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  Staff Interpretation Letter 2010-1  
Identification Number 700
This is in response to your correspondence regarding the applicability of the shareholder approval requirements of Listing Rule 5635(a) (the “Rule”) to the company’s proposed issuances of securities in a proposed acquisition (the “Acquisition”) and in a proposed private placement (the “Private Placement”).  Specifically, you asked: (i) whether the Private Placement would be considered to be in connection with the Acquisition under the Rule; (ii) whether certain shares issuable under warrants and options assumed in the Acquisition would be included in determining whether shareholder approval is required under the Rule; and (iii) whether the Shareholder would be considered to have a 5% or greater interest in the company to be acquired or the consideration to be paid under Listing Rule 5635(a)(2).
According to the information you provided, in the Acquisition the company, a financial institution, would acquire the outstanding common shares of another financial institution (the “Target”) in exchange for shares of its common stock (the “Exchange Shares”).  The company would replace the Target’s outstanding non-convertible preferred stock, which was issued to the United States Treasury under the Troubled Asset Relief Program, with new shares of the company’s own non-convertible preferred stock, and would replace a related warrant of the Target with a company warrant (the “Warrant”).  Following the Acquisition, the Warrant would be exercisable into the company’s common stock at approximately 1700% of the current stock price.  The company would also replace outstanding options issued by the Target with the company’s own newly issued options, which would have an effective exercise price in excess of 10 to 20 times the company’s current stock price (the “Options”).  The company expects that in the aggregate, the number of Exchange Shares and the shares underlying the Warrant and the Options (the “Acquisition Shares”) would equal less than 5% of its pre-transaction outstanding shares of common stock.
The company expects that a condition to the approval of the Acquisition by its banking regulator would be that the company be “well capitalized” following the Acquisition. In order to satisfy this condition, the company would close the Private Placement shortly before closing the Acquisition. Due, in part, to the expected increase in the company’s total assets in connection with the Acquisition, a substantial portion of the proceeds of the Private Placement would be needed to maintain the company’s well-capitalized status following the Acquisition. As such, the Private Placement (or a similar transaction that would result in the company being considered well capitalized following the Acquisition) would be a condition to the completion of the Acquisition. The number of shares that would be issued in the Private Placement, together with the Acquisition Shares, could exceed 20% of the pre-transaction outstanding shares.
The Shareholder owns approximately 6% of the outstanding common shares of each of the company and the Target. These shares are predominately held for pension funds, exchange traded funds, and the Shareholder does not have any direct economic interest in these shares. As noted above, the Target has issued preferred stock to the U.S. Treasury (the “Preferred Stock”). Under the terms of the Acquisition, the consideration to be paid by the company would include the Acquisition Shares and the assumption of the Preferred Stock and certain other securities. As such, the Shareholder would receive less than 5% of the consideration that would be paid in the Acquisition and, after giving effect to this preferred stock, the Shareholder has less than a 5% interest in the Target’s equity capital.  The Shareholder would not participate in the Private Placement and would receive the same merger consideration as all other common equity stockholders of the Target.
Following our review of the information you provided, we have determined that for purposes of the Rule, the portion of the Private Placement that the company believes will be necessary for it to be considered “well capitalized” following the Acquisition would be considered to be in connection with the Acquisition under the Rule. As such, these shares would be included in determining whether shareholder approval would be required for the Acquisition.  We have reached this conclusion because the completion of the Acquisition would be contingent on that portion of the Private Placement and because that portion of the Private Placement would be issued for the purpose of raising an amount of capital sufficient for the company to maintain its well-capitalized status after merging with the Target.  Shares issued in the Private Placement that the company does not believe would be necessary for the company to be considered well capitalized after giving effect to the Acquisition would not be counted in determining whether shareholder approval is required under the Rule. In addition, we note that the shares of common stock underlying the Warrant and the Options would be included in calculating the number of shares issuable in the Acquisition, even though both the Warrant and the Options are significantly out of the money. Finally, we have determined that Listing Rule 5635(a)(2) does not apply because when giving effect to the Preferred Stock, the Shareholder would have an interest of less than 5% in the Target and in the consideration that would be paid in the Acquisition.
Please note that you have not asked us to reach, and we have not reached, a conclusion as to the applicability of the Rules in any way other than as addressed herein.This interpretation provides guidance based on the rules in effect at the time of issuance.  
Publication Date*: 7/31/2012 Mailto Link Identification Number: 700
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