregate the three financings. As such, when aggregated with the prior financings, the Series E preferred stock transaction required shareholder approval because it was issued at a discount to market value and its issuance could potentially exceed greater than 20% of the company’s pre-transaction total shares outstanding. The Panel delisted the company’s securities based on a violation of the shareholder approval rules.
Determination: The company was properly suspended because it had violated the shareholder approval requirements, as set forth in Rule 4350(i)(1)(D)(ii). NASDAQ shareholder approval requirements are designed to provide shareholders with a meaningful voice in significant transactions and in transactions where they may face significant dilution, such as in the current case before the Listing Council. The Listing Council believes that this voice, mandated by NASDAQ rules, is a basic tenet of the NASDAQ corporate governance rules. The NASDAQ shareholder approval requirements are also designed to provide shareholders with notice prior to the consummation of the transaction so that they have the opportunity to sell their shares. In this case, there was no shareholder vote or advance notice of the consummation of this transaction. The Listing Council agrees with the Panel’s assessment that because the Series E documents do not by their terms preclude an issuance without shareholder approval; there exists a theoretical possibility that the company could be compelled to issue the securities. The Listing Council also considered the company’s argument that it would either restructure the transaction with investors unrelated to the Series C, D, and E transactions in an effort to craft a re-financing plan that would allow the company to unwind the Series E transaction, or move forward with a shareholder vote for approval of the Series E transaction. To date the company has done neither. As such, the company is still in violation of the shareholder approval rules. At the time of its deliberations, the Listing Council noted that: (i) there have been no Form 8-K filings with announcements regarding a re-financing plan that would allow the company to unwind the Series E transaction, (ii) the company’s recently filed definitive proxy statement for its annual meeting of stockholders and did not include any proposals to obtain shareholder approval of the Series E transaction, and (iii) the company did not provide an update as to the status of its previously filed amended proxy statement and notice of a special meeting of shareholders, in which the company was seeking shareholder approval for the Series E financing. The Listing Council does not disagree with the company’s assessment that its imperfect efforts to file completed Listing of Additional Shares Notifications should be the cause of its delisting. However, the Listing Council notes that the company was effectively put on notice by staff’s letter, regarding its, first of three, Listing of Additional Shares Notification violations. The Listing of Additional Shares program is used by NASDAQ to monitor compliance with listing rules governing shareholder approval, public interest concerns, reverse mergers, and voting rights. As such, the Listing Council views compliance with the Listing of Additional Shares program as essential in order to protect investors in securities listed on The NASDAQ Stock Market.
The Listing Council is aware that the company is a repeat offender of both the filing of Listing of Additional Shares Notifications and the shareholder approval requirements. If the company was a first time offender, the Listing Council may have been more sympathetic, such is not the case here. In its deliberations, the Listing Council considered that: (i) there is a large amount of easily accessible information on the NASDAQ Legal and Compliance website regarding staff’s views as to when shareholder approval for transactions is required and when a Listing of Additional Shares Notification must be filed; (ii) Staff stands ready to offer informal guidance to assist issuers in structuring transactions so that there will not be violations of the Marketplace Rules; and (iii) there is a process pursuant to Rule 4550, which requires the payment of a fee, for formal guidance regarding shareholder approval interpretations. As such, the company’s argument that once its senior management and Board learned of the repeated Listing of Additional Shares violations they acted promptly and decisively to ensure that no similar violations would occur in the future, was not persuasive. Management should have been on notice with the staff’s warning letter to become more actively engaged and should have taken proactive steps at that time in an effort to prevent future violations. Based on the foregoing, the Listing Council affirms the Panel’s decision to delist the company’s securities from The NASDAQ Stock Market.
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Rule 4310(c)(4): For continued inclusion, the minimum bid price per share for common stock shall be $1.
Issue: At the time of the Listing Council’s deliberations, the bid price of the company’s common stock was below $1.
Determination: As an additional and separate ground for its decision, the Listing Council finds that the company fails to comply with the $1.00 minimum bid price requirement contained in Listing Rule 4310(c)(4). The Listing Council notes that although the company was provided an opportunity to address its non-compliance with this rule, the company declined to do so. Given that at the time of the Listing Council’s deliberations the company’s bid price as quoted on the OTC Bulletin Board was $0.57, the Listing Council finds this violation of Listing Rule 4310(c)(4) as a separate and additional basis for affirming the company’s suspension and delisting from The NASDAQ Stock Market.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 640
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