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  Staff Interpretation Letter 2010-8  
Identification Number 707
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from the shareholder approval requirements and from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) with respect to the proposed transactions described below (the “Proposed Transactions”).
According to the information you provided, in the Proposed Transactions the company would: (i) sell shares of convertible preferred stock to institutional investors; (ii) issue shares of convertible preferred stock to the United States Department of Treasury (the “Treasury”) in exchange for shares of the company’s non-convertible preferred stock currently held by the Treasury; (iii) change the exercise price of an existing warrant held by the Treasury to purchase common stock; and (iv) potentially, pay a fee to the Treasury in shares of the company’s common stock in connection with the exchange. The preferred stock would be convertible into common stock at a conversion price that would be less than the market value of the common stock and would vote on an as-converted basis. You stated that each component of the Proposed Transactions is conditioned upon the substantially concurrent consummation of each of the other components.
You indicated that the company, a bank holding company, faces challenges resulting from current and prior year losses, driven by credit quality issues, and is categorized as being under-capitalized under applicable banking regulatory guidelines. You further stated the company has been adversely impacted by severe declines in housing prices and property values in its primary market areas as approximately 75% of its loan portfolio is secured by real estate. The company has experienced increased loan delinquencies and foreclosures and decreased demand for its products and services. The company incurred significant losses over the last five quarters, and it began deferring interest payments on its outstanding trust preferred securities approximately six months ago. The company’s principal banking subsidiary (the “Subsidiary”) is currently in default under an agreement with its primary banking regulators to raise additional capital.  The company has been informed by the Federal Deposit Insurance Corporation (the “FDIC”) that if it does not raise capital in the very short term, the FDIC will place the Subsidiary into receivership. You stated that such receivership would result in the company’s becoming insolvent and filing for bankruptcy.
You also stated that for so long as uncertainty as to its financial viability continues, the company risks negative impact on its ability to attract new deposits and faces the possibility of additional deposit outflows. In addition, the company expects to face increasing drains on its liquidity over the next three to six weeks as a result of limitations imposed under agreements with its banking regulators.
The company expects that as a result of the Proposed Transactions, it would satisfy the banking regulatory guidelines applicable to both the company and the Subsidiary, and would no longer face the prospect of having to file for bankruptcy. In addition, the company believes that for at least one year following consummation of the Proposed Transactions, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
Without the requested exceptions, the Proposed Transactions would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance could result in a change of control and 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. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in it effectively having greater voting rights than the common stock.
You stated that the company is unable to structure a transaction that would satisfy NASDAQ’s shareholder approval and voting rights requirements, in large part because of the amount of capital it needs to raise to meet the regulatory capital requirements. In addition, you stated that the company believes that the Proposed Transactions may be its final opportunity to raise the capital necessary to successfully address its difficulties and that the delay in seeking shareholder approval could result in it having to seek bankruptcy protection.
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transactions to avoid the FDIC placing the Subsidiary into receivership and the company declaring bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) 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 to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 707
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