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  Staff Interpretation Letter 2010-15
Identification Number 714
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”). In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”).
The company, a bank holding company, conducts banking operations through its wholly-owned subsidiary (the “Bank”) and has minimal assets beyond its ownership of the Bank. You stated that over the past three years, the Bank (and, consequently, the company) has been severely affected by economic conditions and has been particularly exposed to the downturn in the real estate market, suffering a high level of delinquencies on its outstanding loans. As a result, the company has experienced significant losses, severely impacting its capital and liquidity positions, and it continues to project significant charge-offs and operating losses due to losses in its loan portfolio. The company has instituted cash conservation measures including deferring interest payments on its outstanding trust preferred securities and suspending dividends on its outstanding preferred stock but, nevertheless, expects to have only “nominal” cash within 45 days unless it is able to raise additional capital. You stated that unless the company can resolve its financial difficulties, the Bank faces the potential for the withdrawal of significant customer deposits which could trigger a “run on the bank.” The company’s financial condition makes it more difficult to retain vendor and other contracts necessary to serve customers and thereby avoid customer flight which would further harm the company.
The losses and declining capital position have resulted in stringent enforcement actions by the applicable banking regulators requiring the company and the Bank to raise additional capital in the near-term or else face additional regulatory actions which could include seizure of the Bank and result in the bankruptcy of the company. Over the past several months, the company has attempted to resolve its regulatory problems and improve its capital position through the unsuccessful pursuit of possible financing alternatives. The company abandoned a planned public offering due to market considerations on the advice of its investment banking firm, and it has experienced increasing difficulty attracting outside sources of capital as its financial condition has continued to deteriorate.  
In the Proposed Transaction, the company would issue to the Investor shares of common stock, convertible preferred stock, and a warrant exercisable for additional shares during the 18-month period following closing. The securities would be issued, convertible, or exercisable at a discount to the market value of the company’s common stock at the time the Proposed Transaction is consummated. The preferred stock would vote on an as-converted basis.
The company expects that as a result of the Proposed Transaction, it would satisfy the applicable banking regulatory requirements and would no longer face the prospect of the Bank being seized or having to file for bankruptcy.  In addition, the company believes that following the closing of the Proposed Transaction, 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 exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance would 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. Additionally, the Proposed Transaction 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 its effectively having greater voting rights than the common stock.
You stated that the delay resulting from securing shareholder approval would seriously jeopardize the financial viability of the company and that the Proposed Transaction is its only available means to avoid the possibility of regulatory consequences that would likely result in the seizure of the Bank and a bankruptcy filing by the company. In addition, you stated that the company has been unable to structure a transaction that complies with the shareholder approval requirements and that the Investor demanded full voting rights, on an as-converted basis, as a condition into entering into the Proposed Transaction.
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 Transaction to avoid the seizure of the Bank and the company’s 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 Transaction 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: 714
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