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  Staff Interpretation Letter 2011-5  
Identification Number 695
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) (the “Rule”) with respect to a proposed issuance of convertible notes and convertible preferred stock (collectively, the “Securities”) in connection with the company’s financial restructuring (the “Restructuring”). Approximately 18 months ago, we granted an exception (the “Prior Exception”) under the Rule in connection with an issuance of common and preferred stock in exchange for outstanding debt (the “Debt Exchange”). For the reasons described below, we are unable to grant the currently requested exception.
The company provides freight transportation services. You stated that beginning approximately three years ago, the economic environment has had a substantial detrimental effect on the industry and the company, negatively impacting customers’ needs to ship and, therefore, negatively impacting the volume of freight the company ships and the prices it receives for its services. Although market conditions rebounded last year, the company believes it will continue to face operational issues stemming from excess capacity in the industry. It continues to experience declining revenue, operating losses, and net losses.
You stated that the company retains substantial indebtedness under additional notes it issued to retire debt securities still outstanding after the Debt Exchange, under its credit facilities, and under an agreement with its employees’ labor union (the “Union”) relating to its pension fund contributions. Although the company has entered into deferral agreements with its lenders, creditors, and the Union, you stated that a failure to complete the Restructuring within approximately six weeks could trigger events leading to the company’s liquidation. Upon such failure, you expect that the amounts deferred would become immediately payable, the creditors would declare an event of default causing cross-defaults under other agreements, and the Union would revoke previous wage and benefit concessions. You stated that as a result, the company would most likely need to seek protection under the United States Bankruptcy Code. The company expects that if it were to complete the Restructuring within the six-week timeframe, it would have sufficient liquidity to continue as a going concern and would not have to file for bankruptcy protection.
In the Restructuring, the company would issue the Securities at a discount to market value to its creditors, lenders, and the Union under agreements which would release the company from its obligations under existing credit agreements and satisfy the demands of its lenders and the Union. Following the Restructuring, the holders of the Securities would own approximately 97.5% of the company’s common stock on an as-converted basis, with the company’s existing shareholders owning the remaining approximately 2.5%. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance could result in a change of control and pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
Based on our review of the circumstances described in your correspondence, we have determined not to grant the requested exception. Under Listing Rule 5635(f), the financial viability exception may be available “when a delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise” and certain other specified criteria are satisfied. While the company may have presented a compelling case as to its financial distress, we are not convinced that the company did not have the time to secure the required stockholder approval. In that regard, according to its filings made with the Securities and Exchange Commission, at least nine months ago the company already expected that it would have to restructure its financial obligations. Moreover, agreements in principle relating to the Restructuring were reached more than four months ago and definitive agreements were reached approximately two months ago. NASDAQ Staff has had discussions with the company during this period about the company’s need for a transaction like the Restructuring and about its noncompliance with certain listing requirements.
In addition, we are troubled that this is the company’s second request for an exception under the Rule in a short period. While the Rule does not preclude such a request, it is now clear that the transactions completed pursuant to the Prior Exception did not restore the company’s financial viability, and it remains unclear whether the Restructuring would restore its viability. Our concerns are exacerbated by the massive dilution of current shareholders’ interest, which would occur as a result of the Restructuring. The financial viability exception is meant to preserve some value for a company’s existing shareholders when the alternative is the likely failure of the company. However, in this case the existing shareholders’ interest would be essentially eliminated following the Restructuring.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 695
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