This is in response to your correspondence regarding the applicability of the shareholder approval requirements of
Listing Rule 5635(c) and
IM-5635-1 (collectively, the "Shareholder Approval Rule") and the voting rights requirements of
Listing Rule 5640 and
IM-5640 (collectively, the "Voting Rights Rule") to certain actions which the company would take in connection with a reorganization (the "Reorganization").
Currently, the company's authorized capital stock consists of common stock (the "Common Stock"), which is listed on NASDAQ, and preferred stock (the "Preferred Stock"), which is closely-held and not publicly traded. The Preferred Stock carries higher voting
power relative to the Common Stock including the right to elect a majority of the members of the board of directors. This dual structure was implemented more than twenty years ago and pre-dates the company's listing on NASDAQ.
In the Reorganization, the company would create a holding company structure to replace its current structure. Each outstanding share of the Common Stock and Preferred Stock would be converted into one share of common stock or preferred stock, respectively,
of the newly formed holding company, with rights and preferences identical to those prior to the Reorganization. No additional shares of either common stock or preferred stock would be issued in connection with the Reorganization. As such, following the Reorganization,
holders of the Common Stock and Preferred Stock would hold shares in the same amounts and percentages, and would have the same voting power, as before the Reorganization. You asked whether this dual class structure of the holding company would comply with
the Voting Rights Rule.
Additionally, in connection with the Reorganization, the company would adopt certain amendments (the "Amendments") to an equity compensation plan which currently provides for awards of treasury shares of the company's common stock to non-employee members
of the company's board of directors (the "Plan"). The awards are typically subject to a vesting period during which the holders of awards have the right to vote and to receive dividends and other cash distributions. The Amendments would: (i) permit the use
of authorized but unissued shares as well as treasury shares but would not increase the total number of shares that would be available under the Plan; (ii) authorize the award of restricted stock units ("RSUs"); (iii) permit an equivalent payment to the holders
of RSUs when dividends are paid to holders of common stock (the "Dividend Equivalent"); and (iv) provide for certain other changes to more closely conform the Plan's provisions with Section 409A of Internal Revenue Code ("409A"). The 409A changes would: (i)
increase the voting power of the company's shares that would need to be required to constitute a change of control from 30% to 50%; (ii) require that changes in the board that might constitute a change in control occur within a twelve-month period rather than
over an unspecified period of time; and (iii) implement a delay as required by 409A for the payment of benefits to participants following their separation of service from the board. You asked whether the Amendments would require shareholder approval under
the Shareholder Approval Rule.
Following our review of the information you provided, we have determined that the holding company's dual class structure would comply with the Voting Rights Rule and that the Amendments would not require shareholder approval under the Shareholder Approval
Rule.
The dual class structure would comply with the Voting Rights Rule because the issuance of shares in the holding company in exchange for the currently outstanding shares would not disparately reduce or restrict the voting rights of existing shareholders.
The voting rights of the holders of both the Common Stock and Preferred Stock would be unaffected by the Recapitalization.
The Amendments would not require shareholder approval because they would not be considered material amendments to the Plan under the Shareholder Approval Rule. The change to permit the use of newly issued shares to fund awards under the Plan would not
be material because the Plan already permits the issuance of treasury shares. The Shareholder Approval Rule does not distinguish between treasury shares and newly issued shares largely because an issuance of treasury shares has the same dilutive effect with
respect to outstanding shares as an issuance of new shares. The addition of RSUs would not be a material amendment because awards of RSUs would be substantially equivalent to awards of restricted stock, which are already permitted under the Plan. The Dividend
Equivalent that would be paid to the holder of RSUs likewise would not be material because the Plan already permits dividends to be paid to holders of restricted stock awards. The 409A changes are not material because they generally restrict, rather than enhance,
benefits under the Plan. As such, the Amendments would not result in: (i) an increase of the number of shares that could be issued under the Plan; (ii) a material increase in the benefits to participants; (iii) any expansion of the classes of eligible participants;
or (iv) a material expansion in the types of awards available.